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  • Car leasing fringe benefits

    Before entering into a car leasing arrangement (including novated leases) with an employee, it's important an employer or lessor understands the fringe benefits tax (FBT) implications.

    An arm’s length dealing is where each party acts independently and without influence or control over the other. It is dependent on the nature of your relationship and the quality of the bargaining between you

    FBT implications differ depending on whether the car leasing arrangement is a:

    Bona fide lease

    An employer or lessor will only be providing the employee with a car fringe benefit if the car lease arrangement is bona fide.

    A bona fide lease occurs where:

    • all dealings between the lessor, employer and employee are at arm’s length and on commercial terms. An arm’s length dealing is where each party acts independently and without influence or control over the other. It is dependent on the nature of your relationship and the quality of the bargaining between you
    • terms are not based on the reduced (net) cost of the car (that is the cost to the employer or lessor after any trade-in credit or employee cash contribution)
    • the residual value of the car is
      • based on a reasonable valuation of estimated market value at the end of the lease
      • not based on reduced (net) cost
      • not less than the minimum residual values set out in ATOID 2002/1004 Car lease residual values.
       
    • there is no agreement the employee, their associate, nominee, or agent will
      • purchase the car after the end of the lease term
      • be allowed to keep using the car after the lease termination.
       
    • an option for the employee, their associate, nominee or agent to purchase the car is by request and agreement between the lessor and purchaser as to the purchase price.

    Trade-in vehicle or cash contribution

    If an employee provides a trade-in vehicle or cash contribution towards the purchase of the car, the employer or lessor must ensure this amount doesn't reduce the lease payments or residual value.

    A trade-in credit or cash contribution can't be considered a deposit or down payment towards the purchase of the car at the end of the lease.

    Also, payments made under the lease are considered capital, not lease, payments. They are instalments under an arrangement to buy the car at some point.

    Example: Bona fide lease arrangement with up-front cash contribution

    Patrick’s employer plans to supply him a new car for private use, to the value of $40,000, under a novated lease.

    Patrick chooses a car with a purchase price of $41,600, which includes $1,600 in on-road costs (registration, stamp duty, and dealer delivery fee).

    Patrick pays the car dealer $1,600 of his own money to cover the on-road costs. Patrick and his employer enter into a lease with a Fleet Management Company (FMC). FMC, as lessor, pay the dealer the $40,000 balance.

    The lease terms are:

    • The lease payments are calculated so that, over the three-year term, they equal $40,000 minus the residual value at the end of the lease, plus interest on the difference.
    • The residual value is calculated as 46.88% of $40,000 = $18,752. This is the minimum residual value for leased assets with an effective life of eight years specified in ATO ID 2002/1004.

    For FBT purposes, the employer's expenditure is $40,000. The employer should consider this when determining the cost price of the car.

    This is considered a bona fide lease because the lease payments and residual value reflect what would normally be payable under an ordinary commercial motor vehicle lease.

    End of example

    Non-bona fide lease

    If a car lease arrangement is not bona fide, the employer or lessor will not be providing the employee with a car fringe benefit.

    Depending on the arrangement, it may instead be considered a property or residual fringe benefit, that may result in a higher FBT liability.

    See also:

    Example: Car lease arrangement is not a bona fide lease

    Sheila and her the employer enter into a novated lease with a Fleet Management Company (FMC). Sheila will have private use of the car.

    The car list price is $65,000

    The FMC, as lessor, is the purchaser of the car, and is able to obtain a $5,000 fleet discount.

    The car dealer recognises this discount when the FMC acquires the car.

    Sheila also trades-in her own car to the dealer, valued at $20,000.

    This reduces the FMC purchase price to $40,000.

    The terms of Sheila’s FMC lease are based on the (net) $40,000 cost price.

    The lease agreement states:

    • The car may be purchased at the end of the lease for a residual value based on the FMC’s cost price (e.g. 30% of $40,000 = $12,000). This is less than the minimum residual value for a $60,000 car as per ATO ID 2002/1004).
    • Payments, over the lease term, equal $40,000 minus the residual value of the car at the end of the lease, plus interest on the difference.

    As Sheila paid the $20,000 trade-in credit, her payments are less than standard commercial lease payments, and she is also able to acquire the car at less than market value.

    Under these circumstances, we wouldn't consider the lease to be bona fide. Sheila’s employer is not providing a car fringe benefit, but rather a property fringe benefit.

    End of example
    Last modified: 09 Feb 2021QC 64594