Thousands of employers are set to overhaul their fringe benefits tax affairs after next week’s budget due to a Gillard Government reform that will result in a budget saving of $950 million over four years.
In a deal with the Greens, Labor will remove the FBT rule, which favours those who drive company cars for private use when they clock up more travel annually.
Based on a proposal in the Henry Tax Review, the deal gives tax breaks for driving less but brings budget savings by discouraging claims for longer trips.
The review recommended that the different tax rates currently applying to half a million cars, purchased on salary sacrifice, be replaced with a single 20% FBT rate.
This would see all taxpayers receive the same level of concession regardless of the annual distance travelled, eliminating the desire to rack up kilometres to obtain a lower FBT rate.
As many as 570,000 company cars are currently on the road at the disposal of employees, who enjoy more than $1 billion in fringe benefits tax breaks each year.
People who use their car for a significant amount of work-related travel will still be able to use the logbook method to ensure their car fringe benefits exclude any business use of the vehicle.
Compared with the existing statutory tax rates, people who drive their company cars less than 15,000km a year will receive a larger tax break.
Those who drive between 15,000 and 25,000km a year will have the same tax break, and those who drive more than 25,000km a year will have a small tax break.
Tax and monitoring experts say they need consultation with the Government over the detail of how the new fringe benefits tax concession will be applied to company cars.
Fringe benefits tax usually imposes a 46.5% tax rate on the non-cash benefits supplied by employers to their workers in lieu of salary.
However, company cars attract special tax rates, ranging from 7% to 26% depending on the distance travelled by the employee.
The Australian Automobile Association has told the Government it needs to reform fuel taxation and road pricing before introducing an emissions trading scheme.
Meanwhile, the Australian Information Industry Association is urging the Government to review the Employee Shares Option Scheme, claiming the current scheme is a disincentive to start-ups.
Under the current scheme, employees in high-risk, innovative companies are taxed when they receive share options.
But according to AIIA chief executive Ian Birks, the financial benefits of those shares may never be realised.
“The current employee share scheme is a direct disincentive to innovating companies and in particular for SMEs and start-ups,” Birks says.
“Companies with small amounts of capital undertaking high-risk ventures frequently offer share options to attract staff who could otherwise be employed at higher wages in a more stable environment.”
Birk says to tax an employee when options are issued negates the ability of small and innovative companies to compete effectively in the marketplace.
“Employee equity as remuneration keeps cash in a start-up,” he says.
“Employee ownership focuses workers minds on their company’s success, and there is evidence to suggest it has a positive effect on productivity when accompanied by greater employee participation.”