Bruised but optimistic: Salary packaging industry licks its wounds after seven weeks in limbo

For Australia’s salary packaging industry, July 16 this year was a bolt out of the blue.

New prime minister Kevin Rudd, flanked by his new treasurer Chris Bowen, said he would remove the carbon tax, and flagged a range of measures to pay for the loss of revenue.

The most controversial of these was the removal of the statutory method for calculating fringe benefits tax on salary-sacrificed cars.

From that day onwards, Bowen said, employees hoping to gain a tax concession on the use of their cars for work would need to keep a log book of their usage, as opposed to just assuming 50% of their usage was for business use as allowed by the statutory method.

It would save the government $2 billion a year. And it wasn’t a big deal, Bowen said, adding that the development of smartphone applications to track car usage meant it was much easier to log the use of a company vehicle than it had been previously.

“There is no longer any justification for this statutory percentage method of claiming fringe benefits tax on cars,” he said.

“It’s important to note that many tradespeople and others who already use log books are not affected by this change. And it doesn’t affect the 3.6 million Australians who directly claim the fringe benefits tax relief through their tax return.

“It does affect the 320,000 people who are no longer able to justify that percentage claim.”

The change was technical and not immediately understood by most. But it had a big impact. And though it’d take a while to introduce the legislation into parliament, the then government said that when it did, that legislation would be backdated to apply from its July 16 announcement.

In the weeks following July 16, salary packaging and novated lease companies spoke to SmartCompany and anyone else who would listen about just what this meant for their business.

Suddenly, sacrificing your salary for use of a car didn’t make as much sense, they said. New orders were drying up, and retrenchments were the order of the day. Companies like Fleet Network told us with no business coming in, they had no choice but to downsize their businesses.

Among the companies hit the hardest was listed salary packaging giant McMillan Shakespeare, whose shares lost most of their value on that fateful day.

The opposition said it didn’t support the changes. Because the legislation hadn’t yet been introduced, it doesn’t actually have to get anything through parliament for the status quo to remain. When the Coalition won the election, it issued a public letter to the industry saying the mooted changes would not proceed. The industry breathed a sigh of relief.

But the past few weeks have been painful.

On Wednesday, McMillan chief Michael Kay told analysts the hurt wasn’t over.

“We think Labor’s announcement on the proposed taxes and [the] air bubble created in our system is likely to have a material adverse effect on our remuneration services segment,” he said.

“But due to a raft of uncertainties, we really have no present view about what that is going to be.

“There are a lot of pluses and minuses, and we really don’t have a clue.”

McMillan Shakespeare is far from the only company that relies on the salary packaging tax arrangements. Apart from its competitors, the industry is of vital importance to car dealerships, who rely on these firms to buy or lease many of their vehicles.

The damage is done. And yet, when SmartCompany called around the salary packaging industry yesterday morning, we heard plenty of optimism.

At NLC, whose chief executive Matt Reinehr told The Australian Financial Review he was looking at making 74 of his 154 staff redundant, there’s been an uptick in demand since the election.

“It’s not necessarily back to the levels it was, but we’ve had an encouraging first couple of days,” NLC’s national manager of marketing and vehicle sales Graeme Woodlands told SmartCompany.

“We’re cautiously optimistic that things will recover.”

At Perth-based Fleet Network, managing director Eric Cain says his business is recovering from the seven-odd weeks of uncertainty.

“I didn’t think our business was going to immediately go back to the same volumes before the announcement, but we’re absolutely seeing a steady increase now.”

Cain says he laid off 10 staff after the announcement, but hired one back on Monday. As his business picks up again, he hopes to re-employ another two or three by the end of the month.

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