Low Impact

Strange as it may sound, Australia’s current tax rules have the side effect of encouraging people to pump more carbon dioxide into the atmosphere.  The main culprit is Fringe Benefits Tax (FBT) - a tax on benefits that an employer offers its employees, specifically the rules on company cars.

Consult an accountant for the details, but the following description should give you the idea.  Basically, FBT is designed to ensure that people don’t evade tax by having their employer provide something to them as part of a salary package (”Join us and we’ll pay you $40,000 a year, plus a new TV!”) - where an employer provides something that is of personal benefit to the employee, the employer typically has to pay tax on it.  As the name says, its a tax on fringe benefits.

Where it gets interesting is with cars.  A company car benefits both the employer and the employee - the employee gets a car for their own personal use as well as work use.  So, a system is required to determine what proportion of the car’s use was for work use and for personal use. The Tax Office will then charge FBT on the personal portion of the costs associated with the car.  Typically the employer will lease a car on behalf of the employee and provide them with a petrol card, etc.  At the end of the year, the personal use is figured out (using one of the methods described below), the FBT on that proportion of cost is calculated, and the employee reimburses the employer for that portion.

One method that the Tax Office allows is a log book.  The operator keeps a log book of all their use of the car for a representative period (at least 12 weeks), and figures out what percentage was work and personal.  All good.

The other method the Tax Office allows is the “kilometres method”.  You keep track of how far you drove in a year, and the Tax Office uses the logic that the more you drove, the less the proportion of personal use.  The figures are quite generous - as of 2008, if you drive between 15,000 to 24,999 kilometres, you’re deemed to have a personal use of 20%.  Between 25,000 and 40,000 kilometres, the figure drops to 11%.

The difference between the methods can be huge.  Suppose you live 30 kilometres from work at a standard desk job.  Over a year, you’ll drive around 12,000 kilometres in commuting, plus say 5,000 kilometres of personal use;  so 17,000 kilometres in total.  If you were to use the logbook, your personal use would be….. 100%!  The rules are that you can’t claim travel to and from your primary work place at the beginning and end of the day!  But under the kilometres method, your personal use percentage is 20%.

My guess is that the system was designed to cater for travelling salesmen and the like.  People who have to drive around for work all the time, and for whom logging each individual trip would be a burden.  But the rules as they stand simply provide a loophole giving an economic incentive for everyone with a company car to drive as many kilometres as possible.  There is even a phrase, “The March Rally”, to describe the long trips people go on in March (the end of the FBT year), largely to get their kilometres up to the next bracket!

Last year, the government missed out over 1 billion dollars through this particular tax concession.  That money has to be made up through maintaining other taxes, like income tax which we all pay.  Its difficult to find figures to estimate how many extra kilometres were travelled just to take advantage of this loophole, and how many tonnes of CO2 were emitted as a result.

With the current government’s commitment to tackling climate change, and a new budget coming up in May, this looks like a great opportunity to make a difference to Australia’s carbon emissions.  By insisting on the logbook method (or altering the “deemed personal use” to be higher for each bracket), the Government can remove this artificial incentive to drive as far as possible each year.  The end result will be less kilometres driven on our roads, less carbon dioxide emitted to contribute to climate change, and greater tax revenue.

(Image by Hendrik Dacquin, licensed under Creative Commons Attribution 2.0 license)

Categories: automotive, reduce, transport

Tags: automotive, car, carbon dioxide, emissions, fbt, tax