Taxation Law - Fringe Benefits Tax On Motor Vehicles - Assesment Answer

Taxation Law Assignment

Assignment Task

1/ How car benefits are taxed? (also give reasons for the 2 methods)

2/ The history of changes of FBT on motor vehicles

3/ The reasons why the changes were introduced for.

4/ Arguments for and against the change (from a political, economic and social issues)

A car fridge benefit comes up when a car that is held by the employer or an associate of the employer is offered to an employee for use. In such a case, the private car will be applied by the employee for personal by the employee or is just availed to the employee for private use (Pope, et al., 1993). A car is considered as held where it is owned, or leased, or hired for a consistent period of time. There are two methods normally applied in the computation of these benefits:

• the statutory formula method
• the operating cost method(log book)

  Methods used to Calculate Fringe Benefits Tax (FBT)

Statutory formula Method

The statutory formula used compute the annual taxable fringe benefits is based on the percentage of the initial purchase price of the item. The statutory percentage is calculated by determined by the total kilometers covered by the motor vehicle in the FBT year. The large the number of kilometers covered the lower the percentage of the amount. The SFM thus offers a scope for an employee to lower their FBT liability by raising the number of kilometers covered and thus lowering the applicable statutory charge. After the 2011 budget reforms were done to the method. The earlier progressive statutory formula was exchanged by a single statutory rate of 20%. This did not depend on the number of kilometers covered. This rate is applicable to car fringe benefits after 7.30pmAEST on 10May 2011 (Australian Taxation Office (ATO) (2012). The taxable amount of the car fringe benefits is the statutory rate multiplied by the vehicle’s base value. The new statutory formula method computes the taxable value of the motor vehicle benefit as a proportion of the car’s value. This is based on the number of days in the course of FBT year when the vehicle was availed for private use. This percentage is referred to as statutory fraction (Pope et al., 1993).

Operating Cost Method (Log Book)

This method computes the taxable value as a percentage of the total amount of running the car in the course of the FBT year. The amount of the FBT purposes is the private use percentage. In order to calculate the business and private use percentage, the logbook is applied. It must thus be maintained for a consistent duration of 12 weeks for the first year. It is then used for every 5 years though two tax years may overlap. The Logbooks used in this method must have the following details:

• dates in which the journey started and ended
• odometer readings before and after the journey
• kilometers covered
• Purpose of travel

The percentage computed using the operating cost method depends on the rate of private use (Carmody, 1999). The lower the times of actual private use, the lower the taxable amount.

The history of changes of FBT on motor vehicles

There are several changes and reforms that the Fringe Benefits Tax computation regulations. Initially, the two methods the Operating Cost Method and the statutory methods were used as the only methods of calculating Fringe Benefits Tax. In 2010, the government proposed major changes especially in relation to the use of the statutory method. Under the recommendations, the existing statutory percentages with a single rate of 20 percentages that will be used irrespective of the number of kilometers covered. The objective of the suggestion was to minimize the statutory percentage and the FBT liability. The reform applied to all contracts made after 10 May 2011 up to a period of four years. The strategy resulted in an increase in revenue of $970 million (ATO, 2012). It also led to a rise in GST revenue by $50 million in the same period. Other reforms on FBT on motor vehicles were made on 16 July 2013. On that date, the government announced that it had stopped the use of the statutory formula method for computing motor vehicle fringe benefits. In case a car has been owned or leased by an employer is applied for private purposes. On 10th May 2011, the 2011/12 Federal Budget was made with a bias on FBT concerning motor vehicles(ATO, 2012). The new method used in the computation of FBT are simpler and easier for employers.

The reasons why the changes were introduced

The Federal government implemented the new changes to simplify the computations of the FBT for the future and scrap the incentive for the citizens to drive their cars more than it is necessary. This is because if one happens to drive more than it is necessary then the more the tax will be. The employment regulations stipulate that any benefit offered by an employer which are not in the form of agreed of wages of fringe benefits. These benefits are subject to benefit tax. In relation to vehicles, the current regulations anyone using a vehicle provided by the employer should claim for tax relief for FTB that would have been paid. This is the amount computed either using the logbook or the statutory formula. The major reason as to the introduction of the changes was thus to increase the revenue generated by the government. This is because the benefited from FBT was lower than when the statutory method was in the application. The other reason for the adoption of the changes is to reduce the incentive to drive which was brought about by using statutory method in FBT computations (Commonwealth of Australia, 2011). The current method used ensured that employees did not use their employers’ cars unnecessarily. The methods used were simpler and easier to use and further reduced compliance costs.

Arguments for and against the change

All the major stakeholders including the employers, employees, and the government appreciated the reforms suggested in the FBT computations. The government benefited in that the revenue generated from the increased after the implementation of the new suggestions. From an economic perspective, the changes were thus beneficial and positively taken by the persons involved. Some of the parties adversely affected by the new changes included the packaging firms. These firms recorded drops in the amounts of profits that they made. Several drivers were also affected by the new regulation because people opted not to drive unless it is necessary. The incentive to drive was scrapped after the withdrawal of the statutory method of calculation of FBT rates. The new regulations thus led to a slight increase in unemployment as fewer drivers were now engaged in the transportations deals of employees. The proposed reforms were generally beneficial to the government. They led to an improvement in the equity of the national government by taxing the fringe benefits at the worker’s marginal tax rate (Henry et al., 2009). They also led to a general improvement of the economic efficiency due to the removal of all evasions resulting from the previous methods of computation. The recommendations were beneficial to the government because there was a reduction in compliance costs. This is because the new method of calculation was easy and thus led to a reduction of cases of tax cheating. The compliance costs for the employers were not affected (Ralph,1999).

With the new reforms in the computation of FBT, the revenue calculations are now easier and have led to a reduction in compliance costs. The system is now effective and has led to a decrease in the incentive to drive. Though there are minor disadvantages such as reduction in activity of drivers and loss of business by packaging firms, the new system is generally beneficial to the government.