(i) Car fringe benefits – valuation problems
The value to an employee of any private use of an employer’s vehicle may give rise to an assessable benefit under section 26(e). In practice, in the past many employees did not include the value to them of employer-provided cars in their annual taxation returns. Alternatively, if a value was included the ATO usually accepted the value attributed to the benefit by the employee. Because of the subjective element of the value to the taxpayer, it was not practically possible to put to the test the monetary value to the taxpayer of an employer- provided car. For example, factors such as the employee being compelled to garage and clean the car, and at times contribute to the maintenance costs, may have lowered the benefit of the vehicle for tax purposes but were difficult to quantify.
(ii) Present Tax Treatment of Non-Cash Benefits
Some fringe benefits, such as cash payments and benefits convertible into cash, are income according to ordinary concepts and therefore assessable under section 25(1) of the Income Tax Assessment Act 1936.
The income tax law provides for the taxing of other fringe benefits under a general comprehensive provision (section 26(e)) that requires the value to the taxpayer of all allowances, gratuities, benefits or bonuses (whether received in cash or in kind) related to employment to be included in assessable income. Despite the comprehensive coverage of section 26(e), the taxation of benefits which do not take the form of outright cash payments (and of some which do) poses practical difficulties. For non-cash benefits, there is a difficult question in each case, for taxpayer and tax administrator alike, of determining the value to the taxpayer of the benefit provided. These difficulties have led to almost universal non-inclusion by employees of fringe benefits received in kind; effective policing of non-compliance in this area would require a heavy investment of resources.
In practice, therefore, many of the benefits that ought properly to be subjected to tax escape taxation in part or in whole. Because section 26(e) is concerned with benefits granted to employees, there are also difficulties in bringing to tax the value of fringe benefits which are formally conferred on family members of the employee (eg an airline ticket provided to the spouse of an employee).
The consequential loss to revenue cannot be gauged accurately but it is thought to be of the order of $700 million per annum. It is estimated that the potential tax uncollected on the provision of cars, for example, might be of the order of $280 million per year, and of the order of $80 million per year in respect of subsidized housing and $90 million per year in respect of low-interest housing loans. The fringe benefits area is, therefore, a major source of tax avoidance and evasion under the current taxation system. Growing awareness of the ‘perks’ enjoyed by certain groups has helped to create the impression that the tax system in unfair.
Difficulties in collection, combined with high marginal personal income tax rates, have provided a powerful incentive for high income groups to seek part of their remuneration in the form of fringe benefits. Moreover, rather than incur extra wage and salary costs, only a fraction of which may show up in after-tax pay of employees, management has increasingly negotiated with employees for remuneration in non-wage forms that tend, in practice, to fall outside the tax net. The tax saving is available to be shared between employers and employees. Such arrangements help to undermine the equity of the tax system and maintain tax rates higher than they would otherwise be.
The history of attempts in Australia to tax fringe benefits is not encouraging, as the experience with motor vehicles in 1974 and coal miners’ housing in 1980 demonstrates. Notwithstanding this history, fringe benefits need to be brought within the tax net if the income base is to be broadened and the taxation system made fairer.
One approach to curbing the use of non-cash fringe benefits as a means of evading tax would be to enforce the existing law more rigorously. That, however, is unlikely to prove cost-effective, given the massive administrative burden involved in detecting non-cash benefits granted to some 2 million employees, ascertaining their taxable value for individual employees and resolving the large number of disputes that would inevitably arise over taxable values. To quote Canada’s Carter Commission, it would need ‘an army of assessors and a battery of courts’ to apply the existing law effectively. An alternative approach is therefore called for.
ITAA 1997, sec 15-2
Allowances and other things provided in respect of employment or services
- Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums *provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).
- This is so whether the things were *provided in money or in any other form.
- However, the value of the following are not included in your assessable income under this section:
(d) An amount that is assessable as ordinary income under section 6-5.
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