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The whole concept of Salary Packaging your vehicle was new to me when I moved to Australia. It seemed too good to be true. Once digging into the details however there was one thing that struck me as being strange: the more you drove your car, the greater the tax incentive.
Wouldn’t it be fantastic if bike could be salary packaged? The benefits are obvious on a whole number of levels. You’d certainly see me commuting to work on my dream bike with 60mm carbon wheels – no matter how wanky it was!
Brad Priest, a passionate cyclist and marketer (www.brandworld.com.au) wrote this post for us on the benefits and savings that introducing a salary sacrifice scheme would bring. Tony Abbott is a keen cyclist and might want to give this some thought for his upcoming election policy.
Is There Such A Thing As A Free Ride?
by Brad Priest
UPDATE: Brad is happy to coordinate a petition to help push this to our government. Download the Petition form and email completed forms to: firstname.lastname@example.org. All information will be kept confidential.
Well it’s the end of the financial year and tax time is here. Before you fill out that tax return, imagine if you could claim the cost of your new bike, your equipment including helmet and accessories AND, on top of all that, claim the use of your bike – all on your tax return!
In the United Kingdom you can. The introduction of a tax incentive scheme to encourage tax payers to cycle can only be a win-win for Australia with health, social, environmental, financial, economic and community benefits.
So what’s it all about?
Next to Belgium and the Netherlands, the UK is the third European country to introduce tax breaks for employees who use bicycles as a means of commuting to work or for business travel.
Tony Blair first introduced the ‘Cycle-to-Work’ scheme to the UK back in 2004. Part of the Green Transport Initiative, the ‘Cycle-to-Work’ scheme allows employees to purchase a bicycle and/or equipment (generally safety equipment) up to the value of £1,000 (approx $1,750AUD). For purchases over £1,000 (RRP inc VAT) the employer needs to apply for a Consumer Credit Licence to lend money. This can cost up to £970, therefore purchases to the value of £1,000 are generally favoured by most employers. Alternatively employees also have the option to finance the purchase through a finance company.
The purchase is made via a voucher redemption, the bicycle and equipment are paid for and ownership is effectively passed on to the employer under a ‘hire/lease’ agreement, effectively becoming a business asset which the business can claim the tax component (VAT @ 17.5%). The reduced purchase price is then salary sacrificed for the next 12 months by the employee. At the end of the 12 months, the employee has either paid for the item(s) outright or has the choice to pay the outstanding amount. The benefits for the employee are they do not have to pay additional UK taxes and insurances the purchase would normally attract; this may end up in a saving of 40 to 50% dependent on the tax bracket. Employees have the choice to purchase new items each year.
Provided you use the bicycle and equipment for work purposes, the UK model not only allows employers to claim the tax on bicycle and equipment purchases, employees who use their own bicycles for business travel can also claim capital allowances, and up to 20p per mile tax free if they use their own bicycle for business travel or if their employer does not pay travel expenses.
For a commuter, the potential to save on bicycles and cycling equipment is huge … then of course there’s the added benefit of little or no running costs and free parking!
So how could such a scheme work in Australia? Adopting a scheme similar to the UK’s ‘Cycle-to-Work’ model would be an obvious choice. Through salary sacrifice (or salary packaging as it is also known), the cost savings on a bicycle and equipment would include not only the 10% GST on the purchase price, but also the saving on the after tax component dependent on your income tax bracket – in other words you save on the GST and reduce your income tax to offset the cost.
So what purchase value would be reasonable for Australia? If using the UK model, it would be reasonable to assume the purchase value would need to be up to the value of $2,000 or even $3,000AUD to cover the cost of most average purchase values. However it would equally be sensible to not cap the purchase value as a large percentage of bicycle prices are above these average values. Alternatively, for a higher purchase value, the employee could use the capped value towards the purchase and the salary sacrifice period could be extended for longer than a year as per a motor vehicle.
When salary sacrificing a motor vehicle Fringe Benefits Tax (FBT) is usually paid, but what about bicycles? A bicycle and equipment should be exempt of FBT as the employee is contributing to health, the environment and reducing demand on infrastructure. Equally, reporting on these fringe benefits would be difficult to administer.
Furthermore, provided you use the bicycle and equipment for work purposes, an Australian scheme could also allow commuters to claim the use of their own personal bicycle for business travel per kilometer similar to motor vehicles and the UK model.
There are of course other issues such as finance residuals and insurance to consider (it is the responsibility of the employee to insure the asset in the UK scheme), but all things considered such a scheme could be simple to operate in Australia.
The following table outlines a few examples of purchase values and the potential saving for a person with an income of $70,000 per annum based on 2009/2010 tax rates.
As per the above table, there is the potential to save up to 38% on your purchase! Salary sacrifice suddenly makes that $15k dream bike begin to look a lot more affordable (for a commuter that is)!
Salary packaging and offsetting the cost is just one idea, but there’s the possibility of other concepts including capping the purchase price above a certain value (say $1000) to help stamp out rorting the system (such as children’s bike purchases); limit the scheme to new bike purchases; limit purchases to purchases made within Australia, or even limit purchases to one bicycle category.
So what’s the benefit of such a scheme? Is it to sell more bikes?
The benefits of such a scheme far outweigh not having one at all. Aside from the obvious financial saving for the employee, the ‘real’ benefits include reducing carbon emissions, traffic congestion, demand on infrastructure, encouraging more modes of transport and actively promoting a healthy lifestyle with flow on benefits on the cost of health care for example.
There are also benefits for the Australian bicycle industry. Such a program could assist in the development of the local bicycle industry and potentially reduce the higher Australian retail prices making imports and the industry as a whole more competitive locally.
There are added benefits for wider business as well. Aside from being able to claim the tax component, it’s a win for participating businesses in developing a cycle-centric workplace, with flow on benefits of a healthier workforce, greater social interaction, team and morale building and invigorating the workplace. The scheme could equally be a win for the HR department providing there is minimal paperwork or an online system, similar in concept (and no more labour intensive) to current salary sacrifice procedures for vehicles, computers and child care.
For the 10th year in a row, Australian bicycle sales have outsold motor vehicles (by 23% in 2009) according to the Cycling Promotion Fund (CPF). Let’s not forget a program such as this would encompass all types of bicycles including Road, Comfort / City / Hybrid and Mountain Bikes, with the later being the most popular and Road the lesser.
According to the article ‘Why Ride? UK’s Tax assisted cycling boom’ published in issue #48 of RIDE Magazine, since the UK ‘Cycle-to-Work’ scheme was implemented, commuting by bicycle to work has seen a 91% increase in the past decade. In the UK just 3% of the population cycle to work. In Australia only 1.3% currently cycle to work, representing huge growth potential (1.3% to 3% represents 220,000 cyclists alone).
Coming into an election later this year, perhaps such a cycling scheme could be something cycling pollie Tony Abbott could consider in his election policy. While maybe not an election topic or vote winner for the majority, a ‘Cycle-To-Work’ scheme has the possibility to gain wider community support for the environment and of course the carrot of offsetting the cost of a bicycle. It would be nice to think in the future we could benchmark ourselves to Denmark where everyone has a bike, with 32% riding to work and encourage a cycling culture in Australia.
As state governments look to alternative means of transport, perhaps its time the federal government look to offer incentive based solutions for alternative means of transport. When compared to the cost of infrastructure, transport and global warming the costs of a ‘Cycle-to-Work’ scheme are minimal.
After all, the current tax system allows taxpayers to salary sacrifice a motor vehicle, why not a bicycle?