Edited version of administratively binding advice

Authorisation Number: 1012136611240

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Advice

Subject: Fringe benefits tax - application of new statutory fraction

Question 1

If the new employer becomes the employer of the employees on 1 July 2012 will the new statutory rates apply to the calculation of the taxable value of the car fringe benefits under the statutory formula method for the period after 1 July 2012?

Answer

Yes

Question 2

If the new employer becomes the employer of the employees on 1 July 2012 will the new employer be required to lodge an FBT return in relation to benefits provided during the period from 1 July 2012 to 31 March 2013?

Answer

Yes

This advice applies for the following periods:

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

Year ended 31 March 2016

The arrangement commences on:

1 July 2012

Relevant facts and circumstances

Your advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice.

You are proposing to establish a new employer on 1 July 2012.

The new employer will be an associate of the current employer.

At the time of establishing the new employer, the current employer will cease to exist and the new employer will become the employer of all the employees employed by the current employer on the same terms and conditions as the employment with the current employer.

Employment contracts signed with the current employer will terminate and new employment contracts will be entered into with the new employer on the same terms and conditions. All contractual arrangements entered into by the current employer will bind the new employer.

The current employer has entered into novated lease agreements with some employees.

Each of the novation agreements provides that the agreements terminate upon the termination of employment of an employee.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 9(2)(c)

Fringe Benefits Tax Assessment Act 1986 Subsection 66(1)

Fringe Benefits Tax Assessment Act 1986 Section 68

Tax Laws Amendment (2011 Measures No. 5) Act 2011 Subsection 8(2)(b)

Reasons for decision

If the new employer becomes the employer of the employees on 1 July 2012 will the new statutory rates apply to the calculation of the taxable value of the car fringe benefits under the statutory formula method for the period after 1 July 2012?

In general terms if the statutory formula method is used to calculate the taxable value of a car fringe benefit, the taxable value of the fringe benefit will be a percentage of the car's value.

Prior to 10 May 2011 the percentage used in the calculation depended upon the annualised number of kilometres travelled by the car during the year. The percentages were as follows:

However, these rates were amended by Tax Laws Amendment (2011 Measures No. 5) Act 2011. The amendments restricted the use of these rates to cars for which there is a pre-existing commitment in place for the car to be provided to a particular employee

The application of the changed rates is contained in item 8 of schedule 5 of Tax Laws Amendment (2011 Measures No. 5) Act 2011 which states:

8 Application provision

The amendments made by this Part apply to a car fringe benefit in relation to a year of tax beginning on or after 1 April 2011, whether the car fringe benefit is provided before, on or after the commencement of this item.

Despite subitem (1), the amendments do not apply to a car fringe benefit, in relation to an employer in relation to a year of tax, that relates to a car, if:

any car fringe benefit, in relation to the employer in relation to the year of tax in respect of employment of an employee by the employer, that relates to the car is constituted by the application or availability of the car for a period; and

(b) the last time at which:

(i) the employer, or an associate of the employer; or

(ii) the employee, or an associate of the employee;

committed to the application or availability of the car for that period, in respect of the employment, occurred before 7.30pm Australian Eastern Standard Time on 10 May 2011.

Note: The effect of subitem (2) is that the amendments will not apply until the first year of tax starting after the employer, employee or associate first commits, after 7.30 pm Australian Eastern Standard Time on 10 May 2011, to the application or availability of the car.

Therefore, in considering whether the new rates will apply to the calculation of the taxable value of the car fringe benefits after the change of employer it is necessary to determine the last time at which:

· the employer or an associate of the employer; and

· the employee or an associate of the employee

· committed to the application of the car.

As set out in the note to item 8, for the new rates to apply, the employer, or the employee or their associates needs to have made a commitment after 7.30 pm Australian Eastern Standard Time on 10 May 2011.

In your application you contend that none of these parties made a commitment after 7.30 pm Australian Eastern Standard Time on 10 May 2011. This is based on the time at which the lease agreement was entered into being the time at which the commitment was made.

Although we agree that at the time the lease agreement was entered into both an associate of the employer and the employee made a commitment we do not accept the underlying contention that the new employer has not made a commitment.

The term 'commitment' is not defined in either Tax Laws Amendment (2011 Measures No. 5) Act 2011 or the Fringe Benefits Tax Assessment Act 1986 (FBTAA). However, the meaning to be applied was discussed in paragraphs 5.51 and 5.52 of the Explanatory Memorandum to Tax Laws Amendment (2011 Measures No. 5) Act 2011.

Paragraphs 5.51 and 5.52 state:

A commitment is considered entered into at the point that there is commitment to the transaction, and it cannot be backed out of. The commitment needs to be financially binding on one or more of the parties.

Changes made after 7:30 pm, AEST on 10 May 2011 to commitments made prior to 7:30 pm, AEST on 10 May 2011, such as re-financing a car, altering the duration of an existing contract or changing employers, are new commitments and will therefore be subject to the new arrangements.

Further discussion of the meaning of the term 'commitment' is contained within chapter 7 of the publication Fringe benefits tax: a guide for employers which states:

Meaning of the term commitment

A 'commitment' is entered into at the point there is a financially binding commitment to a transaction on one or more of the parties and it cannot be backed out of. The commitment needs to be one that relates to the application or availability of the car to an employee or associate.

For example, there are a number of steps involved where you negotiate with an employee and a salary packaging provider to put in place a novated lease arrangement in relation to a car. A commitment would generally be entered into, and would be financially binding, when you or the employee orders the car that is to be provided by way of a novated lease arrangement and there is a financial penalty if the order is cancelled.

Chapter 7 then provides examples of how this principle is to be applied. In relation to the situation where there is a change of employer chapter 7 states:

Change of employer or change of car

FBT applies to you as an employer. Any change of the employer, even, within the same group of companies, will constitute a new commitment to the application or availability of the car by the new employer. This means the statutory rate of 20% (or applicable transitional rate) will be used by the new employer immediately.

Likewise, any change of car (after 7.30pm AEST on 10 May 2011) will always be a new commitment to which the 20% flat rate (or applicable transitional rate) will apply immediately, even where the employer stays the same.

Example: Change in employer

Anna works for X Co and entered into a three year novated lease arrangement with her employer in January 2010. The car fringe benefits are valued by her employer using the statutory formula method.

On 12 November 2011, Y Co officially takes over X Co and Anna is now an employee of Y Co.

As Anna's employer has changed, car fringe benefits provided by the new employer from 12 November 2011 will come under the new statutory rates immediately.

In applying this discussion to your situation, we consider that the term 'commitment' is to be viewed in a broader context than just the point at which the lease agreement is entered into. As set out in Fringe benefits tax: a guide for employers a 'commitment' is entered into at the point there is a financially binding commitment.

In the situation being considered, new employment contracts will be entered into by the new employer. As these employment contracts will be on the same terms and conditions, they will include the commitment that was made by the previous employer to pay the lease payments and provide the use of the car to the employee as part of the remuneration that will be paid to the employee. In so doing, the new employer will commit to the use of the car being provided to the employee.

Therefore, the last time at which the employer committed to the application or availability of the car will be the time at which the new employment agreement is entered into. As the new employer will not come into existence until July 2012 this commitment will be after 7:30 pm Australian Eastern Standard Time on 10 May 2011. As the commitment is made by the employer after 10 May 2011 the new rates will apply to the calculation of the taxable value of the car fringe benefit that arises from the use of the car being provided to the employee.

The relevant rate that will apply will depend upon whether an election is made to skip the transitional arrangements and if an election is not made, the distance travelled by the car.

In discussing the possibility of making an election to skip the transitional arrangements chapter 7 of Fringe benefits tax: a guide for employers states:

For any new commitments entered into during this period, you can choose to skip the transitional arrangements and apply the 20% statutory rate; however, this choice is subject to certain conditions mentioned below.

You cannot skip the transitional arrangements where an employee would be worse off as a result of this choice. That is, the employee cannot be placed at a direct financial disadvantage as a result of this choice, unless you have obtained the consent of the employee.

For example, you cannot require an employee to bear the financial impact of skipping the transitional arrangements by charging the employee a higher salary packaging amount as a result of an increase in FBT payable merely to save on compliance costs, unless you have obtained the consent of the employee to do so.

The choice to skip the transitional arrangements is on a car-by-car basis.

You do not need to notify us of your choice, as your business records are sufficient evidence of this.

If an election is not made the relevant percentage will be determined by the number of kilometres travelled by the car during the period in the FBT year when the car was held by the provider of the car fringe benefit. The rates are as follows:

If the new employer becomes the employer of the employees on 1 July 2012 will the new employer be required to lodge an FBT return in relation to benefits provided during the period from 1 July 2012 to 31 March 2013?

Subsection 66(1) of the FBTAA imposes the liability to pay fringe benefits tax on the employer Subsection 66(1) states:

[Tax payable by employer] Subject to this Act, tax imposed in respect of the fringe benefits taxable amount of an employer of a year of tax is payable by the employer.

Section 68 of the FBTAA requires the employer to lodge a fringe benefits tax return for a year of tax in which there is 'a fringe benefits taxable amount of the employer'. Section 68 states:

Annual returns

Where there is fringe benefits taxable amount of an employer of a year of tax, the employer shall, unless the employer has furnished a return or returns under section 69 in relation to the fringe benefits taxable amount of the year of tax, furnish to the Commissioner a return not later than 21 May in the next year of tax or such later date as the Commissioner allows.

Therefore, an employer with a fringe benefits tax liability for a particular year is required to lodge a fringe benefits tax return for the relevant year. There is no section in the FBTAA that enables the Commissioner to impose this liability on another entity.

In the situation being considered the current employer is liable to pay any liability that arises in relation to the period from 1 April 2012 to 30 June 2012. The liability for this period cannot be imposed in relation to the new employer.

Similarly, the liability for the period from 1 July 2012 to 31 March 2013 will rest with the new employer. It is not possible to impose this liability onto another employer, especially one that has ceased to exist.

Further, given the exemption in subsection 57A(2) is likely to apply to most if not all of the employees, it is likely that the tax liability if only one return is lodged will be higher than the amount that is legally payable. In this regard it is noted that the calculation of the employer's aggregate non-exempt amount in 5B(1E) relates to the employer. Therefore, in a year in which an employee has two employers, both employers are able to utilise the $17,000 cap. However, if all of the benefits are returned in the return of one employer, only one $17,000 cap will apply.

Similarly, there is a reportable fringe benefits threshold which provides that an employer will not have to report an amount on an employee's payment summary if the employee's individual fringe benefits amount for the year is $2,000 or less. In general terms, the employee's individual fringe benefits amount is the employee's share of the benefits included in the calculation of the employer's fringe benefits taxable amount.

The inclusion of all the benefits in one return may result in the reportable fringe benefits amount being higher than it would otherwise be. For example, if an employee received:

· benefits with a value of $1,800 in the period between 1 April 2012 and 30 June 2012; and

· benefits with a value of $5,400 in the period between 1 July 2012 and 31 March 2013.

the employee would not have a reportable fringe benefits amount in relation to the benefits received between 1 April 2012 and 30 June 2012, but would have a reportable fringe benefits amount of $10,093 for the period between 1 July 2012 and 31 March 2013. Therefore, the total amount reported on the employee's payment summaries in relation to the year ending 31 March 2013 would be $10,093.

However, if the employee was treated as only having one employer for the year, the reportable fringe benefits amount would be $13,458.

As the Commissioner cannot impose either a fringe benefits taxable amount or a reportable fringe benefits amount that is more than the amount provided by the legislation it is not possible to agree with the proposal for only one return to be lodged.

However, it is possible for the Commissioner under section 16-180 of schedule 1 to the Taxation Administration Act 1953 (TAA) to exempt an entity from the payment summary obligations that would otherwise apply.

Without this exemption, if the employee has a reportable fringe benefits amount for both the periods between 1 April 2012 to 30 June 2012 and 1 July 2012 to 31 March 2013:

· the current employer will be required to provide the employee with a payment summary for the year ending 30 June 2013 with the reportable fringe benefits amount for the period 1 April 2012 to 30 June 2012; and

· the new employer will be required to provide the employee with a payment summary for the year ending 30 June 2013 with the reportable fringe benefits amount for the period 1 July 2012 to 31 March 2013.

Given the current employer will cease to exist on 1 July 2012 and will not pay any salary or wages in the year ending 30 June 2013, it is accepted that it may not be practical for the current employer to provide a payment summary for the year ended 30 June 2013. Therefore, you may like to consider making an application for the Commissioner to apply section 16-180 of schedule 1 to the TAA to the current employers for the year ending 30 June 2013 in respect of any reportable fringe benefits amounts on the understanding that the reportable amounts will be shown on the payment summaries of the new employers.