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Rudd’s Novated Lease Upset to Fund Carbon Tax Changes

Company vehicleKevin Rudd’s resurrection as Prime Minister comes at a critical time for the Labor Party, and the on-again, off-again, on-again Prime Minister wasted no time in trying to stem the bleeding by addressing the biggest political nightmares the public were caning them for.

However, most solutions come at a cost. And bringing forward changes to the Carbon Tax had to be funded somehow. So Rudd decided to cut out the ‘statutory formula’ method for valuing fringe benefits in the form of employer-provided cars.

It’s not that you can no longer receive an employer-provided car, or that you will now incur FBT on the entire value of the car. Until 16th July 2013 you were able to use either the ‘cost method’ or the ‘statutory formula’ method and in future you will still be able to use the cost method. What Rudd’s change means is that you will be levied FBT on the ‘actual’ value for personal use rather than a deemed amount. It could be argued that this is the fairest method. However, it carries with it an increased compliance burden in terms of record keeping, and because FBT is levied at the top marginal tax rate (currently 46.5%) an employee who is not in the top marginal bracket would be better off paying the cost of their personal use out of their own pocket, because the tax on their personal income is at a lower rate than the FBT on an employer-provided vehicle.

Aside from the fairness of these arrangements, many Australians have reacted negatively to Rudd’s announcement because the statutory method has been a long-standing option which we have come to expect and have indeed planned for.

However, in the media frenzy that followed Rudd’s announcement a few important details have failed to receive much airplay.

Firstly, the changes were presented as though they take effect ‘immediately’. In fact, they only apply to new contracts entered into after 16 July 2013. So anybody who has a current novated lease on a vehicle can continue to have their FBT treated under the old regime.

Furthermore, all new contracts established after 16 July 2013 can still be calculated under the statutory method up until the end of this FBT year (31st March 2014). It’s only from 1st April 2014 onwards that contracts entered into after 16 July 2013 must be assessed by the cost method.

Of course, if the Rudd Labor Government loses the upcoming Federal Election, we can expect the new Liberal Government to honour their pledge to abolish Rudd’s reform, so things may all go back to the way they were in a few months’ time.

 

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