There was 200 kilometres worth of banked traffic on either side of Sydney over the Easter weekend as holidaymakers made for coastal retreats. Some of these drivers were doing an additional annual duty for their accountants – clocking up extra kilometres on company cars to claim added tax breaks.
Novated leases are a way of arranging three-way leases with a rental company, an employee, and an employer who takes up some or all of the responsibilities of leasing the vehicle. It becomes the employer’s responsibility to ensure the monthly lease payments are paid to the financier out of the employee’s gross salary, making those payments eligible for fringe benefits tax (FBT).
This way, the car becomes available for the employee’s unrestricted use, including private use. FBT is calculated not only on the value of the car, but also on the distance travelled each year. "The greater the distance, the lower your pre-tax salary and the less tax you’ll pay," according to one financial advice site.
The taxability of vehicles run on a novated lease is effectively arranged on a sliding scale – the more kilometres you drive, the better your tax benefit. This is of particular benefit to those in higher income brackets who want to push their taxable income down below the higher tax thresholds.
They call it "the March rally", according to Greens Senator Christine Milne, who was part of a Senate inquiry into oil usage in Australia that criticised novated leases back in 2006. The scheme is popular among public servants, who "drive up and down the country clocking up kilometres – and not just public servants, but anyone who gets a car as part of their salary package".
"This is a huge subsidy to the use of oil at a time when oil is clearly running out – our transport emissions are clearly going out of control and we still have this ridiculous tax concession which should be abolished," said Milne.
A spokesperson for the tax department said that novated leases have been available since the early 1990s and they are not aware of any plans to change the scheme.
Andrew Gibson of Stratton Finance, which makes vehicle leasing arrangements for business, said that novated leases were very popular among his customers. "Most certainly this kind of salary packaging is growing in popularity and has done so over recent years," he said.
According to a 2007 study from the
Futures
of
subsidy even greater than the $1.1 billion given to coal fired power stations.
It is estimated that around 50 per cent of new cars sold each year are company cars, and the rapid uptake of FBT arrangements must be giving a healthy injection into the new car market at a time when the industry is threatened by climate change consciousness.
There are no equivalent incentives for public transport usage – nor is FBT available for the purchase of bicycles. The 2006 senate inquiry recommended that public transport be made available via FBT, but according to Senator Milne, "Treasury wasn’t able to do that … so instead we recommended that the government consider abolishing fringe benefits tax for cars and find a way of delivering the same benefit to public transport users."
But the Coalition failed to act, and "there is no evidence today that the Labor Government is going down that path," said Senator Milne. "Instead of abolishing this concessional tax rate [Minister for Resources and Energy, Martin Ferguson] is going to give accelerated subsidies to the conversion of coal to liquids for transport fuel – this is an absolute disaster for greenhouse gases and for climate change." Such conversions use high energy inputs and were criticised in the 2006 Senate report.
We might be turning our lights off this weekend as a gesture of goodwill toward the planet, but it seems the "March rally" will continue to trample across it for another year.
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