Edited version of private ruling

Authorisation Number: 1011785331761

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: Car expenses incurred by an employee

Are you entitled to a deduction for car expenses calculated using the `cents per kilometre method' under Division 28 of the Income Tax Assessment Act 1997 (ITAA 1997), for a car provided by your employer under a novated lease as part of your salary package?

Advice/Answers

No.

Scheme

The Taxpayer has entered into a novated lease agreement with their employer for a motor vehicle as part of their salary package.

Payments for lease and maintenance are taken from the Taxpayer's pre-tax salary.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 28

Income Tax Assessment Act 1936 Section 51AF

Reasons for decision

Issue 1

Question 1

Summary

You are not entitled to a deduction for car expenses calculated using the `cents per kilometre method' under Division 28 of the ITAA 1997, for a car provided by your employer under a novated lease as part of your salary package.

Detailed reasoning

Discussion of law

Section 8-1 of the ITAA 1997 allows a deduction of any losses or outgoing to the extent to which they are incurred in gaining or producing your assessable income, except where the loss or outgoing is of a capital, private or domestic nature or if a provision of the ITAA 1997 prevents you from deducting it.

Division 28 of the ITAA 1997 contains the rules for working out deductions for car expenses if you own or lease a car or hire a car under a hire purchase agreement, and explains the four methods that may be used to calculate the expense amount. One of these methods is the `cents per kilometres' method.

Section 51AF of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny a deduction for car expenses incurred by an employee in respect of a car provided by an employer for the exclusive use of the employee (or relatives of the employer) if the employee (or the employee's relatives) is entitled to use the car for private purposes.

This prevents `double dipping' so that an employee cannot claim expenses already factored into the formulas used to calculate fringe benefits tax assessed to the employer.

Taxation Ruling TR 1999/15

Taxation Ruling TR 1999/15 provides guidance on the taxation consequences of certain motor vehicle lease novation arrangements.

According to paragraph 4 of TR 1999/15 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. As a result of a full novation the employer takes over all the rights and responsibilities contained in the original lease. Accordingly, there are no income tax consequences for the employee during the period where the employer makes the lease payments.

The employer in the novated lease 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.

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

Application of the law to your circumstances

You have stated that you entered into a fully novated lease arrangement with your employer for the provision of a motor vehicle as part of our salary package. Under the lease agreement you have exclusive use of the car and are entitled to use the car for private purposes.

In novated lease arrangements, as the employee has no contractual obligations regarding the lease payments of the car they are not considered to own or lease the car, therefore Division 28 of the ITAA 1997 finds no application in your circumstance.

When you elected to salary sacrifice in respect of the motor vehicle you received less salary and as a result paid less income tax. You received the right to use the motor vehicle and in respect of that use you were not confined to business purposes and therefore additionally entitled to personal use of the vehicle. This benefit attracted fringe benefits tax.

Section 51AF of the ITAA 1936 was intended to ensure that any contribution by the recipient (of the car benefit) was used solely to reduce the employer's fringe benefit tax liability, therefore denying deductions for car expenses incurred by employees on the view that such expenses have the true character of a reimbursement by the employee to the employer for the right private use of the car. It was not intended that the same expenditure could be used to gain a deduction for the employee.

Conclusion

As you are in a fully novated lease arrangement with your employer, you are not taken to own or lease the vehicle. Therefore, you are not entitled to a deduction under division 28 of the ITAA 1997.

Additionally, section 51AF of the ITAA 1936 specifically denies a deduction in these circumstances.