How Novated Leasing And An FBT Perk Choked Australian Cars Photo:
Tim O'Brien | Aug, 10 2013 | 50 Comments

There has been little sensible discussion about recent changes to FBT rules. Of no help to the discussion has been the wildly exaggerated overstatement by the industry as to the likely impact on the market of these tax changes.

Also not helpful has been the dumbing down of the debate into some screwy sort of class warfare: something about rich dudes with BMWs and Mercs, and not-rich dudes without.

But least sensible among the nonsense being aired is that these changes will somehow nail shut the coffin on the local car manufacturing sector.

Au contraire: history has another view.

At the heart of this issue is novated leasing. Its rapid rise and spread through corporate Australia was driven by a generous tax concession for those lucky enough to enjoy ‘salary packaging’ as part of their employment.

And this, in turn, fed a market distortion that became one of the key factors in the decline of local brands in this market.

It is novated leasing that sits behind the FBT tax perk that, as of next April, will not apply automatically (via the statutory method of reporting), but will need to be substantiated via a vehicle log to be claimed.

And, for the sake of definition, let’s just agree on the conventional meaning of “perk”, and that is, a little side benefit of a job.

Originally, salary packaging was an executive perk.

But it didn’t take long for a new industry to spring up around it: salary packaging professionals who, for a fee, crunched the numbers to provide a suite of off-the-shelf ‘salary packages’ for the employees of companies, government departments and NGOs prepared to pay for the number crunching.

This industry did not, in any other way, contribute to the Australian economy. It sprang up to service the perk.

The guiding principle behind ‘the salary package with the car’ was to use the hefty tax concession attached to a novated lease of a new car (one used sometimes, rarely, or not at all, for work), to reduce the taxable salary.

And, yes, prior to these recent announced changes, it did not really matter whether the car was used for work or not.

It’s not a rort, and it never has been.

It was openly discussed, was in accordance with the tax act, and was a concession that tax-payers could, and did, legally take advantage of.

For employers, it was smart: novated leasing took employee vehicles – those that came with the job – ‘off the books’ of the employer.Employees, in effect, bought their own ‘personal’ transport, which was nominally, if not actually, in service of their employment.

But, because of the generous tax concession, it encouraged the purchase of higher-value cars: the more expensive the car, the greater the personal tax savings.

Under this particular tax distortion, a more expensive car meant they paid less tax.

So, car parks that were once filled with fleets of Holdens and Fords and Toyotas - many of them negotiated directly with Broadmeadows, Fisherman’s Bend and Altona - began being populated with BMWs, Mercedes, Lexus, and the like.

That well-known commentator on matters economic, Robert Gottliebsen, would seem to agree.

Writing in the Business Spectator on the 18 July, he opined, “The concessions on car travel under the fringe benefits tax held up for a long time, despite abuses, because they helped the local car manufacturing industry."

“But my circle of friends and acquaintances have too often used the concessions to lease expensive imported cars, while in other areas they were used for domestic travel rather than work."

"And although fleets are an important part of demand for locally made cars, the fleet demand is now a much lesser percentage of local car sales than, say, 10 years ago.”

Robert the Spectator is right.

This is precisely what happened. Novated leasing, and this FBT distortion, fed a growing appetite for prestige brands - the more expensive cars - in company carparks.

And because novated leases are typically used for personal vehicles, it was, and is, generally left to the employee to choose their own cars (why wouldn’t you choose the most expensive car company rules would allow if it returns the greater personal tax savings?).

Most bizarrely of all - in terms of the equitable workings of the tax act - is that novated leases are better suited for vehicles with mainly private usage, though the ‘statutory formula’ used for the tax concession assumes it is mainly used for business purposes.

Does that look like an equitable tax system at work? Or, more to the point, does it not look like a tax inequity creating the environment for a market distortion?

It’s now gone the way of all tax perks. Just as nature abhors a vacuum, the tax system abhors an inequity. It abhors most of all a widespread inequity.

While the perk was contained to a privileged few, it didn’t really matter.

But when it began to spread right through corporate Australia, into Government departments, NGOs and into smaller businesses, when everyone got onto the train, that’s when the tax system found itself with a problem.

And, by this time, our local manufacturers, who once dominated fleet sales for ‘company cars for managers, middle managers and key personnel’, also had a problem.

All of that is simply history.

Will, therefore, our local manufacturers benefit again from increased company fleet purchases now that part of the perk behind a novated lease has been closed off?

Probably not. It is more likely that the shift that began as a market distortion is now embedded. But it may slow down the growth of prestige brands in this market.

And it may, if buyers have to think harder about servicing and ownership costs of a car, have those buyers looking closer at our local manufacturers.

For Ford, Holden and Toyota, it’s likely to be a zero-sum outcome: neither better nor worse.

It won’t be another nail in the coffin despite Government nervousness and despite its pledge of an extra $200 million to offset any losses in the market to our local manufacturers.

But it absolutely will not do, as FCAI hysterically claims, wipe off $3.4 billion in new car sales over a full year. One hundred thousand cars? Really?

Sure, there may be a short period of readjustment to the new rules with cancelled orders and dips in sales in some dealerships as VACC has warned (if also exaggerated).

Beyond that, the world will go on, the squeals of outrage will subside and, short of a rapidly worsening economy, the market will remain on track for another million sales in 2013.

Whatever the outcome, our local manufacturers will never now reclaim the market lost when novated leasing, and an FBT perk, became a wildfire.

Tim O’Brien
TMR Managing Editor

Disclosure: This correspondent enjoyed salary packaging for the better part of ten years – and a nice little perk it was. First a Commodore, then a Lexus, then an Alfa Romeo.

TMR Comments
Latest Comments