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Ruling

Subject: Leased car value and earliest holding time

Question 1

Does the base values of the cars, for the purposes of subparagraph 9(2)(a)(ii) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), change as a result of the transfer of the employment of employees from Entity A to Entity B?

Answer

No

Question 2

Does the base values of the cars for the purposes of subparagraph 9(2)(a)(ii) of the FBTAA change as a result of the demerger of Entity A and Entity B?

Answer

No

Question 3

Does the base values of the cars for the purposes of subparagraph 9(2)(a)(ii) of the FBTAA change as a result of the Entity B subsequently entering into new or replacement novated lease agreements with the lessor?

Answer

Yes

Question 4

In respect of question 3, is the leased car value of the cars their market value when Entity B entered into those later novated lease agreements?

Answer

Yes

This ruling applies for the following periods:

Year ended 31 March 2012

Year ended 31 March 2013

The scheme commences on:

On or after 1 January 2011

Relevant facts and circumstances

Entity A provided cars to employees under novated lease agreements between themselves, an employee and a third party lessor. This gave rise to a car fringe benefit as per the Commissioner's view contained in Taxation Ruling TR 1999/15 Income tax and fringe benefits tax: taxation consequences of certain motor vehicle lease novation arrangements.

Due to a restructuring of their business Entity A transferred a number of its employees to Entity B. These employees continued to receive car benefits under the novated leases entered into by Entity A and the agreement between Entity A, the employees and the unrelated third party.

Entity A and Entity B then demerged. Pursuant to an agreement with Entity A and Entity B, Entity A agreed to continue to provide the cars to the employees under the pre-existing novated leases.

On Date X the agreement between Entity A and Entity B ceased and the novated leases entered into by Entity A were terminated.

The employees entered into new novated lease agreements with the lessor and Entity B in respect of the cars that were previously novated with Entity A.

As a result of the demerger Entity A ceased to be an associate of Entity B.

Relevant legislative provisions

FBTAA section 7

FBTAA section 9

FBTAA subsection 136(1)

FBTAA section 162

Reasons for decision

Summary

The base values of the cars for the purposes of subparagraph 9(2)(a)(ii) of the FBTAA changes on Date X when the leased car value is calculated in reference to the time the new novated leases were taken out. This is also the earliest holding time of the cars for Entity B.

Prior to Date X the leased car value is s calculated in reference to the time Entity A entered into the novated leases on the cars.

Detailed reasoning

Legislative Background

Subparagraph 9(2)(a)(ii) of the FBTAA states:

in a case to which subparagraph (i) does not apply - the amount calculated in accordance with the formula

AB,

where:

A is the leased car value of the car at the earliest holding time; and

B is:

(A) in a case where the commencement of the year of tax is later than the fourth anniversary of the earliest holding time - 2/3; or

(B) in any other case - 1;

Under this subparagraph the base value of the car is calculated in reference to the 'leased car value of the car at the earliest holding time'.

'Leased car value' is defined in subsection 136(1) to mean:

'Leased car value, in relation to a car held but not owned by a person at a particular time, means:

(a) in a case to which paragraph (b) does not apply - the amount that the person could reasonably be expected to have been required to pay to purchase the car from the owner at that time under an arm's length transaction; or

(b) if the person commenced to lease the car at that time from the lessor who purchased the car at or about that time - the cost price of the car to the lessor."

'Earliest holding time' is defined in paragraph 9(2)(b) of the FBTAA as:

the earliest holding time, in relation to a car held by the provider at a particular time (in this paragraph referred to as the "current time"), is the earliest time before the current time when the car was held by the provider or an associate of the provider

Subsection 162(1) of the FBTAA described when a car is held by a person and it 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.

In addition subsection 7(1) of the FBTAA states:

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.

Original Novation

In looking at the novated leases originally entered into between Entity A, the individual employee and the lessor a leased car value would have been determined in reference to specific circumstances behind each lease.

When Entity A entered into the leases they became the lessee and commenced to hold the car and (unless it was previously held), this would be the earliest holding time for the purpose of subparagraph 9(2)(a)(ii) of the FBTAA.

The base value would be determined using the lease car value at the time the lease began.

Transfer of employees

The employee then employees changed employers (even if their duties of employment didn't change), when their employment was were transferred from Entity A to Entity B in preparation for the demerger.

This had the effect of changing Entity A from a 'current employer' to a 'former employer' (both terms defined in subsection 136(1) of the FBTAA), with the Entity B becoming the current employer. The employees went from being a current employee to a former employee of Entity A and became a current employee of Entity B. It also means that for the purposes of the FBTAA the employees are 'employee' (as defined in subsection 136(1) of the FBTAA of both Entity A and Entity B.

For a fringe benefit to arise, it has to be provided 'in respect of employment'. As held in the Full Federal Court decision of J & G Knowles v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151 (2000) 44 ATR 22, the words 'in respect of' have no fixed meaning. However 'the words must be given a meaning that depends on the context in which the words are found'. It was also held by the Court that there must be a 'sufficient or material connection or relationship' between the benefit and employment.

In determining where the fringe benefits tax (FBT) liability arises we need to look at the arrangement to establish a 'sufficient or material connection or relationship' between the benefit and employment.

One of the features of a novated lease is that there is a terminating event when the employee ceases employment with their employer. This means that Entity A could have terminated the lease when employment was transferred.

In looking at the connection between the provision of the benefit and the employee's employment it would be difficult to conclude that in arranging to continue to be the lessee Entity A was providing benefits to 'former employees' (in the way they may agree to continue to provide benefits to retirees). The agreement was part of the demerger process.

Prior to the demerger the employees were transferred to their new employer and began to perform their duties of employment for that new employer. The remuneration the employees receive from that date is reward for performing their employment duties with their new employer. Any fringe benefits provided as part of that reward for services would also transfer the old employer to the new employer.

This means that the obligation in respect of ongoing fringe benefits (such as the provision of a car) also moved from Entity A to Entity B as the nexus between the provision of the benefit and employment now sits with Entity B.

Although the obligation moved the lease remained with Entity A.

In looking at subparagraph 9(2)(a)(ii) of the FBTAA, the leased car value and the earliest holding time would still be determined in reference to specific circumstances behind each novated lease entered into by Entity A.

Therefore the base value of the car remains unchanged.

Demerger

As a result of the demerger Entity A and Entity B ceased to be associates.

However Entity A continued to remain a party to the novated leases and provide the cars to their former employees.

The leased car value and the earliest holding time remain unchanged as they are still determined in reference to specific circumstances behind each novated lease entered into by Entity A.

The only difference is that for the purposes of subsection 7(1) of the FBTAA, as the provider, Entity A is providing the car to an employee Entity B as a third party under an arrangement.

Therefore the base value of the car remains unchanged.

New leases

When Entity A terminated the novation they ceased to hold the car and the employees would have then become the lessee. The lease was then re-novated with Entity B becoming a party to the lease on the car.

As this point Entity B begins to hold the car under subsection 162(1) of the FBTAA as the lessee.

In looking at calculating the leased car value, the car was owned by the lessor during the period it was novated with Entity A. This means that the lessor cannot have purchased the car at or about the time they entered the lease with Entity B.

Therefore the leased car value will be 'the amount that the person could reasonably be expected to have been required to pay to purchase the car from the owner at that time under an arm's length transaction' when the new novated leased commenced on Date X.

This has to be examined in conjunction with Entity B's earliest holding time and to do this we need to look at when the car was first held by the provider or an associate of the provider.

Entity A who previously provided the car was an associate but they ceased to be an associate of Entity B at the time of demerger. As Entity A is not an associate the earliest holding time is only determined in reference to when Entity B first held the car.

However we do need to look at whether Entity B 'held' the cars before X. In other words when they entered into the agreement with Entity A did Entity A make those cars made available to Entity B.

Under a novated lease the employer is the lessee by virtue of the novation but there is also an employee who is a party to that lease and under the lease agreement the employer agrees to make that car available to the employee party to the lease for their private use. By not terminating the lease Entity A has extended the period that they remain the lessee to a car which they also make available for the use of the employee that is a party to the lease.

The arrangement was not to allow Entity A to provide cars to the Entity B who then would provide the cars to the employees. Under the terms of the novated lease the employees had already been given private use of the cars. What Entity A, in effect , did was continue to remain a party to the leases and continue to providing cars directly to employee of Entity B for their private use in accordance with those leases.

In looking at this subsection 7(1) of the FBTAA the "provider" of the car was Entity A, who, as an associate (until to the demerger), made that car available to the employees for their private use. Then from the demerger until they terminated the novation made the cars available to the employees under an arrangement between themselves and Entity B.

Although from the date employment transferred, Entity B became liable for the FBT they did not hold the cars until they become they became a party to the replacement novated leases on Date X.

Date X is Entity B's earliest holding time.

Therefore the bases value is the arm's length of the cars when the lease was re-novated on Date X.