Edited version of private ruling

Authorisation Number: 1011800306388

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Ruling

Subject: GST and novated leases

Question 1

Are you eligible for GST credits on the novated lease contract?

Answer: Yes.

Relevant facts

You are registered for GST.

Your employee has entered into a finance lease with a finance company

You have entered into a novated motor vehicle leasing agreement with the finance company and your employee.

Under this agreement you have assumed the obligations of the employee to make the rental payments described in the lease agreement that become due during the novation period and also assume the right to the use and enjoyment of the goods. (See clause 1 of the Novated Motor Vehicle Leasing document (novation agreement), which we note is not dated).

All other rights and obligations of the employee under the lease agreement remain with the employee (see clause 2 novation agreement).

Nothing in the novation agreement creates a lease of the goods from the credit provider to the employer (clause 3). However, you assume the obligation to make the rental payments and the right to the use and enjoyment of the goods (clauses 1.1 and 1.2).

You are able to terminate the novation agreement if the employee's employment is terminated or other requirements are met (see 18.6 'termination date'). With effect from the termination date, all rights and obligations of the employer cease and they become the rights and obligations of the employee (clause 9).

You have entered into a salary sacrifice agreement with the employee in relation to the novated lease.

Reasons for decision

Question 1

Summary

You are eligible for GST credits on the novated lease contract, and may treat the contract as a tax invoice for the purposes of claiming these GST credits.

Detailed reasoning

Your employee has entered into a lease with a finance company and you have entered into a deed of novation with your employee and the finance company. According to the terms of your deed of novation, you are responsible for making the lease payments. You also assume the right to the use and enjoyment of the goods.

Your novation agreement does not revoke the original lease agreement. The original lease from the finance company to the employee stands, but you agree under your novation arrangement to take on the employee's right of enjoyment of the goods and the obligation to make lease payments. It is not necessary for the original lease to be completely revoked (so that the car is supplied directly to you) in order for you to be able to claim GST credits. The novation agreement transfers the relevant right and obligation of the lease to you.

No other rights or obligations are novated, so for example you are not responsible for guaranteeing the residual value of the vehicle at the end of the lease as your employee retains this obligation. This arrangement is considered to be a split full novation arrangement.

Under your arrangement the finance company claims a GST credit for the GST they paid on the purchase of the vehicle. When you obtain the rights to the vehicle from the finance company under the novation you can claim a GST credit for the GST included in the lease charges when the vehicle is being novated to you in the course of carrying on your enterprise.

You are a registered entity carrying on an enterprise. You provide remuneration benefits to employees as part of your enterprise of running a school. Benefits you provide under a salary packaging arrangement are generally 'remuneration benefits' and are not related to other supplies that you make (such as your supplies as a school). Your acquisition of the rights and obligations to the car for the purposes of providing remuneration benefits is an acquisition for a creditable purpose (GSTR 2001/3). As you hold the rights and obligations under the novation agreement and the payments to the finance company are consideration for a taxable supply, you are making creditable acquisitions and are entitled to GST credits for the payments.

As you have an agreement effecting the novation, a tax invoice for the lease amounts should be issued to you. However, the Commissioner has a discretion to treat a fully novated lease agreement as a tax invoice where it satisfies the information requirements for tax invoices (subsection 29-70(1B) GST Act). The Commissioner also has discretion to treat a tax invoice issued to the employee, but held by the employer, as a tax invoice issued to the recipient of the supply.

The Commissioner will normally exercise this discretion where there would be compliance costs to reissue documents to employers (see GSTA TPP 056, copy attached). In your case, you have all the necessary information and the finance company have supplied you with all the information that they intend to. It is appropriate in this situation for the Commissioner to treat the document you already hold as a tax invoice, and you may therefore claim the GST credits based on this in relation to the relevant novated lease with the employee mentioned above.