• 7.7 Novated leases

    Full novation

    Under this arrangement, an employee leases a vehicle from a financier using a standard finance lease agreement. The employee, you (the employer) and the financier then enter into a novated lease, which transfers to you for the term of the lease:

    • the employee's obligation to pay the lease payments
    • the right to use the vehicle
    • other obligations under the finance lease.

    As the employer in the novated lease, you are entitled to a deduction for lease expenses where the vehicle is used in the business or provided to an employee as part of a salary packaging arrangement. However, this rule does not apply to leasing a luxury car. In the case of a luxury car, the deduction is based on an accrual amount and depreciation is subject to the luxury car depreciation limit.

    FBT consequence of full novations

    A car fringe benefit arises where you are the lessee of a car that is provided for the private use of an employee or associate of the employee. Cars under a full novated lease are subject to the same car fringe benefit valuation rules as other cars you lease.

    Split full novation

    A variation on the full novation is an arrangement known as a split full novation. Under this arrangement, the lessee's rights and obligations under a finance lease (except the residual payment obligation) are transferred to you.

    FBT consequences of split full novations

    Cars under a split full novated lease are subject to the same car fringe benefit valuation rules as other cars you lease.

    Transfer of lease to new employer

    Upon a terminating event, such as the payment of the last lease payment under the novated lease or termination of employment, a further novation may occur. Under the further novation, your rights and obligations are novated to the employee. The employee becomes the lessee and can take this lease to another employer.

    Where an employee transfers a novated lease to a new employer who is not an associate of yours, the base value of the car is the market value at the time of transfer.

    Example

    An employee has a bona fide novated leasing arrangement with their employer. The base value of the leased car at the start of the lease was $35,000. The employee finished employment with the company on 31 March 2008. At that time, the novation agreement between the finance company and the employer was terminated. The employee became responsible for the lease obligations from 1 April 2008.

    The employee started working for a new employer on 1 May 2008. The new employer entered into a new novation agreement on this date. The market value of the car on this date was $25,000.

    The base value of the car to the new employer is $25,000, assuming the new employer is not an associate of yours. However, the base value remains at $35,000 if the new employer is an associate of yours.

    End of example

    FBT consequences of acquiring the car at the end of a lease

    If the employee acquires the car at the end of a bona fide lease for its residual value, this will be an arm's length transaction on which you would not be subject to FBT.

    This is because the residual value and notional value would be the same, so the benefit provided to the employee will have a nil taxable value.

    We will generally accept the agreement as a bona fide lease if:

    • there is no express or implied agreement under which ownership would pass to the lessee at the end of the lease
    • the residual value under the lease is equal to or exceeds the minimum residual value calculated in accordance with Taxation Ruling IT 28.

    However, if the agreement is not covered by a bona fide lease, a fringe benefit would usually arise.

    7.8 Record keeping requirements for cars

    The record keeping requirements vary for the statutory formula and operating cost methods and are explained below. For more information, refer to Fringe benefits tax record keeping.

    Fuel and oil expenses declaration

    You can apply car expenses paid for by an employee as an employee contribution under both the statutory formula and operating cost methods. However, the employee must provide you with documentary evidence of the expenditure (for example, receipts or invoices). In the case of petrol and oil costs, a declaration from the employee is sufficient. The declaration must be in form approved by the Commissioner.

    You have to obtain any relevant declarations before the due date for lodging your annual FBT return or, if you do not have to lodge a return, by 21 May.

    To obtain a copy of the fuel expenses declaration, refer to Declarations.

    Statutory formula method records

    Base value

    You can obtain the base value of a car from the normal purchase records or any other records relating to the direct cost of the vehicle. The records should include the purchase price (subject to the various inclusions and omissions discussed in section 7.4) and the date of purchase.

    Records you can use to work out the base value include:

    • invoices/tax invoices
    • receipts
    • journal entries
    • bills of sale
    • lease documents.

    Total kilometres travelled

    If you use the statutory formula method to calculate the taxable value of a car fringe benefit provided before 7.30pm AEST on 10 May 2011, or where you had a pre-existing commitment for a car benefit provided after that time, or you are required to use the transitional rates, you have to determine the total kilometres travelled by the car during the year. The best way to do this is to keep a record of the odometer readings at the beginning and end of the FBT year.

    If you do not record odometer readings for the car, it is acceptable to provide appropriate evidence of two separate odometer readings close to the beginning and end of the FBT year, for example:

    • vehicle purchase or sale invoices showing an odometer reading
    • repair invoices showing an odometer reading
    • service records showing an odometer reading
    • any document used for registration purposes that shows an odometer reading (for example, pink slips)
    • entries in your logbooks showing an odometer reading close to the beginning and/or end of the FBT year (as long as the entry is dated, shows the name and signature of the person making the entry and the odometer reading)
    • fleet management or oil company charge cards that show an odometer reading on account statements
    • if a new car was purchased and no odometer reading was recorded on the vehicle purchase invoice, zero kilometres is acceptable as the opening odometer reading.

    Days available for private use

    If a car is available for private use every day of the year, you do not have to keep records of when the car is available. But you must record the days when the car is not used or available for private travel. You can do this in a number of ways, including referring to the pattern of use - for example, where a car is garaged each night.

    Operating cost method records

    Calculating and substantiating the percentage of business use

    If you use the operating cost method to calculate the taxable value of a car fringe benefit, you have to calculate the percentage of business use of the car and keep records that substantiate the percentage of business use.

    Because logbook records are normally maintained for only 12 weeks, take care in estimating the percentage of business use of the car. The estimate must take into account the information in the logbook records and the odometer records, as well as any variations in the pattern of business use throughout the year.

    The percentage of business use of a car is calculated as:

    A ÷ B x 100%

    Where:

    • A = your estimate of business kilometres travelled by the car during the FBT year (or part-year, as the case may be)
    • B = the total kilometres (both business and private) actually travelled by the car during the same period.

    Estimating the business kilometres travelled in a logbook year

    In estimating the business kilometres travelled in a logbook year, you must:

    • keep a logbook recording details of business journeys undertaken in the car for a continuous period of at least 12 weeks (the logbook period must also be recorded in the logbook)
    • keep odometer records of the total kilometres travelled during that period
    • keep odometer records of the total kilometres travelled during the year
    • estimate the number of business kilometres travelled during the full FBT year (or part-year, if appropriate)
    • take into account all relevant matters, including logbook, odometer and any other records you keep, and any variations in the pattern of business use throughout the year due to things like holidays or seasonal factors.

    Estimating the business kilometres travelled in a non-logbook year

    In estimating the business kilometres travelled in a non-logbook year, you must:

    • keep odometer records of the total kilometres travelled during the year (or part-year, if appropriate)
    • estimate the number of business kilometres travelled during the full FBT year (or part-year, if appropriate)
    • take into account all relevant matters, including logbook, odometer and any other records you keep, and any variations in the pattern of business use throughout the year due to things like holidays or seasonal factors.

    Replacement cars

    If you replace a car during the year, you may treat the replacement car as though it were the replaced car for the purposes of complying with the requirements of the operating cost method.

    If you maintained logbooks and odometer records during the year or in a previous year, you may transfer that percentage to the new car (if it remains appropriate) when estimating a business percentage for the replaced car.

    The transfer of a business percentage in this way is conditional on you recording in your business records the make, model and registration number of both cars and the date on which the replacement was made. These entries must be made before the due date for lodging your annual FBT return or, if you do not have to lodge a return, by 21 May. Odometer records you keep for the cars during the replacement year must show details of the odometer readings of both the replaced car and the new car on the replacement date.

    Logbook year

    A year is a logbook year if one of the following applies:

    • none of the previous four years was a logbook year of tax for that car
    • you elect to treat the year as a logbook year (for example, to increase the nominated percentage of business travel)
    • the Commissioner of Taxation, by written notice, requires you to treat the year as a logbook year.

    See also:

    • TD 2012/7 - Fringe benefits tax: what is the benchmark interest rate to be used for the fringe benefits tax year commencing on 1 April 2012
    • TD 2011/6 - Fringe benefits tax: what is the benchmark interest rate to be used for the fringe benefits tax year commencing on 1 April 2011
    • TD 95/63 - Fringe benefits tax: where a car is acquired at the end of a lease, is the acquisition at the residual value an 'arm's length transaction' for the purposes of section 43 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)
    • TD 94/16 - Fringe benefits tax: where an employee is provided with a car by the employer and the car is kept in safe storage (for example, in a commercial garage) while the employee is travelling, under what circumstances is that car taken to be available for private use under section 7 of the Fringe Benefits Tax Assessment Act 1986
    • TD 94/19 - Fringe benefits tax: is the method outlined in Taxation Ruling MT 2024 appropriate for determining whether a vehicle, other than a dual or crew cab, is 'designed for the principal purpose of carrying passengers' and thereby ineligible for the work-related use exemption available under subsection 8(2) of the Fringe Benefits Tax Assessment Act 1986
    • IT 28 - Leasing arrangements of plant and machinery
    • TR 1999/15 - Income tax and fringe benefits tax: taxation consequences of certain motor vehicle lease novation arrangements
    • TR 2011/3 - Fringe benefits tax: meaning of 'cost price' of a car, for the purpose of calculating the taxable value of car fringe benefits
    • Miscellaneous Tax Ruling
    • MT 2033 - Fringe benefits tax: application of subsection 8(2) exemption to modified cars
    • MT 2024 - Fringe benefits tax: dual cab vehicles eligibility for exemption where private use is limited to certain work related travel
    • MT 2027 - Fringe benefits tax: private use of cars - home to work travel
    • MT 2050 - Fringe benefits tax: payment of recipients contributions by journal entry
    • Fringe benefits tax - exempt motor vehicles

    Changes and updates

    The following tables detail any major changes and updates made to this chapter.

    May 2011

    Section

    Changes and updates

    More information

    Most recent tax determinations and publication included.

    Removed reference to older tax rate determinations.

    July 2011

    Section

    Changes and updates

    7.4 Statutory formula method

    On 10 May 2011, the government announced changes to the statutory formula for calculating a car fringe benefit.

    Days available for private use and period car held have been changed to different time periods at 'Example 1' under 'Example: Calculation using the statutory formula method'.

    At 'Example: Calculation using the statutory formula method', example 2 included for car shared between employees.

    August 2011

    Section

    Changes and updates

    7.2 Taxable value

    Added information about the 2011 Budget changes to the statutory formula method.

    7.4 Statutory formula method

    Added information about what rate applies, and when the old rates can still be used, as a result of the 2011 Budget changes to the statutory formula method.

    Added information to assist with transition to new 20% rate, including examples of application.

    At 'Cost price', updated information to reflect views expressed in TR 2011/3.

    7.5 Operating cost method

    At 'Cost price', updated information to reflect views expressed in TR 2011/3.

    7.8 Record keeping requirements for cars

    At 'Total kilometres travelled', updated information to reflect records of kilometres travelled not required where the new 20% rate is used.

    April 2012

    Section

    Changes and updates

    7.7 Novated leases

    Updated information about purchasing a car at the end of the lease.

    More information

    Added the most recent tax determinations and ruling relating to purchasing a car at the end of a lease.

      Last modified: 15 May 2017QC 17818