Edited version of your private ruling

Authorisation Number: 1012460252328

Ruling

Subject: Car fringe benefits, in-house fringe benefits

Question 1

Following the transfer of employees to you will the new statutory percentage apply if the statutory formula method is used to calculate the taxable value of a car fringe benefit that arises from the use of a car by an employee or an associate where the use of the car had been provided to the employee by the current employer under a commitment entered into prior to 10 May 2011?

Answer

Yes

Question 2

Following the transfer of employees will the in-house fringe benefit valuation rules apply to the calculation of the taxable value of a fringe benefit provided under a salary packaging arrangement entered into with the employee if the current employer had been using the in-house rules to calculate the taxable value of the fringe benefit?

Answer

We are not able to provide a ruling to this question as the legislation has not received Royal Assent.

However, it is noted that the transitional measures contained in Tax Laws Amendment (2012 Measures No. 6) Bill 2012 can only apply if the benefit is provided under an existing salary packaging arrangement. An existing salary packaging arrangement is defined in item 13 of Schedule 7 of Tax Laws Amendment (2012 Measures No. 6) Bill 2012 to be 'a salary packaging arrangement entered into by the employer and employee before 22 October 2012'. As you will be the employer from 1 July 2013, this definition (if the legislation is passed) will mean that the transitional arrangements will not apply to a benefit provided to an employee if it is not provided under a salary packaging arrangement that you entered into with the employee prior to 22 October 2012.

This ruling applies for the following period:

Year ended 31 March 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You are about to become the employer of employees currently employed by several different employers.

You will employ the employees on the same terms and conditions as their current employers.

Some of the employees being transferred are receiving car fringe benefits from their current employer under agreements entered into prior to 10 May 2011.

As these car fringe benefits are being received under an agreement entered into prior to 10 May 2011, the current employer has not been required to use the new statutory percentages that were contained in Tax Laws Amendment (2011 Measures No. 5) Act 2011.

Some of the employees are receiving benefits that have been valued as in-house fringe benefits by the current employer. These benefits are being received under a salary sacrifice agreement which the current employer entered into with the employee.

Relevant legislative provisions

Tax Laws Amendment (2011 Measures No. 5) Act 2011

Tax Laws Amendment (2012 Measures No. 6) Bill 2012

Reasons for decision

1. Following the transfer of employees to you will the new statutory percentage apply if the statutory formula method is used to calculate the taxable value of a car fringe benefit that arises from the use of a car by an employee or an associate where the use of the car had been provided to the employee by the current employer under a commitment entered into prior to 10 May 2011?

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

(1) 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.

(2) 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:

(a) 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 a car fringe benefit 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.

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:

5.51 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.

5.52 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.

Application to your circumstances

Currently employees are employed by different employers. If the employee and their employer have not made a new commitment in relation to the application and availability of a car since 7.30 pm, AEST on 10 May 2011, the previous statutory percentage would be applied to the calculation of car fringe benefits under the statutory formula method.

On 1 July 2013, you will be the employer of the employees. On becoming the employer of the employees you will continue to provide the employees with the use of the same cars under the same conditions that applied when they were employees of a regional corporation.

In applying the test contained in sub item 8(2) of schedule 5 of Tax Laws Amendment (2011 Measures No. 5) Act 2011 it is accepted that the last time at which the employee or an associate of the employee made a commitment in relation to the car fringe benefit may have been before 10 May 2011. It is likely to have been the date on which the employee or associate entered into an agreement with the relevant employer and/or financial institution for the use of the car.

In your application you contend that this is also the last time at which the employer made a commitment. While this may be the last time at which an associate made a commitment, we do not agree that this will be the last time at which you will make a commitment.

When the transfer of employees occurs, you will assume the financial responsibility for the provision of the car. In so doing, you will make a commitment in relation to the application or availability of the car.

Therefore, when you become the employer the last date on which the employer committed to the application or availability of the car will be the date on which you become the employer. The last date on which the current employer made a commitment will not be relevant as the date on which you (the employer) will be 'the last time'.

As the transfer of employees will occur after 10 May 2011 you will use the new rates.

However, the current employer will be able to use the old rates (assuming the last time at which the commitment was made was before 7.30 pm Australian Eastern Standard Time on 10 May 2011) for the period of the year that it is the employer.

2. Following the transfer of employees will the in-house fringe benefit valuation rules apply to the calculation of the taxable value of a fringe benefit provided under a salary packaging arrangement entered into with the employee if the current employer had been using the in-house rules to calculate the taxable value of the fringe benefit?

As set out in your ruling application, Tax Laws Amendment (2012 Measures No. 6) Bill 2012 contains amendments to the in-house fringe benefit provisions of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). As these measures are currently before Parliament we are unable to provide a ruling in relation to the application of the in-house rules when you become the employer.

However, it is noted that the transitional measures contained in Tax Laws Amendment (2012 Measures No. 6) Bill 2012 can only apply if the benefit is provided under an existing salary packaging arrangement. An existing salary packaging arrangement is defined in item 13 of Schedule 7 of Tax Laws Amendment (2012 Measures No. 6) Bill 2012 to be 'a salary packaging arrangement entered into by the employer and employee before 22 October 2012'. As you will be the employer from the transfer, this definition (if the legislation is passed) will mean that the transitional arrangements will not apply to a benefit provided to an employee if it is not provided under a salary packaging arrangement that you entered into with the employee prior to 22 October 2012.