FBT back on track under new Coalition government

When Kevin Rudd announced sweeping changes to Australia’s Fringe Benefits Tax (FBT) system, it’s inconceivable the former Prime Minister fully appreciated the consequences of his actions.

On July 16, 2013 – within two months of the federal election – Kevin Rudd and his then treasurer Chris Bowen abolished the FBT concessions that had been freely available to vehicle purchasers for the past 27 years. This was done in an ill-fated and flawed attempt to be seen to be plugging a $1.8 billion hole in the budget, with Labor ‘under new management’ in the lead-up to the September 7 Federal election.

This dramatic and poorly conceived move on FBT policy had several immediate effects. There was a dramatic drop in the sale of cars manufactured locally. Holden sales dropped six per cent, while Ford’s plunged by more than 20 per cent (compared with August 2012). Both were near their lowest levels in two decades.

Ford Falcon sales dropped by almost 60 per cent, while Territory sales fell almost 40 per cent. As a result, Ford had no alternative but to halt production of both the Falcon and Territory at its Broadmeadows plant in Victoria. At least 750 workers were stood down in a series of rolling stoppages.

Holden fared somewhat better. Cruze sales fell substantially – down almost 10 per cent from 2628 in August 2012 to 2369 this year, despite a massive drop in the price. Commodore sales actually increased modestly – from 2435 in August 2012 to 2809 in August this year. (The jump in Commodore sales is probably more due to latent demand for the new VF model than anything else.)

Just two days after the FBT ‘bombshell’ announcement, industry bodies advised News Limited that 8500 new car orders had already been suspended. Three hundred jobs at specialist salary packaging financial services businesses were lost immediately, and 3000 more jobs were threatened as a result of the expected downturn in sales.

Fleet leasing companies, which are generally responsible for facilitating the purchase of one car in 10 – or about 100,000 cars each year – experienced a profound and immediate drop in orders. On average, that drop was 26 per cent – but on locally made cars, the drop was even higher, at 30 per cent. This downturn meant at least $160 million in lost economic activity in August alone.

Principally this policy was put in place not because of any intrinsic problem with FBT concessions, but as a convenient way to offset the drop in revenue from Kevin Rudd’s plan to float the price of carbon earlier than originally planned.

Shortly after the July 16 announcement, Anthony Albanese dismissed the 27-year-old FBT concession policy as a “rort”. The former Deputy Prime Minister, told ABC radio: “The chances are it’s not a Holden Commodore driver [rorting the system] it’s a BMW driver.”

However tasty this comment may have been as a soundbite, it stood up only briefly to scrutiny. Australian Salary Packaging Industry Association data showed 75 per cent of company car drivers were earning less than $100,000 per annum, and they drive vehicles typically costing less than $40,000 – in other words, much more likely to be driving a locally made car than an imported German premium brand.

Andrew Gardiner, who represents the National Tax and Accountants Association, told News Limited: “This is bad policy. Our members are concerned about the wider impact on jobs and the community.”

Under the previous system, the concession policy meant the government of the day assumed your private use of the vehicle was 20 per cent, and FBT was charged against that 20 per cent. The remaining 80 per cent of the vehicle’s use was FBT-free, which was a significant inducement for many to purchase a new vehicle under a ‘novated lease’ or ‘salary sacrifice’ arrangement.