Edited version of private ruling

Authorisation Number: 1011501894549

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Ruling

Subject: Fringe benefits tax: Novated car leases

Question 1

Does a single fringe benefits tax liability exist if the employer enters into a novated car lease agreement with their employee, pays the novated lease payment and vehicle running costs, and provides the car for the private use of the employee?

Answer

Yes.

Question 2

Does a fringe benefit arise if the employee acquires the car for the residual value at the completion of the lease?

Answer

No.

Question 3

Are payments to the employer made by the employee out of after tax income where the employer provides the employee with the private use of a vehicle the subject of a novated lease agreement, "recipient's payments" that reduces the taxable value of the car fringe benefits liability provided to the employee?

Answer

Yes.

This ruling applies for the following periods:

1 April 2010 - 31 March 2011

1 April 2011 - 31 March 2012

1 April 2012 - 31 March 2013

The scheme commences on:

1 April 2010

Relevant facts and circumstances

The employer's employees will enter into the Lease Agreement with one of the Finance companies.

The employer will enter into novated car lease agreements with the employee and one of the Finance companies.

The employer will pay the lease payments and the vehicle running costs which are registration, insurance, repairs, maintenance and fuel.

The employees will be responsible for the residual payment and the excepted obligations.

The employees plan to make payments directly to the employer out of their after tax incomes to reduce or eliminate any fringe benefits tax liability incurred by the employer as a result of the novated car lease agreements.

The relevant clauses from the three Lease Agreements and Novation Agreements indicate that:

· the lease rights and obligations from the original lease agreement are novated to and assumed by employer - except for the residual value and the excepted obligations.

· there is no express or implied agreement under which ownership would pass to the lessee at the end of the lease.

Question 1

Summary

The employer is regarded as 'holding' the relevant cars for the purposes of subsection 7(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) per paragraph 162(1)(b) of the FBTAA and paragraph (a) the definition of 'person' in subsection 136(1) of the FBTAA.

The provision of the Leased Cars to the employer's employees for application by these employees for the employees' private use will be a car benefit under subsection 7(1) of the FBTAA. Subsection 136(1) of the FBTAA defines a 'car fringe benefit' to mean a fringe benefit that is a car benefit.

It is accepted that the Leases are all split full novation leases as described in TR 1999/15.

Any fringe benefits tax (FBT) liability arising under the relevant arrangements for the Leased Cars will only be in respect of the car fringe benefits provided and not also in respect of any expenditure paid or reimbursed by the employer for registration, insurance, repairs, maintenance or fuel, as relevant, as such latter expenditures are exempt benefits section 53 of the FBTAA.

Detailed reasoning

Subsection 7(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) states that 'car benefits' when car benefits arise as follows:

7(1)  [Car applied to...employee's private use]  

Where:

(a) at any time on a day, in respect of the employment of an employee, a car held by a person (in this subsection referred to as the ``provider''):

(i) is applied to a private use by the employee... or

(ii) ...

(b) ...the following conditions is satisfied:

(i) the provider is the employer...of the employee;

(ii) ...

that application...shall be taken to constitute a benefit provided on that day by the provider to the employee...in respect of the employment of the employee.

Subsection 162(1) of the FBTAA states when a car is 'held' for the purposes of the FBTAA as follows:

162(1)  [``Car held by a person''] 

In this Act, unless the contrary intention appears, a reference to a car held by a person is a reference to:

(a)  ...

(b) a car leased to the person; or

(c) ...

A 'person' is defined in subsection 136(1) of the FBTAA as follows:

"person" includes:

(a) a body politic;

(b) a body corporate;

(c) a partnership;

(d) any other unincorporated association or body of persons; and

(e) a person in the capacity of trustee.

Section 53 of the FBTAA states that certain benefits provided when car benefits are provided are exempt benefits as follows:

SECTION 53  MOTOR VEHICLE FRINGE BENEFIT FUEL ETC. TO BE EXEMPT IN CERTAIN CASES 

53(1)  [Benefits provided when car fringe benefit provided]  

For the purposes of this Act:

(a) a car expense payment benefit;

(b) ...

(c) ...

in respect of a car, being a benefit that is attributable to a period when a car fringe benefit was provided... in relation to the car, is an exempt benefit.

53(2)  ...

53(3)  [Definitions]  

In this section:

"car expense payment benefit" means an expense payment benefit where the recipients expenditure is a car expense;

...

Section 20 of the FBTAA states that an expense benefit arises where:

20  EXPENSE PAYMENT BENEFITS

Where a person (in this section referred to as the ``provider''):

(a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the ``recipient'') to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the ``recipient''), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

Subsection 136(1) of the FBTAA provides the following definitions:

"car fringe benefit" means a fringe benefit that is a car benefit.

"recipients expenditure" , in relation to an expense payment benefit, means the expenditure incurred by the recipient as mentioned in paragraph 20(a) or (b), as the case requires.

"car expense" , in relation to a car, means an expense incurred in respect of:

(a) the registration of, or insurance in respect of, the car;

(b) repairs to or maintenance of the car; or

(c) fuel for the car.

Taxation Ruling TR 1999/15, Income tax and fringe benefits tax: taxation consequences of certain motor vehicle lease novation arrangements (TR 1999/15) provides the following guidance on certain motor lease novation arrangements:

4. A novation is a tripartite arrangement whereby the three parties (lessor, lessee and employer) agree to change or transfer all or some of the rights and obligations in a motor vehicle lease entered into between two of the parties.

..

Full novation is a novation (transfer) of all the rights and obligations in a finance lease or in a finance lease and sub-lease arrangement. As a result of a full novation the employer takes over all the rights and responsibilities contained in the original lease.

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

...

The effect of novations

Full novations

6. In full novations the lease obligations are transferred to the employer...

7. ...

8. A car benefit arises under the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where the employer is lessee of a car that is provided for the private use of the employee or associate of the employee.

According to the relevant clauses in the Leases the employee novates the Lease Rights and Obligations to the employer except for the residual value and excepted obligations.

It is therefore accepted that the Leases are all split full novation leases as described in TR 1999/15.

Split full novation arrangements and finance and operating leases

Taxation Ruling TR 1999/15 says, in paragraph 3, that the ruling includes both finance and operating leases however this does not necessarily lead to the conclusion that split full novation leases as addressed in TR 1999/15 are both finance and operating leases.

Accounting Standard AAS 17 sets standards for both lessees and lessors, regarding the accounting for and disclosure of lease involving land and/or depreciable assets and defines the classification of leases as 'operating' or 'finance'.

AAS 17 states:

The standard requires leases to be classified as either "operating" or "finance". The basic distinction underlying this classification is that where substantially all the risks and benefits incidental to ownership of the property effectively remain with the lessor, the lease is an operating lease; however, where the risks and benefits effectively pass to the lessee, a finance lease exists.

Furthermore, ATO ID 2001/69 Income tax: operating lease on motor vehicle, states:

The lease is a genuine operating lease: the lessee has no right nor any expectation to purchase the car at the end of the lease, there is no residual value, and the lessor bears any economic loss on disposal.

Therefore, where the risks and benefits of the lease pass to the lessee, where the lessee has a right or expectation to purchase the car at the end of the lease, or where there is a residual value, or where the lessor does not incur any economic loss on disposal a split full novation lease cannot be an operating lease.

Car fringe benefit

On implementation of the Leases, the employer is regarded as 'holding' the relevant cars (Leased Cars) for the purposes of subsection 7(1) of the FBTAA per paragraph 162(1)(b) of the FBTAA and the definition of 'person' in subsection 136(1) of the FBTAA.

In basic terms, a fringe benefit, also defined in subsection 136(1) of the FBTAA, is a benefit provided to an employee (or associate) by an employer (or associate) or a third party under an arrangement with the employer (or associate) in respect of the employee's employment and such benefit is not otherwise exempted.

Therefore, in this case, the provision of the Leased Cars to the employer's employees for application by these employees for the employees' private use will be car fringe benefits as defined.

Any expenditure or reimbursement to be undertaken by the employer in respect of the Leased Cars for registration, insurance, repairs, maintenance or fuel, as relevant, will be a 'car expense' as defined in subsection 136(1) of the FBTAA.

Also, any such 'car expenses' will be a 'car expense payment benefit' as defined in subsection 53(3) of the FBTAA per section 20 of the FBTAA and the definition of 'recipients expenditure' in subsection 136(1) of the FBTAA.

Paragraph 12 in Taxation Ruling IT 2509, Income Tax: income tax and fringe benefits tax consequences of an employee leasing a car to an employer which is subsequently provided back to the employee, provides the following guidance:

12. To the extent that the reimbursement of the car running expenses by the employer qualify as "car expense payment benefits" they are exempt from fringe benefits tax under section 53 of the Fringe Benefits Tax Assessment Act. A "car expense payment benefit" is defined in subsection 53(3) of the Fringe Benefits Tax Assessment Act as meaning an expense payment benefit where the recipient's expenditure is a "car expense". "Car expense" is defined in subsection 136(1) of the same Act as meaning an expense incurred in respect of registration, insurance, repairs, maintenance or fuel for the car. Accordingly, only the reimbursement of those expenses would be exempt fringe benefits. No exemption would be available for reimbursement of other expenses such as rental payments.

Therefore, the expenditure or reimbursement to be undertaken by the employer in respect of the Leased Cars for registration, insurance, repairs, maintenance or fuel, as relevant, will be exempt benefits under section 53 of the FBTAA.

Consequently, only car fringe benefits will arise in respect of the provision of the Leased Cars to the employer's employees for these employees' application to private use provided the only expenditures and reimbursements in regard to such cars by the employer under the particular arrangements are for registration, insurance, repairs, maintenance or fuel, as relevant.

Accordingly, any fringe benefits tax (FBT) liability arising under the relevant arrangements for the Leased Cars will only be in respect of the car fringe benefits provided and not also in respect of any expenditure paid or reimbursed by the employer for registration, insurance, repairs, maintenance or fuel, as relevant, as such latter expenditures are exempt benefits.

Question 2

Summary

As long as the residual value under the Leases is equal to or exceeds the minimum residual value calculated in accordance with the percentages of the original cost as set out in the table in IT 28 and there is no express or implied agreement under which ownership would pass to the lessee at the end of the lease the acquisition of the vehicle by the employee at the end of the lease will not incur a fringe benefits tax liability.

Detailed reasoning

Taxation Determination 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 95/63) states in paragraph 6:

6. Under certain other types of leasing arrangements, including subleases and novations, the lessee of the car may be the employee or an associate of the employee (Such arrangements are set out in more detail in Taxation Ruling IT 2509.) Consistent with the above views, the taxable value of a property fringe benefit arising (under on of these arrangements) from the purchase by the employee at the residual value, will depend on whether or not the lease is a bona fide lease.

The Commissioner accepts that, in respect of the novated lease arrangements, where the lease agreement is bona fide, the parties are dealing at arms length. Therefore a fringe benefit will not arise at the termination date or in the event that the vehicle is sold by the finance company to the employee in conjunction with the final novation of the lease.

However, where the agreement is not a bona fide lease, but is in effect a contract for the sale of goods, then the taxable value for the purposes of section 43 of the FBTAA will be the notional (or market) value at the time of acquisition of the car by the employee, less any employee contribution.

Therefore, if an employee purchases a Leased Car at the residual value there may be a property fringe benefit payable if the Leases are not bona fide leases.

Are the Leases bona fide leases?

Paragraph 4 of TD 95/63 states:

Where the residual value under a lease agreement is equal to or exceeds the minimum residual value calculated in accordance with the percentages of the original cost as set out in the table in IT 28, and where there is no express or implied agreement under which ownership would pass to the lessee at the end of the lease, we will generally accept the agreement as a bona fide lease.

The Commissioner has amended his determination for the effective life for cars from 6 and 2/3 years to 8 years, with effect from 1 July 2002, for cars acquired on or after that date. Therefore, for the lease of a car to be accepted as bona fide the residual value under the lease must be equal to or exceed the percentage of the original cost as set out in ATO ID 2002/1004 and not those set out in IT 28. The percentages in ATO ID 2002/1004 are:

Term of Lease Percentage

Year 1 66.63%

Year 2 56.25%

Year 3 46.88%

Year 4 37.5%

Year 5 28.13%

The relevant clauses in the Leases show that there is no express or implied agreement under which ownership would pass to the lessee at the end of the lease.

Conclusion

As long as the residual value under each of the Leases is equal to or exceeds the minimum residual value calculated in accordance with the percentages of the original cost as set out in the table in ATO ID 2002/1004 and there is no express or implied agreement under which ownership would pass to the lessee at the end of the lease the Leases are considered bona fide leases. Therefore the acquisition of the vehicle by the employee at the end of the lease will not incur a fringe benefits tax liability.

Question 3

Summary

The after tax payments by the employees to their employer, for the provision of a car fringe benefit, would be a 'recipient's payment' according to TR 2001/2 under subparagraph 9(2)(e)(i) of the FBTAA provided that certain conditions are met.

Detailed reasoning

Under subsection 9(1) of the FBTAA, the taxable value of car fringe benefits calculated from the statutory formula can be reduced by the amount of 'recipient's payments'. Subparagraph 9(2)(e)(i) of the FBTAA defines recipient's payment as the sum of:

(i) in a case where expenses were incurred to the provider or employer during the holding period by recipients of the car fringe benefits by way of consideration for the provision of the car fringe benefits - the amount of those expenses paid by the recipients less any amount paid or payable to the recipients by way of reimbursement of those expenses;

Taxation Ruling TR 2001/2 Fringe benefits tax: the operation of the new fringe benefits tax grossed-up formula to apply from 1 April 2000 states at paragraph 98 that:

Where the recipient's payment is paid to the employer, the full amount will be the 'amount of expenses paid by the recipient' in satisfaction of the expenses incurred to the employer or provider (if you do not have any set off for reimbursed amounts).

Furthermore, ATO ID 2005/210 states that:

Where a remuneration arrangement entered into between an employer and employee requires that the employee makes contributions, from after-tax salary income, to the extent of reducing the taxable value of any car fringe benefits to nil, only these amounts can be regarded as consideration for the provision of the car fringe benefits, due to the remuneration agreement that is in place.

In this case, the employees are reimbursing the employer for a car fringe benefit that they have provided out of a novated lease agreement. Payments made under a remuneration arrangement between the employer and their employee would be a 'recipient's payment' if the following conditions are met:

· It must be an expense incurred to you by a recipient employee;

· It must be incurred during the holding period;

· It must be paid to you by the recipient; and

· It must be reduced by the amount of any reimbursement paid or payable to the recipient by anyone in respect of the expense incurred.

Conclusion

Provided that the above conditions are met, those after tax contributions would be, according to TR 2001/2, a 'recipient's payment' under subparagraph 9(2)(e)(i) of the FBTAA.

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