Car cuts may cost more than they save

In a recent column for Business News I questioned whether there was a bigger issue driving the surprise FBT tax changes proposed by the federal government, and whether these were worth examination once the early hysteria had died down.

I had a few responses but the best comes from Abbott’s Chartered Accountants director Chris Higham (a coincidentally but aptly named business, considering the political nature of the issue) who reiterated my point that the FBT tax formula is very much misunderstood by amateurs, like myself and, more importantly, people who ought to have known better, such as the Prime Minister Kevin Rudd and Treasurer Chris Bowen.

“It’s has been widely reported across all news agencies that the statutory formula used for FBT on vehicles equates to an 80 per cent tax deduction by simply concluding the rule has a 20 per cent private component,” Mr Higham wrote.

“This is entirely wrong due the way the FBT rules work.

“The statutory formula generally generates a tax deduction equating to about 50 per cent private use, but it is often the case that the actual tax deduction percentage is nearer 25 or 30 per cent.

“It will never ever be anything near 80 per cent and, once a car is over about four years old, the tax deductions often completely disappear.”

Mr Higham points out that the alternative method, using a log book, is far better for obtaining deductions but has a compliance burden that means most people are prepared to forgo some return of tax to avoid the paperwork.

He suggests the only major area where there is an obvious question mark is that employees can salary package more than one vehicle. They can therefore, provide a car to a spouse, for example, who may not work.

Who knows how prevalent this is? However he suggests that could have been avoided by more subtle rule changes that those proposed by the government.

You might recall the attack on FBT car expenses under the statutory method was meant to raise $1.8 billion to help meet the cost of Mr Rudd’s urgent political need to bring forward the transition from a carbon tax to an emissions trading scheme.

Labor has rocked a whole industry and potentially added to the compliance burden of thousands of people, but Mr Higham suggests there may be no gain. Worse, he says, it might even come at a cost to government.

“Kevin Rudd is removing a tax policy that was designed to make individuals tax compliance simpler, but in turn reduce their tax deductions,” Mr Highham wrote.

“How he expects the removal of this policy will raise money rather than merely increase individuals’ tax compliance complexity and, correspondingly, increase their tax deductions, is a mystery.

“Having been forced to do log books it’s a safe bet every business kilometre will be well and truly accounted for and most log books will come back in well above 50 per cent.”

So it is both a productivity issue (and Mr Rudd has been highlighting that catchy term a lot lately) and a potential cost to the government.

The perfect result of policy on the run.