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Ruling

Subject: Pre-tax refund due to termination of lease

Question

Does the pre-tax refund you received due to the termination of a novated lease form part of your assessable income?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You entered into a salary sacrifice novated vehicle lease arrangement with your employer.

The salary sacrifice included a budgeted amount for vehicle running costs including fuel, repairs, maintenance, roadside assistance (if applicable), registration and insurance. As you incurred these running costs, the amounts were deducted from your budgeted amount.

If you spent less than your budget, any surplus would be returned to you at the end of your lease.

You ceased your employment with your employer and purchased the vehicle.

You received a cheque from your former employer accompanied by a note stating the payment was a 'pre-tax refund due to termination of a lease'. This payment represents a refund of unused budgeted running costs paid under the novated lease.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 136

Income Tax Assessment Act 1936 Section 23L

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-15

Reasons for decision

An employee's remuneration package may include salary, wages or fringe benefits provided by the employer.

Salary or wages are considered to be income according to ordinary concepts under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and are therefore assessable income.

Income provided in the form of fringe benefits, as defined by subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) are exempt income under subsection 23L(1) of the Income Tax Assessment Act 1936. Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income it is not assessable income.

The definition of a fringe benefit under subsection 136L(1) of the FBTAA specifically excludes a payment of salary or wages.

If a fringe benefit has not been provided and is cashed out at the end of a salary sacrifice arrangement accounting period, the amount cashed out is salary and is taxed as normal income.

In your case, you took out a novated lease, through a salary sacrifice arrangement, with your former employer. The lease ceased when your employment also ceased. The lease provided for any unused budgeted running costs to be refunded to you at the end of the lease agreement.

As you received a refund of the unused budgeted running costs it is considered that the full value of benefit provided to you as part of your salary sacrifice arrangement was not delivered. Therefore, the refund you received is considered to be salary and wages.

The pre-tax refund you received due to the termination of your novated vehicle lease forms part of your assessable income in the year in which it was received as it represents salary and wages.