Brakes put on car perks

THE Government's plans to scrap generous tax breaks on company cars could result in many employees losing their cars or facing higher tax bills.

The sweeping changes, which are to be considered by the Legislative Council, are aimed at reducing car usage and easing road congestion.

Under the proposals, the deduction of all expenses in connection with the purchase, financing, leasing, maintenance, operation and use of private cars from the employer's tax liability will be stopped.

Companies presently qualify for deductions totalling more than 70 per cent of the costs involved in buying the car.

Staff who were given an equivalent cash sum to buy a car would be subject to salaries tax of 15 per cent on the lump sum.

Jeff May, tax principal with Coopers & Lybrand, said: 'The proposed amendments apply to both employers providing private cars to their employees as part of their overall remuneration package and employees claiming the cost of owning and maintaining a car owned by them which is used in the course of their employment.' Mr May warned the proposed tax would 'clearly disadvantage' employers who continued to provide motor vehicles to employees as a tax free perk.

'The cost associated with providing the private car to employees will become non-tax deductible.' An alternative strategy for the employer could be to pay a cash allowance to his employee that was equivalent in value to the former car benefit, Mr May said.

In this case, the cost of the allowance would remain tax deductible as a normal expense but the tax liability would be shifted on to the employee.

'The impact on the employee of restructuring in this manner is that the person is no longer entitled to a tax-free perk and will be subject to salaries tax on the cash allowance received,' Mr May said.

'No deduction is available to the employee for the costs associated with acquiring and maintaining the car.' For example, the equivalent cash benefit of a car for an employee over a year could be $60,000.

At present, the employee receives the car as a non-taxable benefit, which means that no tax is paid.

But if the proposed changes are introduced then the $60,000 would be subject to 15 per cent salaries tax.

'The proposed amendments could also have a significant impact on leasing companies that have large portfolios of private cars leased to taxpayers for use in their business,' Mr May said.

Under the proposed amendments there was a risk that such companies would be taxed on leasing income derived by them and denied any deduction associated with the private car.

'Transitional provisions that allow the continued deductibility of depreciation allowances on private cars acquired before the commencement date are unduly harsh given that the costs associated with maintaining and financing those motor vehicles will become non-deductible.' Mr May said: 'We also question the effectiveness of using the tax system to address traffic congestion problems.

'Both employers and employees require cars for use in the ordinary course of business as well as for private use.

'It is doubtful whether the denial of a tax deduction for the costs associated with the use of cars will be a sufficient deterrent to meet the Government's objectives.' Industry sources estimate that eight out of 10 luxury cars - those costing at least $400,000 - are bought by companies for their staff.

Transport Secretary Haider Barma's pledge to abolish tax incentives has attracted strong opposition from business groups.

Critics of the plan claim that the deduction is unlikely to have any impact on road congestion as both private individuals and companies will still buy cars.

Additional plans to cut road use include increasing the cost of car registration tax and annual licence fees.