Edited version of private ruling

Authorisation Number: 1011726503510

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: entitlement to input tax credits

Question

Are you entitled to claim the full input tax credits on the acquisitions related to the provision of the salary packaging arrangements to your employee?

Answer

Yes, you are entitled to the input tax credits for the acquisitions related to the provision of the salary packaging arrangements to your employee.

Relevant facts and circumstances

You are an Australian resident entity. You are registered for GST.

X is your employee (employee). The previous employer where X worked owns a motor vehicle, which the employer allowed him to use for private purposes. X has an arrangement with the previous employer and is continuing to hire the car from the previous employer at a nominal fee until X can make some arrangement with you, his current employer.

Your employee proposes a sale and lease back scheme with the Lessor, who is registered for GST.

The proposal is as follows: your employee will enter into a novated lease arrangement with you and the finance company, (the Lessor), to lease the Goods (the motor vehicle).

The lease is to provide the employee with the motor vehicle. The employee is the lessee, while the Lessor is the finance company. The proposed novated lease is a standard novated lease that the Lessor uses for their customers.

The employee uses the motor vehicle for business purposes and for private purposes.  

The provision of the lease of the motor vehicle to the employee is part of his compensation for providing employee services to you.  

The employee will agree to transfer his rights and obligations as the lessee to you, including the obligation to make the lease payments. The employee pays the running costs; however, you will reimburse him the costs.

You provided us with a copy of the proposed novation arrangement (novated lease). This is the only lease which will be entered into between you, the lessor and the employee.

Your proposed novated lease contains the rental schedule and copy of a proposed tax invoice which states all three parties' names.

The novated lease specifies that the employer must perform the obligations of the lessee during the novation period.

The novated lease specifies that when the lease ends the lessee must return the goods to the place and the person that the Lessor nominates. The lessee will sign and hand over all documents necessary to transfer the registration or licence of the motor vehicle to the person that the Lessor nominates.

The novated lease specifies that once the goods are returned to the Lessor, the lessor must either offer the Goods for sale at a public auction or attempt to re lease the Goods. There is no express or implied agreement under which ownership would pass to the lessee at the end of the lease.

Reasons for decision

Your novation arrangement

Under a full or split full arrangement

§ your employee enters into a lease with a finance company, and

§ you enter into a deed of novation (tripartite agreement) with your employee and the finance company.

Under the deed of novation, you may agree with your employee and the finance company to take on all, or some, of the employee's rights and obligations in the original lease agreement.

Under a full novation arrangement, you are responsible for making the lease payments and guaranteeing the residual value of the vehicle at the end of the lease. Under a split full novation arrangement, you are responsible for making the lease payments but you are not responsible for guaranteeing the residual value of the vehicle at the end of the lease. Your employee retains this obligation.

Under a deed of novation that involves a revocation of the original lease, the supply of the vehicle is made directly by the finance company to you, even if your employee retains the obligation to guarantee the residual value.

In your case, there is no express or implied agreement in the novated lease under which ownership would pass to the lessee at the end of the lease.

The Residual Value of the motor vehicle is specified in the rental schedule and the termination amount is mentioned in the novated lease as follows: where there is a total loss of the Goods, you have to pay the termination amount (including the residual value).

We consider that you agree with your employee and the finance company to take on all the employee's rights and obligations in the original lease agreement during the Novation Period as specified in the novated lease.

Your entitlement to the input tax credits for the acquisitions related to the provision of the motor vehicle as a salary packaging arrangement to your employee

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

For a supply to be taxable under paragraph 11-5(b) of the GST Act, all the requirements of section 9-5 of the GST Act must be satisfied. Section 9-5 of the GST Act states:

You make a taxable supply if:

(a)    you make the supply for *consideration; and

(b)    the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c)    the supply *is connected with Australia; and

(d)    you are *registered or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

From the facts given, the Lessor's supply of the lease of the motor vehicle to you satisfies the requirements of paragraphs (a), (b) and (d) of section 9-5 of the GST Act as follows:

§ the Lessor makes a supply of the lease of the motor vehicle to you and in return receives consideration by way of payments;

§ the Lessor makes the supply in the course or furtherance of their business;

§ the Lessor supplies the lease to you through an enterprise that the Lessor carries on in Australia, therefore the supply is connected with Australia (paragraph 9-25(5) (b) of the GST Act);

§ the Lessor is registered for GST

In addition, the supply of the lease is neither GST-free nor input taxed under any provision of the GST legislation. Hence the supply by the Lessor to you satisfies paragraph 11-5(b) of the GST Act.

From the fact, the supply by the Lessor also satisfies paragraphs (c) and (d) of section 11-5 of the GST Act because you paid rental payments for the novated lease to the Lessor, and both you and the Lessor are registered for GST.

We need to discuss if your acquisition satisfies paragraph (a) of section 11-5 of the GST Act. Whether you are entitled to the full input tax credit on the acquisition made by you in order to provide the car benefit to your employee depends on whether you acquire the leased car for a creditable purpose. Section 11-15 of the GST Act, which explains the meaning of 'creditable purpose', states:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:
(a) the acquisition relates to making supplies that would be *input taxed; or
(b) the acquisition is of a private or domestic nature.

…

According to the information you provided, your employee can use the car for work as well as for private purposes.

Paragraph 52 of Goods and Services Tax Ruling GSTR 2001/3 states as follows:

52. An acquisition or importation you make to provide a fringe benefit in respect of employment in your enterprise is made in carrying on the enterprise and is not of a private or domestic nature for the purposes of section 11-15 and section 15-10

Therefore, whether you are entitled to the full input tax credits on the acquisitions made by you in order to provide the car benefits to your employees depends on whether the acquisitions are creditable. They would not be creditable if they are related to the making of input taxed supplies.

Your acquisitions are paid for by the payments for the novated lease and car running costs. 

The concepts of 'remuneration benefit' and 'work benefit' have been discussed in GSTR 2001/3. Paragraph 55 of GSTR 2003/1 states: 

'Remuneration benefits' are benefits provided to employees which, together with salary and wages, are provided by employers in return for employee services. Acquisitions that relate to providing these remuneration benefits will not relate to other supplies that an entity makes, such as input taxed supplies that an entity makes to clients or customers. 

Benefits provided to employees under a salary packaging arrangement are generally 'remuneration benefits' and as such they are not related to other supplies that the entity makes to clients or customers. This is supported by the examples set out in paragraphs 56 and 57 GSTR 2001/3 as follows: 

56. Examples of Remuneration Benefits would include:

* Use of a car to be used for employee's private travel;

* Entertainment provided to employees;

* Employee holiday travel and accommodation.

Example 9


57. International Bank acquires a car by way of lease, undertaking to make lease payments to a lessor so as to provide employee Eva with a motor vehicle for her private use, entirely as a remuneration benefit. The bank does not require the car to be used for work activities. The supply of the car to International is a taxable supply. International is entitled to input tax credits for the lease payments on the car and for car running costs such as petrol and repairs that it incurs to the extent that it meets the other requirements of section 11-5.

Accordingly, your provision of car fringe benefits to your employees under a salary packaging arrangement is not related to the supplies you make as a school.  

Therefore you are entitled to the input tax credits for the acquisitions. In your case, to the extent that the acquisition is made to provide a motor vehicle for the private use of your employee, it is made for a creditable purpose. Likewise, to the extent that the motor vehicle is used for work purpose, it is an acquisition for your enterprise and is made for a creditable purpose; hence your acquisition satisfies paragraph (a) of section 11-5 of the GST Act.

Therefore your acquisition satisfies section 11-5 of the GST Act and the acquisition is a creditable acquisition made by you. The entity that made the creditable acquisition must have a valid tax invoice for the acquisition in order to claim the input tax credit.

Section 29-70 of the GST Act and Regulation 29-70.01 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) set out the information that must be contained in a tax invoice. It includes the requirement that a tax invoice must state the name and address or ABN of the recipient. If the invoice does not contain this information it is not a valid tax invoice. Consequently, an entity may not claim an input tax credit on a creditable acquisition unless it holds a valid tax invoice for that acquisition.

Goods and Services Tax Advice GSTA TPP 056 states that subsection 29-70(1) of the GST Act allows the Commissioner discretion to treat a fully novated lease agreement (in the form of a tripartite agreement) as a tax invoice provided it satisfies the other information requirements for tax invoices. The Commissioner can also treat a tax invoice held by the employer but issued to the employee as a tax invoice issued to the recipient of the supply.

If you enter into a deed of full novation, for GST purposes, you are the lessee of the vehicle from the Lessor. Since this lease to you is taxable, the acquisition would be creditable acquisition made by you and the Lessor must provide you (not your employee) with a tax invoice if requested.

Note

Taxation Ruling TR 1999/15 deals with the taxation consequences of certain motor vehicle lease novation arrangements.

Paragraph 25 of TR 1999/15 states that in a full novation the lease payment obligations are transferred to the employer. It is explained in paragraph 27 of TR 1999/15 that the employer becomes the lessee under the novated lease.

Irrespective of whether the lease is a fully novated or partially novated lease, under the terms of the agreement the employee novated to the employer all of the expenses relating to the vehicle. As such, it is the employer who was incurring the expense and fringe benefits tax liability.