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Submission No. 41 Back to full list of submissions
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21 December 1998

The Secretary
Review of Business Taxation
Department of the Treasury
Parkes Place
Canberra ACT 2600

 

Dear Sir/Madam

Review of Business Taxation – Submission on Fringe Benefits Tax

I refer to your invitation on page vii of "Review of Business Taxation A STRONG FOUNDATION Discussion Paper Establishing objectives, principles and processes" (the Discussion Paper) to the members of the community to make submissions relating to any matter raised in the Discussion Paper which bear on its terms of reference.

Proposing a Design Framework

Page xvii of the Discussion Paper proposes three national objectives around which to structure debate towards formation of a national consensus on the required design principles. The three objectives are:

    • optimising economic growth;
    • ensuring equity; and
    • facilitating simplification.

Our submission encourages the proposal that one of the national objectives should be to ensure equity. Our submission makes reference to a number of statements made in the Discussion Paper referring to the design principle of equity as it applies to individuals and the application of the Fringe Benefits Tax legislation to employers.

Deficiencies in the Present Foundation

The Discussion Paper highlights "Other business tax anomalies" as part of the discussion on the existing deficiencies in the taxation system. The Discussion Paper states on page 19:

"2.20 Fringe Benefits Tax (FBT) is payable by companies on many expenses they incur which provide a personal benefit to their employees. The rationale for the FBT is that these expenses are equivalent to personal income to the employees, in the same way as wages and salaries, and so should be subject to tax at the marginal tax rate of the employee. Under existing tax arrangements, the FBT is levied on companies at the top personal marginal tax rate, although employees receiving the benefit may be on lower marginal tax rates. If the value of the fringe benefit received were to be taxed in the hands of the employee then the employee’s appropriate marginal tax rate would be used."

Our submission supports the above statement as part of encouraging equity as one of the foundations for the review of business taxation. To further illustrate the present inequity it is possible for an individual to be subject to a marginal rate of 20% plus medicare levy of 1.5%, yet the company employing the individual would be liable to FBT at 48.5% on any benefits provided to the employee. This is an inequitable result if all remuneration provided to employees is to be taxed equitably (ie at their marginal tax rate) .

Recommendation

Our submission recommends that in order to overcome the above inequity an employer would include the grossed-up value (gross salary equivalent) of all fringe benefits provided to an employee on the group certificate and include the FBT paid by the employer as part of Tax Instalment Deductions.

The employee includes the group certificate details in their annual income tax return. The employee would be assessed on the grossed-up value of fringe benefits at their marginal rate of tax and receive credit for FBT already paid by the employer. The net result would be the employee is assessed on fringe benefits received at their marginal rate of tax in the same way as other income.

Equity and Simplification

The Discussion Paper states on page 57 the following:

"5.12 From time to time the suggestion has been made that the function of raising revenue can be achieved by the abolition of the business entity taxation, accompanied by a complete shifting of the that tax burden to the level of personal taxation. It has been suggested that this would effect significant simplification. While the review notes the potential simplification benefits, it considers such abolition of business entity tax to be neither feasible, in terms of the impact on revenue, nor desirable, given the adverse impact on the efficiency and equity of the tax system."

Our submission agrees that the benefit of simplification of the tax system should not come at the cost of efficiency and equity. The tax system should attempt as much as possible to provide equity to all taxpayers.

Fringe Benefits Tax Reform Proposals

In addition to the above, the purpose of this submission is to highlight the ramifications of a Fringe Benefits Tax reform proposal outlined in the Federal Government's Tax reform booklet "Tax Reform not a new tax a new tax system" ("booklet").

The section titled "Reforming the Fringe Benefits Tax provisions" begins on page 49 of the booklet. Page 50 continues with the proposed reform of the Fringe Benefits Tax provisions and states:

"…In addition, the FBT gross-up rate will be changed to ensure neutrality of treatment between fringe benefits and cash salary following the introduction of the GST…"

Neutrality of Treatment between Fringe Benefits and Cash Salary

The booklet strongly implies that there will be neutrality between the provision of fringe benefits and cash salary to employees. For this concept to be given its proper effect, where the employee is provided with a fringe benefit, the gross-up rate and Fringe Benefits Tax rate must reflect the employees marginal rate of tax plus medicare levy. This would ensure the objective of equity is implemented.

However, if the highest marginal rate of tax and medicare levy is adopted for the calculation of the gross-up rate and Fringe Benefits Tax rate and applied to a fringe benefit provided to an employee on a lower rate of tax then the intended neutral position between cash salary and fringe benefits does not result.

Example 1 (below) provides an illustration of the impact of the above proposed reform to the calculation of FBT.

 

Example 1

An employee is entitled to a salary of $50,000 and has elected to salary package a motor vehicle.

Assumptions

    • Purchase Price of Car $30,000
    • Lease Payments $6,600 per year
    • Running Costs $4,400 per year
    • FBT Statutory Fraction 20%
    • Employee's Marginal Tax Rate 30%

Method 1: Assumes an effective FBT rate of 103%. The effective FBT rate of 103% has been calculated as the current effective rate of FBT 94.17% plus 10% for GST (ie. 94.17% + (10% x 94.17%) = 103% approx).

Method 2: Assumes the FBT rate is equivalent to the marginal tax rate of 30% plus medicare levy of 1.5%. Therefore the effective rate of FBT is 45.98% ie. ((1/1-.315) x 31.5%)).

Details

Method 1

Method 2

Gross Salary

$50,000

$50,000

Cost of Fringe Benefits

$11,000*

$11,000*

Cost of FBT

$6,180**

$2,759**

Net Taxable Salary

$32,820

$36,241

PAYE Tax plus Medicare Levy

$6,718

$7,796

Net Cash Salary

$26,102

$28,445

* Cost of Fringe Benefits is lease payments $6,600, running costs $4,400 (ie. $6,600 + $4,400 = $11,000).

** The net increase in the Cost of FBT by not implementing a true tax neutral position is $6,180 - $2,759 = $3,421

The above example illustrates the present inequity in the Fringe Benefits Tax system.

Recommendations

It has been proposed in the booklet that 81% of all taxpayers will have a top tax rate of 30% or less. Providing that this is the case, in order to be consistent with the Government's proposal of tax neutrality between cash salary and fringe benefits, the Government should abolish the FBT rate being applied at the top marginal tax rate plus medicare levy (ie. currently 48.5%).

We recommend that the FBT rate is legislated to be implemented at 30% plus medicare levy of 1.5% in order to apply FBT equitably to the majority (ie. 81%) of all taxpayers.

Confidentiality

The submission may be made public and part or whole of the submission may be quoted or published.

Contact Person

The person that can be contacted in relation to this submission is Michael Lyons Manager - Taxation and Research or me on 03 9416 0399.

Yours sincerely,

Anthony Podesta
Managing Director