This year's Federal Budget announced proposed changes to the motor vehicle Fringe Benefits Tax rules. Under the current Fringe Benefits Tax rules, there are two methods for calculating a motor vehicle's Fringe Benefits Tax:

1. The "Statutory Formula" that calculates Fringe Benefits Tax based on a percentage (statutory rate) of the motor vehicle's base value.
2. The "Operating Costs" method which calculates Fringe Benefits Tax based on the business travel percentage, per a 12 week log book.

The proposed changes will affect only how the Statutory Method is calculated. To be phased in over the next four years the Statutory Method will be calculated using a flat 20% statutory rate multiplied by the motor vehicle's base value. This replaces the current method where statutory rates range from 26% to 7% depending on how many kilometres are travelled (the more kilometres travelled within certain ranges, the lower the statutory rate).

With the new 20% statutory rate for motor vehicles, businesses will need to look at how they are allocating motor vehicles, and if salary packaging is still a tax effective option. Businesses will need to assess whether using the Operating Costs method (requiring a log book) will provide a more effective Fringe Benefits Tax outcome.

If you had previously travelled more than 25,000 kilometres in your motor vehicle you would have benefited from a low statutory rate of 11%. This statutory rate will now increase to 20%, resulting in a higher Fringe Benefits Tax liability.

Where the provision of a motor vehicle to an employee is not salary sacrificed and the motor vehicle travels more than 25,000 kilometres per year, employers should consider changing to the Operating Costs method and start preparing a 12 week log book.

Business owners will also need to assess the way in which motor vehicles are provided, and whether they need to sell a motor vehicle due to it no longer being tax effective.

The introduction of a flat 20% statutory rate will make salary packaging of a motor vehicle more attractive for those who travel less than 15,000 kilometres per year as they are currently paying tax on the higher statutory rate of 26%.

We suggest that you discuss these proposed changes and the method for calculating Fringe Benefits Tax with your accountant so as to avail yourself of the most tax effective option.