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Ruling

Subject: Car fringe benefit

Question 1

Do car fringe benefits arise under section 7 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) in respect of cars made available to the employer under an agreement?

Answer

Yes

Question 2

If the answer to question 1 is yes, are the expenses paid by the employer under the agreement exempt benefits pursuant to section 53 of the FBTAA?

Answer

Yes

This ruling applies for the following periods:

Year ended 31 March 2011

Year ended 31 March 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The employer and the employee entered into agreement in which the employee will provide cars owned by the employee to the employer, in return the employer will pay specified expenses in respect of those cars and the cars will be provided back to the employee as a 'car fringe benefit'.

Copies of all agreements have been provided.

The employer has stated they intend to calculate car fringe benefits on the vehicles using the statutory formula method as described in section 9 of the FBTAA.

The vehicles are cars as defined in subsection 136(1) of the FBTAA.

Relevant legislative provisions

Section 7 FBTAA

Section 20 FBTAA

Section 53 FBTAA

Section 67 FBTAA

Subsection 136(1) FBTAA

Subsection 162(1) FBTAA

Reasons for decision

Question 1

Summary

A car benefit will arise as the vehicles are held by the employer and are applied to a private use or are otherwise made available to the employee for their private use.

Detailed reasoning

Subsection 7(1) of the FBTAA provides a description of what constitutes a car benefit. It states in part:

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. . .

Therefore for car fringe benefit to arise, the car has to be held by a person who then on any day (either directly or via an arrangement), provides the car (or makes the car available) to an employee for their private use.

Holder of the car

Under section 7 of the FBTAA the holder of the car is the provider of the benefit and in respect of whether a car is held by a person, subsection 162(1) of the FBTAA states:

In this Act, unless the contrary intention appears, a reference to a car held by a person is a reference to:

(a) a car owned by the person;

(b) a car leased to the person; or

(c) a car otherwise made available to the person by another person.

To begin with as the owner of the cars, the employee is considered to hold the car and will continue to hold the car even after entering into the motor vehicle agreement with the employer.

However a car can also be held by more than one person at a time and the answer to question 14 (under the sub-heading car fringe benefits) of Miscellaneous Taxation Ruling MT 2021 explains how a car benefit is determined under these situations, the question and answer states:

What is the position where, at a particular time, more than one person holds a car? Is the fringe benefits tax law inoperative because the car is not held by a particular person?

ANSWER

It is possible for more than one person to "hold" a car at a given time. For example, a car may be owned by one company and leased to another company. A car benefit arises where the holder, or any one of the holders if there is more than one, is an employer (or associate) and an employee (or associate) uses the car for a private purpose or is entitled to do so.

Therefore even though the employee holds the cars, the employer can also hold the cars if they lease the cars from the employee or if they are otherwise made available to the employer by the employee.

To determine if the cars are held by the employer, we need to examine the relevant agreements provided.

Based on a literal interpretation of the relevant clause within the agreements, it can be concluded that the owner who is also the employee has made the cars available to the employer.

Is the car made available to an employee for their private use?

The relevant information in the agreement indicates that the employer intends to provide car fringe benefits.

This has the effect of returning the cars to the employee for their exclusive use which would mean that they would be available for their private use.

Based on the relevant agreements it can be concluded that the cars are provided to the employee in respect of employment.

Question 2

Summary

The exemption will apply under section 53 of the FBTAA due a car residual benefit arising in relation to car expenses.

Detailed reasoning

Section 53 of the FBTAA provides an exemption for certain benefits provided in respect of a car where a car benefit has arisen from the use of the car. Subsection 53(1) of the FBTAA states:

For the purposes of this Act:

(a) a car expense payment benefit;

(b) a car property benefit; or

(c) a car residual benefit;

in respect of a car, being a benefit that is attributable to a period when a car fringe benefit was provided, or would but for subsection 8(2) have been provided, in relation to the car, is an exempt benefit.

Car fringe benefits will arise in respect of relevant agreements therefore what we need to is determine whether the payments being made under the agreements are car expense payment benefits, car property benefits or car residual benefits.

Clause 3 of the motor vehicle made available agreement states:

The Company hereby covenants with effect from the date of this deed and for the Term:

At the Company's own cost to insure for its full insurable value, register (in the name of the vehicle owner), maintain, provide fuel for and lubricate the Vehicle;

To perform and observe all further or other legal obligations arising out of the possession and operation of the Vehicle to the intent that all fixed and variable costs in respect thereof shall be borne by the company.

The relevant agreements contain a specific list of expenses that the employer will pay and the legal obligations are transferred in respect of the cars from the owner to the employer.

This is similar to what is done under partially novated leases as described in Taxation Ruling TR 1999/15 Income tax and fringe benefits tax: taxation consequences of certain motor vehicle lease novation arrangements. Paragraph 47 of TR 1999/15 states:

A residual benefit or a car benefit arises under the FBTAA in partial novation arrangements. A residual benefit arises where all that occurs is the transfer of the lease payment obligation, as we consider that this transfer is in respect of employment. These residual fringe benefits are treated as being received during the period the employer makes the lease payments. A car benefit arises where the employer provides the motor vehicle for the private use of the employee or associate of the employee.

As explained in paragraph 47 of TR 1999/15, the transfer of obligations to the employer creates a residual benefit and therefore we need assess whether the benefits are car residual benefits. A car residual benefit is defined in subsection 53(3) of the FBTAA as:

"car residual benefit" means a residual benefit where, if the recipient had incurred expenditure in respect of the provision of the recipients benefit, that expenditure would have been a car expense.

For the benefit to be a car residual benefit in this case, we need to assess whether each expense would have been a car expense if the employee had not transferred his legal obligations in respect of the expenses to the employer.

A car expense is defined in subsection 136(1) of the FBTAA to mean:

car expense, in relation to a car, means 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.

The list of expenses contained in the agreements all fall within the definition of a car expense shown above.

Therefore section 53 of the FBTAA would apply to exempt the residual benefits that arise from the payment of expenses by the employer made under relevant agreements.

However any payments made outside the relevant agreements as a result of the employer's legal obligation under the agreements may not be exempt. This would depend on the nature of the payment being made.