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Ruling

Subject: car expenses

Are you entitled to claim a deduction for work related motor vehicle expenses where the vehicle is subject to a novated lease?

No.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

You entered into a novated car lease agreement with a finance company and your employer for a car with under one tonne carrying capacity.

Under the agreement, your employer agreed to assume responsibility for the obligations arising under the lease, including the monthly rental instalments.

Payslips received during the income year show that you were paying the rental instalments from your net income.

You were also paying for fuel, repairs and maintenance, tyres and half of the insurance on the car.

Your employer did not treat the lease agreement as a fringe benefit for income tax purposes.

During the income year, your employer set up a separate payroll company, and, as a result, you were issued two payment summaries.

Your employer did allocate a part of your gross income as a car allowance, which has been included on your payment summaries for the income year as an allowance. This allowance has not been taxed.

The motor vehicle was used for work related travel as well as private purposes.

In a separate agreement with your employer, the employer's logo was placed on the car and in return the employer agreed to pay your vehicle's registration and part of the insurance.

Reasons for decision

Taxation Ruling TR1999/15 considers the taxation consequences of certain motor vehicle lease novation arrangements.

Novation arrangements occur where the employee takes out a finance lease for a car. The finance lease is then novated in full to the employer. As a result, the employer becomes the lessee and all the rights and obligations of the lease are transferred to the employer. The finance lease is rescinded (contractually extinguished) and replaced by the new novated lease arrangement. The employer becomes the lessee under the novated lease and is 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.

Where the employee's use of the vehicle includes private as well as work-related travel a fringe benefit is provided to the employee and this will generally incur a fringe benefits tax for the employer.  

Generally, under a novated lease agreement, an employee is deemed not to have incurred any expense in relation to the car. This is because under the terms of the agreement all of the expenses relating to the vehicle are novated to the employer. As such, the employee is provided with a car by the employer and it is the employer who is incurring the expenses and fringe benefits tax liability during the period of the novated lease.

In instances where an employee is actually incurring expenses in relation to a vehicle provided by an employer, for whatever reason, section 51AF of the Income Tax Assessment Act 1936 (ITAA 1936) specifically denies employees from claiming deductions in respect of the car expenses. The employee is prevented from claiming a deduction for expenses they have incurred because they are used to reduce the employer's fringe benefits tax liability. The expenses are factored into the formulas used to calculate fringe benefits tax assessed to the employer and if the employee was also entitled to claim a deduction for the expenses then there would be double dipping.

In your case, you entered into a novated lease agreement with your employer, however, in practice, the employer did not assume the rights and obligations arising under the lease. The lease payments, as well as the fuel, repairs and maintenance, tyres and some insurance expenses, were paid by you from your net income. However, you are not able to claim a deduction for these car expenses as a deduction is specifically denied under section 51AF of the ITAA 1936.

Even though your employer transferred its payroll functions to a separate company during the income year, resulting in two payment summaries being issued, your employment with the employer did not cease, therefore, the novated lease agreement was in place for the entire income year.

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