Completely out of the blue, on the 16th July 2013, the Federal Government made a Fringe Benefits Tax (FBT) announcement that caused shockwaves throughout the automobile industry.

This is nothing however, compared to what’s going to happen to HR professionals if the legislation comes to pass.

The Government proposed to abolish the statutory method of calculating FBT, which means that roughly 90% of all employees with novated leases (or salary sacrificed vehicles) will not be able to salary package their cars after their existing lease terms end. It’s business as usual for novated leases using the operating cost and exempt benefit method, but that’s only for about 10% of all salary packaged cars.

The financial implications of this are quite simply, enormous. The average after-tax benefit for employees (using the statutory method) on Autopia’s novated leasing program, for example, is $5,770 a year.

Losing that amount of disposable income would cause a decent hole in any household budget, so let’s hope these individuals can afford it, or at least that there’s not too many of them.

Taking a look at the latest analysis of all employees with a novated lease from the Australian Salary Packaging Industry Association (ASPIA) allows us to get a better picture:

• Less than 30% earn more than $100,000, so they’re not really high income earners.
• The average value of vehicle that is packaged is $34,500, so we’re not exactly talking BMWs.
• The industries they work in are 28% charities and public health, 33% state/federal government, 21% police and teachers, 18% private sector.
• And finally, there are 550,000 of them.

So, should the legislation come to pass, roughly 495,000 employees ( 90% of the 550,000, who are hardly earning a fortune) are going to experience a significant reduction in their take home pay.

And I would hazard a guess here – they’re not going to be very happy about it.

The changes also apply to company cars (owned or leased), so if an organisation still has a fleet of company cars, the FBT costs could be about to escalate dramatically.

Although the legislation will apply wherever an employee works, it will affect their perception of their current place of employment. So ‘dealing’ with the affected individuals in an appropriate manner will be important if you want to maintain engagement and retention.

And this is just one of the problems that HR will face should the proposed changes go ahead. The following will also apply:

Compromised compensation strategies and increased car allowances

Over the last decade many businesses have ‘cashed out’ their company cars and replaced them with car allowances and the option to salary package their cars. This has involved the development of sophisticated compensation strategies based on a number of factors, including the ATO legislation around FBT.

If the legislation goes ahead it’s back to the drawing board, and more likely than not, it’s going to end up with increased compensation costs for the organisation.

Increased FBT expenditure

Most novated leases, company owned and company leased vehicles are currently using the statutory method because it delivers a lower FBT liability. So migrating over to the operating cost is going to mean increased FBT costs too.

Remuneration contractual issues
As organisations look into the situation further, they may find that ‘increased compensation costs’ are not just an option, but in fact, the only option. If an employee’s contract states that a company car, or a novated lease, is part of their overall remuneration package, then escalating FBT costs may well be something the organisation has to absorb.

Contractual issues could well apply on a larger scale too, where unions may have negotiated employees’ remuneration packages.

Increased risk and administrative burden

The statutory method was easy, the FBT was set (a flat 20%) and minimal record keeping was required. As vehicles move over to the operating cost method, the complexity increases considerably.

First of all, employees have to keep a log book for 12 weeks detailing all journeys, identifying whether they’re for business or personal use. More business use means more of a tax break, so there’s a legitimate risk that logbooks will be misrepresented to attain illegitimate tax benefits.

And here’s the problem for HR: the employer is accountable for this. So monitoring and verifying the log books becomes a huge burden and risk, which didn’t exist with the statutory method.

OHS and CSR compromised

The statutory method encouraged businesses and employees to rotate vehicles regularly, resulting in newer vehicles with the latest advancements in safety and fuel efficiency.

And with existing vehicles remaining on the statutory method until the end of their lease terms, organisations will understandably avoid the move to operating cost method for as long as possible.

This will result in ‘grey fleets’ (out-dated, ‘run-them-into-the-ground’ vehicles) that will
have a detrimental impact on the environment, and the safety and wellbeing of employees.

Increased payroll tax

A little known fact about novated leasing is that as an employee sacrifices part of their salary to pay for their car, the organisation’s payroll tax reduces. This is because reduced taxable income for an employee means a reduced total Australian wages base for the organisation, and it’s this figure that is used to calculate payroll tax.

So if 90% of your employees with novated leases are about to lose the benefit, then payroll tax is about to go up too.

Finally, the removal of the statutory method will create a glaring black hole in the employee benefits suite. Employers need to consider what, if anything, they can use to replace it, and Autopia are looking into this right now.