Edited version of private ruling

Authorisation Number: 1011658339039

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Ruling

Subject: Assessability of refund from novated lease

Is the full amount of the refund of the budgeted surplus on your novated lease assessable?

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2005

Relevant facts

As part of your income package, you entered into a four year novated lease arrangement with your employer. This lease was for a motor vehicle and running expenses, with a budgeted amount for running expenses.

You ceased employment prior to the completion date of the lease.

The employer made some payments after you ceased employment. The novated lease appears to have continued even though you had ceased employment.

The provider of the novated lease called upon you to make two payments out of your after tax income for the June and July periods. The rental was broken up into a finance component and a service component.

At the end of the lease the novated lease provider refunded an amount to you being the difference between the estimated costs budgeted for at the commencement of the lease and the actual expenses for the period of the novated lease.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(1)

Income Tax Assessment Act 1997 Section 23L

Income Tax Assessment Act 1997 Section 6-15

Fringe Benefits Tax Assessment Act 1986 Section 23L

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision

Summary

The refund of the service fee component that you paid from your own funds (after tax income) does not form part of your assessable income.

Detailed reasoning

An employee's remuneration package may include salary, wages or fringe benefits provided by the employer.

Salary or wages are considered to be income according to ordinary concepts under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and are therefore assessable income.

Income provided in the form of fringe benefits, as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), are exempt income under subsection 23L(1) of the Income Tax Assessment Act 1936 . Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income it is not assessable income.

The definition of fringe benefit under subsection 136(1) of the FBTAA specifically excludes a payment of salary or wages.

If a fringe benefit has not been provided and is cashed out at the end of a salary sacrifice arrangement accounting period, the amount cashed out is salary and is taxed as normal income.

Your case

In your case, you took out a novated lease from a lease provider with your then employer. You ceased your employment prior to the completion date of the lease. For some reason the employer has continued to make payments after the cessation of your employment. The novated lease did not cease as would normally be expected.

In the completion of the lease you were required to make two "employer payments" which included a component for the running expenses. You would normally expect to only pay the finance component as after cessation of employment you are paying the running expenses yourself.

You received a refund from the novated lease provider being the difference between the estimated costs and kilometres budgeted for running expenses at the commencement of the lease and the actual expenses for the period of the term.

You received the refund because the full value of benefit to be provided as part of your salary sacrifice arrangement was not delivered. As such under normal conditions, the refund you received is considered to be salary and wages and thus constitutes assessable income.

Part of the refund is a reimbursement of the payment you made for running expenses out of your after tax income. This reimbursement does not form part of your assessable income.

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