Peter is a public servant who lives within 10 kilometres of his CBD high rise workplace. Although it would be faster most days to take public transport, he drives alone to and from work. On weekends he drives across the city and back to buy the newspaper, just to be sure that he covers enough kilometres to make the 15,000 kilometres he needs to drive so that he can claim fringe tax benefits. Peter is one of the many public servants and private employees with company cars who drive unnecessarily long distances just to claim back tax.
Australia’s 25-year-old fringe benefits tax (FBT) system provides a perverse incentive to employees with company cars, including a large number of public servants, to drive unnecessarily just to save on tax. A report released this week by the Australian Conservation Foundation found that FBT costs Australian taxpayers more than $1 billion a year. Should petrol be excluded from a future tax on carbon it will become all the more important to change this expensive incentive to drive more.
Introduced in 1986 to bolster Australia’s ailing automotive industry, the fringe benefits tax legislation for company cars means that if you lease a car based on salary sacrifice, the more kilometres you drive each year the more your tax is reduced. The tax break doesn’t turn on how much time you spend in your car nor your need for support from taxpayers. The more petrol you burn the more tax you save, regardless of whether the travel is for business or leisure. This means more driving, more road congestion and increased greenhouse gas emissions — so that employees with company cars can save tax.
Not only does the FBT system support unnecessary car travel, it also works to encourage employees to purchase larger, more fuel inefficient and more expensive cars than they might have otherwise. In addition, there are no similar incentives to motivate employees to choose sustainable forms of transport over driving.
Since 2000 there have been a number of reports and papers from both the environmental and taxation sectors calling for a review of the FBT regime for company cars or business vehicles. According to a study released by Treasury in 2008, the cost of providing this tax concession for company cars was $1,070 million for the year 2006-7 alone.
One option is to offer more choice within the current tax arrangement on cars to help reduce the distorted valuation for car purchasing and to discourage unnecessary driving. Providing FBT on sustainable transport, including bicycles, bicycle maintenance and insurance, public transport tickets, walking shoes, and taxi-cabs when alternatives are not available makes much better environmental sense. It would save taxpayers millions of dollars on wasted tax concessions too.
In the US cyclists are allowed a $20 per month fringe benefit exclusion. The United Kingdom introduced a tax exemption in 2002 whereby an employer lends or hires bicycles to employees for home to work travel. Australia could easily adopt similar tax exemptions, reducing the incentive for employees to choose the highest polluting transport option.
Vehicle fleets make up a significant portion of a government agency’s carbon emissions. Yet, as a 2009 report on government vehicle fleets found, there is no evidence indicating that these agencies regularly review or assess their vehicle use against their needs. Government fleet purchases (pdf) make up 19 per cent of total vehicle sales in Australia. Around 20 per cent of these are vehicles purchased for senior government employees to lease on a salary sacrifice arrangement. The money they pay to lease the vehicles reduces their tax and the more they drive, the more tax they save. When looking at Australia’s emissions on a whole, road transport contributes 12 per cent of the total greenhouse gas emissions by sector.
In Victoria the annual costs of owning and operating the 8800 vehicles in the government fleet is around $100 million. While some improvements had been made by introducing hybrid vehicles — now 19 per cent of Victorian government fleet — and reducing the size of departmental vehicle fleet pools, the same cannot be said for public servants with salary sacrifice packaged vehicles.
Eighty-eight per cent of Victorian government executives drive six cylinder vehicles — often the highest polluting vehicles they could choose, despite having the choice of more economical hybrid vehicles — and there has been little indication of their moving towards selecting lower emitting vehicles. Only 7 per cent of executives have chosen hybrid or liquid petroleum gas powered vehicles, even despite their reduced fuel costs, as there is no tax incentive to choose the more sustainable option.
A carbon price is vital to reducing emissions, but an easy win is to remove polluting incentives from our tax system. Changing the FBT to provide incentives for employees to select low emission vehicles, to drive less frequently or to choose a sustainable transport option such as public transport, walking or cycling makes better economic and environmental sense. There is little to lose and a lot to gain.
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