Home > Economic policy > Saving the salary packaging industry

Saving the salary packaging industry

September 19th, 2013

The Abbott government is faced with its first big economic policy decision, a bit sooner than I expected. Going into the election Abbott promised to reverse the Rudd government’s tightening of FBT rules for motor vehicles, at a cost of $1.2 billion over the forward estimates period of 4 years. This was to be funded in part by scrapping $500 million of assistance to the domestic car industry.

Since the great majority of cars in Australia are imported, and since much of the benefit of FBT rorts is dissipated through the inefficiency of the required structuring of salary packages, the reversal of the FBT decision yields only a minimal benefit to the domestic industry. It’s unsurprising therefore, that Holden has announced that, unless the government restores Labor’s assistance policy by Christmas, the company will close down. The general assumption is that the resulting contraction of the supply chain would force Toyota out of domestic production as well, so that the entire industry would shut down.

All of this would be comprehensible if the government was pursuing a consistent free-market line. But no one has tried to pretend that the FBT treatment of cars is anything other than a rort. LNP advertising during the election was all about the damage removing the rort would do to jobs in the salary packaging industry and to employers who depended on the rort to reduce their wage bills. Those employers notably include charities and NGOs which could be aided more efficiently with grants – of course, the LNP is going to cut those grants.

Assuming the government is unwilling to see the car industry close down within its first year of office, the sensible thing would be a double backflip, restoring Labor’s policy. That seems highly unlikely. I’ll also be surprised if the government holds its nerve and lets Holden close. So, I suspect we are going to see a half-baked partial solution which will increase the structural budget deficit relative to any consistent policy, and still only defer the end by a few years.

But, even if we don’t make cars any more, we will, at least, have a salary packaging industry that is the envy of the world.

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  1. NathanA
    September 19th, 2013 at 12:39 | #1

    I also think that we (as in the green side of politics) missed a trick here. If you’re going to have salary packaging of vehicles, it should have been regulated so as to minimize carbon dioxide emmissions. That means that the type of vehicle eligible for the scheme must conform to certain criteria.

  2. Alphonse
    September 19th, 2013 at 12:47 | #2

    Not a problem. Expansion of the rort sector can be expected to offset manufacturing job losses.

  3. Ikonoclast
    September 19th, 2013 at 12:50 | #3

    How long can this economy keep running with all these inefficient rent-seeking rorts and with zero attention being paid to moving to a low carbon emissions, renewable materials and renewable energy economy? That is the question. The current system is unsustainable right across the board. I expect by 2025 we will look like Greece does currently.

  4. ChrisH
    September 19th, 2013 at 12:55 | #4

    It’s slightly worse than JQ said.
    The charities and NGOs do salary packaging a bit further down from the top executives than other employers: but only because of fringe benefit tax exemption (or generous thresholds) others don’t enjoy.
    Car packaging does nothing significant for local car making and does only harm to effective transport policy.
    But the point of the salary packaging rort is to to allow the privileged to run their cars privately from before-tax or concessionally-taxed income. There’s nothing defensible there unless you believe, as everyone did before popular democracy gained a foothold, that the purpose of taxation is to use power to take away money from the weak.

  5. daz
    September 19th, 2013 at 12:58 | #5

    I wish I could salary package a brand new road bike!

  6. TerjeP
    September 19th, 2013 at 13:53 | #6

    Let Holden close.

  7. patrickb
    September 19th, 2013 at 14:32 | #7

    I agree with Terje.

  8. September 19th, 2013 at 14:33 | #8

    @ChrisH Live and work in the city I assume then Chris?

  9. John Quiggin
    September 19th, 2013 at 14:39 | #9

    @TerjeP

    But, as you’ve said previously, save salary packaging. I love libertarianism!

  10. John Quiggin
    September 19th, 2013 at 15:01 | #10

    @Rustynails

    Say what? Is this some new National Party claim that country people should get free cars?

  11. derrida derider
    September 19th, 2013 at 18:20 | #11

    This is getting ridiculous:

    we need to be building 100,000 cars a year in Australia, so [Holden] and Toyota have got to work out who gets the share of that.

    – McFarlane today
    Err, don’t we have a Trade Practices Act designed to protect consumers by preventing exactly such market rigging?

    This industry, for better or worse, is already dead – it’s beyond time we turned off the life support machine.

  12. TerjeP
    September 19th, 2013 at 19:38 | #12

    JQ – as a libertarian I’m hardly going to favour an increase in FBT. The government should spend less (ie let Holden shut) and also let people keep more of their income (ie don’t increase FBT). You scoff as if there is some inconsistency in this.

  13. ChrisH
    September 19th, 2013 at 19:56 | #13

    I scoff because FBT is simply a way of getting a bit closer to taxing all wage income (more) alike. Without an FBT or some similar measure, you have a tax system that plays favourites: taxing ordinary wages and salaries, untaxing the fringe benefits that predominantly go to managers or business controllers.
    I scoff at the inconsistency of talking of getting rid of a loophole as ‘increasing’ FBT.
    I scoff at the absurdity of letting only some people keep more of some income by extending or maintaining loopholes.
    People who really want to cut tax generally want to apply it more fairly and consistently – then it can drop for everyone, not just a few well-positioned close to a loophole.
    JQ can scoff as he himself chooses!

  14. John Quiggin
    September 19th, 2013 at 20:02 | #14

    I scoff because you don’t understand that tax expenditures (concessional tax if you spend your money on particular goods and services) work in the same way as tax-funded subsidies for the same goods and services. And so you are led to the absurdity of closing down the car industry to subsidise the salary packaging industry, simply because they appear on different sides of the public accounts.

    But that is typical of any approach to politics that puts logical consistency on the basis of (inevitably) flawed premises ahead of a concern about outcomes.

  15. TerjeP
    September 19th, 2013 at 20:18 | #15

    Except the FBT concessions don’t favour one set of producers over another. They are not propping up inefficient work practices in the way that direct handouts to Holden do.

  16. Will
    September 19th, 2013 at 20:33 | #16

    Wasn’t it Shakespeare that wrote “A subsidy, by any other name, would smell as sweet”?

  17. John Quiggin
    September 19th, 2013 at 20:35 | #17

    @TerjeP

    I suggest you stop digging, Terje. You’re making it painfully obvious that libertarianism isn’t about economics, it’s about sticking it to the workers.

  18. TerjeP
    September 19th, 2013 at 20:52 | #18

    That’s just your imagination running rampant John. But nice try.

  19. September 19th, 2013 at 21:21 | #19

    Presumably the government will remove the FBT benefits once we have no domestic car makers?

    But seriously, this is the sort of election promise that no self respecting government should keep.

    Labor at least removed a loophole whereby one of my reasonably affluent friends was able to salary package his childcare, which reduced his income enough that he qualified for a childcare subsidy. Maybe the libs should undo that one too.

  20. TerjeP
    September 19th, 2013 at 22:19 | #20

    A lot of people in the health sector that I know somehow manage to salary package food. Including family groceries and restaurant costs. With no limit. Basically they feed their families out of pre tax dollars. I know of a couple of doctors and a nurse that all say they do it. And they think it’s a great perk. It seems to be somehow exclusive to the health sector.

  21. TerjeP
    September 19th, 2013 at 22:24 | #21

    http://www0.health.nsw.gov.au/policies/pd/2007/pdf/PD2007_076.pdf

    Under the Fringe Benefit Tax (“FBT”) legislation, where the employer is a public hospital or a government body and the duties of the employees are exclusively performed in or in connection with a public hospital, employees are able to be provided with fringe benefits which are exempt from FBT, up to a threshold of $17,000 per annum (“the exemption threshold”). This threshold is applied to the grossed up taxable value of the benefits provided to each employee.

    The scheme utilises the public hospital status of area health services under the FBT legislation and enables NSW Health employees to sacrifice pre tax salary in exchange for benefits which are FBT exempt, up to the exemption threshold of $17,000 per annum. This arrangement results in a tax saving for the employee. This tax saving, together with the annual administrative fee charged to individual participants for administering their salary packaging arrangements, is shared on a 50/50 basis between employees and NSW Health.

  22. Mr T
    September 19th, 2013 at 22:37 | #22

    The lack of logic sometimes used in comments astounds me.

    Terje at #12

    I am surprised that you formulate views on the label you choose to put on yourself. Surely a reasonable man formulates views, and then labels himself if that helps his self identity.

    Further, it is not obvious to me that a libertarian would automatically object to the FBT.

    I am not aware of any definition of “Libertarian” that advocates no government, just minimal government. Government requires some sort of funding. It is perfectly reasonable that FBT forms part of that funding mix.

    The FBT was introduced as a way counteracting the way some people moved personal expenditure from After Tax Earnings to Pre Tax Earnings. This seems to have a high “Fairness” value. It’s effect on other parts of the economy should not be taken into account. If the government wants to support the local car industry, it should do so directly, where it is transparent, and much better targeted.

  23. September 20th, 2013 at 00:48 | #23

    The majority of workers that get salary packaging are lower paid workers in state and federal governments, hospitals, charities and private sector non profit organisations. i.e teachers nurses, charities workers etc. in fact legislation gives these sectors extra benefits in this area.

    After attacking single mother benefits; the attack on lower paid workers FBT entitlements is another example of how the ALP sold out its constituents.

    http://www.mmsg.com.au/about/our-services/salary-packaging/

    “Through our brands Maxxia and RemServ, we help administer salary packaging programs for employers from a range of sectors across Australia, including state and federal governments, hospitals, charities and private sector organisations.”

    Kind regards,

    Phoenix

  24. ChrisH
    September 20th, 2013 at 06:38 | #24

    On the contrary, Phoenix.
    The majority of salary packaging, and most of its value, is for higher paid workers. Yes, the FBT exemption/concessional limit scam applies to some charities (and not to most non profits). But even in this very small proportion private cars are mostly, and most expensively, packaged to the well off executives.
    The bogus arguments otherwise were drawn from the assertion that the tax figures for car travel deduction claims showed who gets private use cars as a fringe benefit.
    The arguments were bogus, because those getting the private car use fringe benefit don’t claim deductions for the cost of work travel in their own cars: they are getting the benefit of an employer’s expenditure on the employer’s (or a leasing company’s) car.
    It’s the lower paid workers who generally have to use their own cars, pay their own bills, and prove their work use to get any deduction.
    So far from being an attack on ‘lower paid workers’ FBT entitlements’, the removal of the private use rort put the well-off who disproportionately benefit from the private car use rort in the same position as those lower paid workers: having to substantiate their work use of a car to get the indirect FBT benefit, where the lower paid have to substantiate their work use to get a tax deduction.

  25. HAN
    September 20th, 2013 at 07:19 | #25

    my wife used to work for a global consulting company and had a salary packaged car. The deal required a minimum 25000km per year but we were never able to reach that amount. So in the last week of June (end of financial year) I would have to drive from Sydney to Newcastle at nights for a few return trips just to bump up the mileage. The hundreds of dollars spent on fuel still dwarfed compared with the thousands of dollars of tax benefit.
    If this FBT arrangement is not rort then what is?

  26. TerjeP
    September 20th, 2013 at 07:24 | #26

    I am surprised that you formulate views on the label you choose to put on yourself.

    If you think that is what just happened then you’re a little slow on the uptake. JQ took my position on the FBT concession and the Holden subsidy, brought into focis the fact that I regard myself to be a libertarian, and then attempted to put a wedge between the two. I merely explained that the wedge wouldn’t fit given the angle he was using. That is quite different to saying I’m a libertarian therefor I must think X.

    Further, it is not obvious to me that a libertarian would automatically object to the FBT.

    I agree. And in fact I myself would prefer to lower other taxes before I’d lower FBT. And I’d prefer a general lowering of FBT over selected concessions like doctors grocery bills and employees cars.

  27. John Quiggin
    September 20th, 2013 at 08:35 | #27

    @phoenix
    Thanks for elaborating the rent-seeking arguments for protecting the SP industry

  28. J-D
    September 20th, 2013 at 12:01 | #28

    There is very little to be said in favour of the position that the appropriate level for the total tax burden is ‘I don’t know what, but anyhow something lower than it is now’.

    But there is even less to be said in favour of the position that any decrease in any tax must be a good thing, and any increase in any tax must be a bad thing, regardless of the circumstances.

  29. J-D
    September 20th, 2013 at 12:04 | #29

    @TerjeP
    If I have understood correctly what John Quiggin is saying, the point is that the FBT concessions do favour one set of producers (specifically, the salary packaging industry) and do prop up inefficient work practices (specifically, salary packaging). I guess what you mean is that they don’t favour one producer over another within the same industry, but if so I’m not sure why you would think that an important criterion.

  30. TerjeP
    September 20th, 2013 at 12:30 | #30

    J-D – I will happily concede that the tax system is a mess. I would much prefer a saner system with a lower level of tax and less distortions. However I would not want to remove the distortions if it simple meant more money for Canberra to spend meddling in our lives. I will vote for and support the white acting of the tax system until such time as genuine tax reduction and reform is an alternate option.

  31. Donald Oats
    September 20th, 2013 at 14:09 | #31

    Why can’t I package a good bicycle? I can pay $15K for one, and I can guarantee it won’t need petrol in the tank. Perhaps food eaten to provide the fuel for transport by bike should be treated beneficially?

    Personally, I think the whole notion of salary packaging is nothing but a distortion. Without it, life would go on, and tax time would be simpler for the ATO. Perhaps some accountants would lose out, but hey, their skills are readily transferable to more productive pursuits.

    As for Abbott’s self-wedgie, I particularly enjoyed your final sentence in the post. Any chance of an examination of WA’s Liberal government economic and financial skills, in a future post?

  32. J-D
    September 20th, 2013 at 14:19 | #32

    @TerjeP
    So you’re endorsing both the position that has very little to be said in its favour and the position that has even less to be said in its favour.

  33. Stockingrate
    September 20th, 2013 at 16:15 | #33

    Scrapping the salary packaging rort – now that would be a useful item on the “productivity” agenda.

  34. James Wimberley
    September 21st, 2013 at 07:42 | #34

    A different question. Holden builds conventional cars with internalcombustion engines. These are on the way out and in 10 or 15 or 20 years, depending on the learning curve, all new cars will be electric. GM makes some electric models already so it will almost certainly continue to be a very large player in the car market, as wil Toyota. Now will the production economics of EVs be the same as that of ICVs, or different? Assembly plants will I guess look much the same as now, only even more automated. The drive train – battery, wheel motors, and controls – is entirely different and will probably be imported into Australia. It´s hard to see any compelling national interest in maintaining one or two automated car assembly plants in anticipation.

  35. TerjeP
    September 21st, 2013 at 10:51 | #35

    James – I don’t think the shift from ICT to batteries and motors will alter the production economics radically. In any case hybrid electrics are likely to remain more competitive than full electric for some time and they offer a gateway transition in manufacturing skills moving to full electric cars. However changes in other areas such as material science may be quite disruptive. 3D printing of components may alter things substantially also. IMHO.

  36. Ikonoclast
    September 21st, 2013 at 13:10 | #36

    One point worth mentioning is that if you have no heavy industry capacity you cannot fight even a defensive war. If we are attacked and if the USA does not or cannot supply us for one reason or another then we will rapidly collapse militarily. Our national strategic forward planning ought to include this consideration. You have to maintian domestic heavy industry capacity if you are serious about self defence.

    In the future, large scale regional and proxy conflicts are very likely all over the globe (but probably short of nuclear war). Resource scarcity will give rise to these conflicts. Of course, they will be a negative sum game but that’s not stopped wars before. A realist would support heavy industry support in this country. It would not have to be the making of internal combustion engine cars. Probably a rail and train building industry would be better.

    China wants nothing better than for the rest of the world to ship it raw materials and for China to be the only country making stuff. That would suit their 100 year plan nicely. Of course, the Chinese are in for as much trouble as the rest of us from global warming, so their 100 year plan is rather doubtful in any case.

  37. September 21st, 2013 at 14:47 | #37

    I always wondered why Vietnam was so easy to conquer.

  38. J-D
    September 22nd, 2013 at 07:26 | #38

    @Ikonoclast
    The only country with the logistical capacity to sustain an invasion of the Australian continent is the United States. There’s no point in planning for the capacity for military resistance to a land invasion by the USA because there’s no way we could achieve that capacity (if for some reason the USA wanted to mount a land invasion); and there’s no point in planning for the capacity for military resistance to a land invasion by any other country, because no other country could pose such a threat even if it wanted to.

  39. Peter T
    September 22nd, 2013 at 20:43 | #39

    We have decided over the last thirty years that we do not need a textile industry, a food-processing industry, a steel industry, a furniture industry. Now we do not need a car industry. Then we will not need a machining industry (kept in being largely by the car industry). Then we will wonder why so many of us are poor, and no doubt some smart person will explain to us that if only we get rid of the remaining industries we will all be much richer.

  40. Chris O’Neill
    September 23rd, 2013 at 02:17 | #40

    @TerjeP

    I know of a couple of doctors and a nurse that all say they do it. And they think it’s a great perk.

    Wow, what a surprise.

  41. Xevram
    September 23rd, 2013 at 12:30 | #41

    Holden need to look seriously at the Aussie version of a Tata people car concept.
    Cleraly it is not going to be sustainable for the car indutry to continue as it is. Given the way the future looks to a lot of people, there could well be a good market for Aussies cheapest car, electric, city bound, 2 seater.

    My understanding of the tightening up of the FBT for car salary packaging was nothing more than asking everyone to justify and evidence the use. Cant see how asking for some evidence of honesty can be an issue. Then again i guess I am kind of naive and old fashioned.

  42. September 26th, 2013 at 04:18 | #42

    ¿Que mas nos puedes explicar?, ha sido fantastico encontrar mas explicaciones sobre este tema.

    Saludos

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