Edited version of private advice

Authorisation Number: 1051933760643

Date of advice: 14 December 2021

Ruling

Subject: FBT car benefits - associate leases

Issue 1

Question 1

Will the payment of car expenses by the associate/lessor constitute recipient's payments for the purposes of section 9 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), that are available to reduce the taxable value of the relevant car fringe benefit?

Answer

Yes, the payment of car expenses by the associate/lessor constitute recipient's payments for the purposes of section 9 of the FBTAA, that are available to reduce the taxable value of the relevant car fringe benefit.

Issue 2

Question 2

Will the Commissioner apply section 67 of the FBTAA to the arrangement described, to negate any tax benefit obtained by the employer?

Answer

No, the Commissioner will not apply section 67 of the FBTAA to the arrangement described, to negate any tax benefit obtained by the employer.

This ruling applies for the following periods:

FBT years 1 April 20XX to 31 March 20XX

The scheme commences on:

1 April 20XX

Relevant facts and circumstances

The employer offers salary packaging of cars to their employees through "associate lease arrangements". These arrangements are a variation on traditional associate leases. The arrangement is an operating lease arrangement, where all running costs are paid by the lessor. (A copy of the lease agreement template was provided).

The arrangement in relation to which the Council seeks a private binding ruling will operate as follows:

·                    The employer leases a vehicle from the "associate" of its employee ("associate" having the meaning it has for the purposes of the FBTAA).

·                    The associate is the owner of the vehicle, or has financed, or is financing it. The associate is therefore the lessor.

·                    The vehicle is a "car" as defined for the purposes of the FBTAA.

·                    The lease will be a "fully maintained" operating lease - that is, the associate/lessor will bear all the running costs (including insurance, registration, servicing, repairs, and fuel) associated with the vehicle and there will be no residual value.

·                    The lease payments (which are comprised of two components, a lease charge plus estimated running costs) will be set at a flat amount that does not fluctuate and the associate/lessor will bear the risk of fluctuations in the running costs.

·                    The employee will give up a combination of pre and post-tax salary, under an effective salary packaging arrangement, to cover the lease payments being made by the employer (the lessee) to the associate/lessor and any FBT (although in most cases the post-tax salary deductions will eliminate the FBT liability).

·                    The employer will provide the use of the car to the employee and the associate/lessor.

·                    The associate is a recipient of the car fringe benefit.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 7

Fringe Benefits Tax Assessment Act 1986 section 9

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Issue 1

Question 1

Will the payment of car expenses by the associate/lessor constitute recipient's payments for the purposes of section 9 of the FBTAA that are available to reduce the taxable value of the relevant car fringe benefit?

Summary

The car expenses paid by the associate/lessor constitute recipient's payments and will be available to reduce the taxable value of the relevant car fringe benefit.

Detailed reasoning

The employer intends to provide a leased vehicle to the employee and the employee's associate. The do this, the employer enters into an associate lease arrangement with the associate of the employee. The associate is therefore the lessor, and also a recipient of car fringe benefits. Under the associate lease arrangement, the lessor pays for car expenses, Contributions by recipients of car fringe benefits towards the car expenses can be used to reduce the taxable value of the car fringe benefits. The circumstances of the arrangement raises the issue as to whether the payments for car expenses incurred by the associate/lessor are recipient's payments for the purposes of section 9 of the FBTAA. In determining whether the payments constitute recipient's payments it is necessary to start by considering the definition of 'recipient's payment' in paragraph 9(2)(e).

Recipient's payment

Subparagraph 9(2)(e)(ia) and (ii) of the FBTAA explains that where a car is provided for use by both the employee and an associate (i.e. in an associate lease arrangement), expenses paid by the recipient are included in the amount of the recipient's payment.

9(2)(e) [Taxable value of car fringe benefits]

For the purposes of this section:

(i) in a case where expenses were incurred by 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;

(ia) in a case where car expenses in respect of fuel or oil for the car were incurred during the holding period by recipients of the car fringe benefits and:

(A) the persons incurring those expenses give to the employer, before the declaration date, declarations, in a form approved by the Commissioner, in respect of those expenses; or

(B) documentary evidence of those expenses is obtained by the persons incurring the expenses and given to the employer before the declaration date;

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; and

(ii) in a case where:

(A) car expenses in respect of the car (other than car expenses in respect of fuel or oil for the car) were incurred during the holding period by recipients of the car fringe benefits; and

(B) documentary evidence of those expenses is obtained by the persons incurring the expenses and given to the employer before the declaration date;

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.

In considering these paragraphs, subparagraph 9(2)(e)(i) of the FBTAA will not apply as the expenses paid by the associate are for the purpose of facilitating a full operating lease to the employer, rather than for the provision of the car fringe benefit.

Subparagraphs 9(2)(e)(ia) and (ii) of the FBTAA will apply in relation to the car expenses incurred during the holding period if the necessary documentation is provided.

However, it should be noted that not every expense to be paid by the associate will be a car expense. A 'car expense' is defined in subsection 136(1) of the FBTAA to mean 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

Where expenses are incurred for the above items the amounts that are incurred are for car expenses. In the situation being considered the lease will be a "fully maintained" operating lease. As per the lease agreement, the associate/lessor will bear all the running costs (including insurance, registration, servicing, repairs, and fuel) associated with the vehicle. These items are car expenses.

Recipients of car fringe benefit

'Recipient' is defined in subsection 136(1) of the FBTAA to mean 'the person to whom the benefit is provided'. In this context, the car benefit in the associate lease arrangement will be provided to both the employee and the employee's associate. Where car expenses are incurred by recipients of the car fringe benefit, the amounts may be treated as a recipient's payment if the necessary documentation is provided.

Subsection 7(1) of the FBTAA provides that a car benefit will arise where at any time on a day a car held by the employer is either:

·                    applied to a private use by the employee or associate, or

·                    taken to be available for the private use of the employee or associate under either subsection 7(2) or 7(3).

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 an associate of the employee; or

(ii) is taken to be available for the private use of the employee or an associate of the employee; and

(b) either of the following conditions is satisfied:

(i) the provider is the employer, or an associate of the employer, of the employee;

(ii) the car is so applied or available, as the case may be, under an arrangement between:

(A) the provider or another person; and

(B) the employer, or an associate of the employer, of the employee;

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

Under the arrangement proposed in the scheme, the car will be applied to a private use by either, or both, the employee and the associate/lessor, making the associate/lessor also a recipient of the car benefit.

This position is supported by the ATO in the minutes of the National Taxation Liaison Group FBT (NTLG) FBT Sub-committee Meeting of 17 August 2006:

"It is accepted that the 'associate' is an associate of the employee as defined for the purposes of the FBTAA. In determining whether the associate is a recipient, 'recipient' is defined in subsection 136(1) to mean 'the person to whom the benefit is provided'. In the context of the car benefits provided in an associate lease arrangement, car benefits may be provided to both the employee and the associate.

Therefore, the 'associate' will be a 'recipient' and the taxable value of the car fringe benefits that arise will be able to be reduced by the car expenses incurred during the holding period by the associate which are included by reason of subparagraph 9(1)(e)(ia) or (ii)."

These particular arrangements have since been considered by the ATO, and the ATO position confirmed in the FBT Working Group Minutes of 16 October 2019; and the FBT Working Group Key Messages of 5 August 2020.

Conclusion

In the arrangement, car expenses will be incurred and paid by the associate/lessor on the basis of providing the car to the employer as part of a "fully maintained" operating lease for a car. They are related to the provision of car fringe benefits to the lessor as an associate of the employee. The employee and the associates are recipients of the car fringe benefits. The car expenses paid by the associate/lessor are therefore, considered recipient's payments for the purposes of section 9 of the FBTAA, The recipient's payments are available to reduce the taxable value of the car fringe benefit provided to the employee's associate.

Issue 2

Question 2

Will the Commissioner apply section 67 of the FBTAA to the arrangement described, to negate any tax benefit obtained by the employer?

Summary

Section 67 of the FBTAA will not apply as the employer will not obtain a tax benefit from this arrangement.

Detailed reasoning

Section 67 of the FBTAA contains an anti-avoidance provision, which applies where an employer may otherwise obtain a tax benefit in connection with an arrangement he has entered into or carried out for the sole or dominant purpose of enabling the employer to obtain an FBT benefit.

The section requires:

·                    the identification of an arrangement

·                    a tax benefit obtained by the employer that was the sole or dominant purpose for a person entering into the arrangement and

·                    that it is activated by the making of a determination by the Commissioner.

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules provides guidance on the application of section 67 of the FBTAA. It has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains how section 67 of the FBTAA operates. Most notably, paragraphs 145-148 provide as follows:

145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit.

147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i) a benefit is provided to a person;

(ii) an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

Subsection 67(2) of the FBTAA:

67(2) [Reference to obtaining a tax benefit]

A reference in this section to the obtaining by an employer of a tax benefit in respect of a year of tax in connection with an arrangement under which a benefit is provided to a person is a reference to an amount not being included in the aggregate fringe benefits amount of the employer of the year of tax in respect of that benefit where the amount would have been included, or could reasonably be expected to have been included, in that aggregate fringe benefits amount if the arrangement had not been entered into or carried out.

It is clear that the Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 under the heading "Appendix, Question 18" where, on the application of section 67, the Commissioner states:

...As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement...

Further, paragraph 151 of Practice Statement 2005/24 provides:

151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

You state that if the associate lease arrangement is not entered into, the employer will not provide any car fringe benefit and there will be no amount to include in the aggregate fringe benefit amount. Therefore, the employer would not be paying less FBT by entering into this agreement.

On the assumption that this is the case, the Commissioner will not make a determination that section 67 of the FBTAA applies to include an amount in the aggregate fringe benefits amount of the employer.

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