Why There’ll Be More Fringe Benefits Tax-Like Bombs in the Future

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It’s Friday. We’re tired. Especially after enduring the tortuous climb of Alpe d’Huez twice last night.

But let’s take another look at the ‘economic structure’ angle we’ve been discussing this week. A few days ago, the Australian Federal government announced changes to Fringe Benefits Tax rules, which will have major ramifications for the car leasing industry. The changes come as the government tries to plug a $3.8 billion budget hole caused by changes to the carbon price.

The proposed FBT changes hope to save around $1.8 billion by making it tougher for an individual to gain a tax advantage by leasing a new car. The move has had a major effect on the car leasing industry. NLC, Australia’s largest car leasing company, immediately sacked half its workforce as business ground to a halt.

Salary packaging company McMillan Shakespeare saw its shares plummet 15% on the day of the government’s announcement.

‘So what?’ you may ask.

Well, this is just a tiny example of economic structure in action. A whole industry has evolved based on government regulation. A change to that regulation could threaten the industry’s existence and the employment that it brings. NLC boss Matt Reinehr tells the Financial Review today that his business, built from scratch 23 years ago, is now under threat.

It is especially noteworthy given NLC is perhaps the only start-up company in the world not conceived and started around the kitchen table or the garage. Says Mr Reinehr about his company’s origins, ‘I built it up with a deckchair and a card table and one other person.

The fact that the tax change is a good one (it will stop thousands of people driving around aimlessly to increase their kilometres and tax benefit) is beside the point.

The point is that tax policy is one determinant of economic structure. Low interest rates are another major determinant because the cost of credit is everything. Take away low interest rates and the whole structure of the economy will change. That means high levels of unemployment while the adjustment takes place.

We’re not suggesting that higher interest rates are on their way. We’re just reinforcing the point that the modern day obsession with lower interest rates always being an economic panacea is wrong, because it changes an economy’s structure in unhealthy ways. When inflation finally rears its head and threatens the global economy’s low interest rate structure, and it will, it will be like a snap change to FBT, only on a massive scale.

But that’s all in the future. Don’t worry about it. Go out and buy the S&P500, the ASX200, and sell gold…that’s the trade that seems to be working right now.

The other point to note about the tax change is the pressure on the government to make tax savings when forecast tax revenues don’t eventuate. Over the next two or three years, we think you’re going to see a lot more pressure on the budget as demands for stimulus grow. While new spending measures are assured, much of it will come at the expense of existing tax benefits, whether it be FBT, welfare payments, or even negative gearing. Expect more FBT-like boms in the future.

Regards,

Greg Canavan+
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

From the Archives…

The Agonists and the Ecstasy of the Financial Market
12-07-13 – Dan Denning

A Two-Faced Shock for the Australian Economy
11-07-13 – Dan Denning

Asiana Boeing 777: Lifesaving Defence-Tech ‘Miracle Materials’ in Action
10-07-13 ­– Byron King

Interest Rates: Something Wicked This Way Comes
9-07-13 – Bill Bonner

The End of a Share Market Correction… or the Beginning?
8-07-13 – Dan Denning
 

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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11 Comments on "Why There’ll Be More Fringe Benefits Tax-Like Bombs in the Future"

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Tony Mervin
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“Expect more FBT-like boms in the future. ”
Greg, I love your article. I have your paid version.
I just don’t understand what you meant in your last statement. Could you please clarify?

Cheers,

Tony

Bob Loblaw
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Just a clarification on the issue of kilometres travelled and the statutory fraction, as per changes recommended by the Henry Review the kilometre requirement was actually dropped a couple of years ago. The 7%(40,000+) and 11% (25,000 min) brackets were removed for a flat 20% regardless of use.

I’d say this would also have an affect on the commercial finance sector who provide the finance for these lease vehicles (St George Bank, Macquarie Finance).

The Government giveth and the Goverment taketh away.

slewie the pi-rat
Guest

“Well, this is just a tiny example of economic structure in action. A whole industry has evolved based on government regulation. A change to that regulation could threaten the industry’s existence and the employment that it brings.”

oh, boy!
the ultimate carborundum conundrum!
DarwinISM v. NannyISM!

would you like to share my popcorn?
this could take a while.
pull up a deck chair & careful!~~don’t knocka ze bong offa ze olde card table…
the bong is strong, but the table may not be able. it ain’t what it usta be…
…structurally…

BP
Guest
Both parties will have to create new ‘boms’ (blitzes on money?) to compensate for mining taxes which return(ed) virtually nothing… and watered down carbon/ETS initiatives. It’s likely neither party will spare taxpayers pain. At the same time, stimulus will continue while polls exist. The political animal must be fed. Changes to negative gearing? They can’t be retrospective, so any hope of an outcome in which lessors and investors quit properties at a loss are akin to letters to Santa at the North Pole. Such a move would however, stifle future residential construction, exacerbate supply issues, and raise rents. In short,… Read more »
Lachlan
Guest

DarwinISM v. NannyISM!
True.
As for here, I think aussie is destined to be a nanny state for a long while yet. Too many goodies (food, resources) and so few people. Besides that there’ll be robots doing all our work in ten years or so. Better apply for a couldn’t be bothered pension next week.

BP
Guest

You want robots? I’ll give you robots, Lachlan!~ :)

http://www.youtube.com/watch?v=8_lfxPI5ObM

garry
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” making it tougher for an individual to gain a tax advantage by leasing a new car. ” Er, why was that placed in the article, it has no merit at all, insofar as the leasing business has nothing to do with the rightness of how things were, other than private travel in the past has been funded by taxpayers, and now the only legitimate tax deductions may come from business use alone. Indeed, hark back to the mid 1980’s when long and sumptuous “business” lunches were taxpayer funded. Sure the hospitality industries kicked up when the funding was abandoned,… Read more »
shortchanged
Guest

The Lord giveth and the Lord taketh away, blessed be the name of……..

Lachlan
Guest

Excellent BP. I was joking about pensions of course. People will be afraid about the destruction of jobs and other things but tech itself is not the demon. It’s brilliant.

Joe
Guest

What’s a bom? Are we referring to that English word Bomb or the acronym for Bill Of Materials?

Joe
Guest

BP on 20 July 2013, letters to Santa addressed ‘the North Pole’, get replied to (as long as there is a stamp on the envelope).

wpDiscuz
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