Edited version of your private ruling

Authorisation Number: 1012567545915

Ruling

Subject: Fringe benefits tax: Car fringe benefits

Question 1

Will the base value of the car for the purposes of calculating your fringe benefits tax liability be $Y?

Answer

No

This ruling applies for the following periods:

01/04/2013 to 31/03/2014

The scheme commences on:

In the FBT year commencing 01/04/2013

Relevant facts and circumstances

At a specified date, less than three years before the relevant fringe benefits tax year, you purchased a car which you provided to an employee (employee 1).

The purchase price of the car was $X.

In the relevant fringe benefits tax year an employee (employee 2) purchased the car from you for $Y.

Employee 2 then sold the car to a finance company for $Y, and then entered into a lease arrangement with the finance company to lease the car.

Employee 2 then novated the lease to you and a novated lease arrangement formed between you, the finance company and the employee.

You provided the car to employee 2 for their private use under a valid salary sacrifice arrangement.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 7

Fringe Benefits Tax Assessment Act 1986 paragraph 7(1)(a)

Fringe Benefits Tax Assessment Act 1986 section 9

Fringe Benefits Tax Assessment Act 1986 subsection 9(2)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 section 162

Reasons for decision

Question 1

Will the base value of the car for the purposes of calculating your fringe benefits tax liability be $Y?

Detailed reasoning

Has a car fringe benefit been provided?

You provide a car to employee 2 through a novated lease arrangement and employee 2 uses the car for private purposes.

Section 7 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides that a car fringe benefit will arise where an employer makes a car they hold available for the private use of an employee. Section 7 states:

7 Car benefits

(1) 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 a car fringe benefit will arise where you provide a car to an employee, in respect of the employment of the employee and the car is applied to or available for the private use of the employee.

As you provide a car to employee 2 for their private use, through a salary sacrifice arrangement, a car fringe benefit arises in respect of the employment of employee 2.

How is the taxable value of the car fringe benefit calculated?

The taxable value of a car fringe benefit can be calculated using either the statutory formula method or the operating cost method. The statutory formula method will be used unless you make an election to use the operating cost method.

Section 9 of the FBTAA sets out the statutory formula method:

1)

Note: For special rules for the years of tax starting on 1 April 2011, 1 April 2012 and 1 April 2013, see item 9 of schedule 5 to the Tax Laws Amendment (2011 Measures No. 5) Act 2011].

The base value of a car for the purposes of calculating the taxable value under the statutory formula method is worked out in accordance with subsection 9(2) of the FBTAA. Subsection 9(2) states:

(2) For the purposes of this section:

(a) the base value of the car is the sum of:

(i) where, at the earliest holding time, the car was owned by the provider or an associate of the provider, the amount calculated in accordance with the formula AB, where:

A is the cost price of the car to the provider or associate as the case may be; and

B is:

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

(B) in any other case - 1; and

(ii) 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; and

(iii) the cost price of each non-business accessory that:

(A) was fitted to the car after the earliest holding time and before the end of the year of tax; and

(B) remained fitted to the car at a time during the year of tax when the car was held by the provider;

Subparagraph 9(2)(a)(ii) only applies where subparagraph 9(2)(a)(i) is not applicable. Therefore, it must initially be considered whether subparagraph 9(2)(a)(i) is applicable to calculate the base value of the car.

Subparagraph 9(2)(a)(i) is used to calculate the base value of the car where at the earliest holding time the car was owned by the provider or an associate of the provider.

At the earliest holding time was the car owned by the provider or an associate of the provider?

Paragraph 9(2)(b) of the FBTAA sets out what is meant by the earliest holding time:

(b) 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; …

Section 162 of the FBTAA states that a car held by a person includes where the car is owned by the person:

162 Holding of car

(1) 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.

The Explanatory Memorandum for the Fringe Benefits Tax Assessment Bill 1986 discusses in the notes for subclause 2 the meaning of the components of the statutory formula as follows:

Sub-paragraph 2(a)(i) applies in circumstances where the car is owned by the person providing it (i.e., the employer, associate or the third party arranger). The general rule for this purpose is that the base value of the car is its cost price. "Cost price" is defined in sub-clause 136(1) and is generally, the amount of the expenditure incurred in acquiring the car (including any delivery costs). The cost of accessories fitted at that time are also included in the base value unless they are accessories that are required to meet the special needs of any business operations in which the car is used (e.g., a 2-way radio fitted to a salesman's car). Accessories which fall for inclusion in the cost price of a car are defined in sub-clause 136(1) as "non-business accessories".

…

Sub-paragraph 2(a)(ii) applies where the car is leased or otherwise held by the person providing it for the employee's use. In these circumstances the base value is the cost price (as outlined above) of the car to the lessor or, if the car is otherwise held by the person providing it, the amount that the person could reasonably be expected to have paid to purchase the car under an arm's length transaction …

In applying the preceding sub-paragraphs, the base value of the car is determined at the earliest time at which the car was held by the person providing it (or by an associate of that person). This is a safeguard that will ensure that the base value of a car is not reduced by such techniques as sale and lease-back or buy back arrangements. It will also ensue that the base value is not reduced where the car is acquired by a lessee on termination of a lease.

Under the novated lease arrangement the car is leased to you by the finance company. You therefore hold the car in accordance section 162 of the FBTAA and in turn, you are the 'provider' of the car in accordance with the requirements of paragraph 7(1)(a) of the FBTAA. As you are the provider and the employer of the employee, and the car held by you is available for the private use of employee 2, you are providing a car fringe benefit to employee 2 under the arrangement.

In your situation, the earliest holding time, being the earliest time before the current time when the car was held by the provider (you), was when you originally purchased the car at the specified date less than three years before the current date. Therefore, at the earliest holding time the car was owned by the provider (you) and subparagraph 9(2)(a)(i) should be used to calculate the base value of the car.

As discussed above, subparagraph 9(2)(a)(i) states that the base value of the car, where at the earliest holding time the car was owned by the provider, is the sum of AB where:

A is the cost price of the car to the provider or associate as the case may be; 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; and

Subsection 136(1) defines what is meant by the 'cost price' for the purposes of this calculation as follows:

cost price:

(a) in relation to a car owned by a person, means:

(i) where the car was manufactured by the person - the amount for which the car could reasonably have been expected to have been sold by the person by wholesale under an arm's length transaction at or about the time when the car was applied to the person's own use; or

(ii) where neither subparagraph (i) nor (iii) applies, an amount equal to the sum of:

(A) the expenditure incurred by the person (other than expenditure in respect of a tax on, or on a transfer of, registration) that is directly attributable to the acquisition or delivery of the car or, if subsection 7(6) applies in relation to the car, the leased car value of the car when the person first took the car on hire; and

(B) the amount of any additional expenditure incurred by the person for or in relation to the fitting of non-business accessories to the car at or about the time when the car was acquired by the person, reduced by the amount of any reimbursement of the whole or a part of that expenditure paid, at or about the time when the expenditure was incurred, by a recipient of a car benefit in relation to the car; or

(iii) where subparagraph (i) does not apply and the person was entitled to privileges or exemptions in relation to customs duty in respect of a transaction by which the person acquired the car or by which the person arranged for the fitting of non-business accessories to the car at or about the time when the car was acquired by the person, the amount that could reasonably have been expected to have been applicable under subparagraph (ii) if the person had not been entitled to those privileges to exemptions;

Neither subparagraph 136(1)(a)(i) or subparagraph 136(1)(a)(iii) apply, and therefore the cost price is calculated in accordance with subparagraph 136(1)(a)(ii).

That is, the cost price of the car is the amount of the expenditure incurred in acquiring the car (including any delivery costs, but not registration and stamp duty) and the cost of any fitted accessories not required for business use of the car.

In conclusion, the base value of the car will be the sum of AB in accordance with subparagraph 9(2)(a)(i) of the FBTAA where A is the cost price of the car to you. The cost price of the car will be calculated in accordance with subparagraph 136(1)(a)(ii) of the FBTAA based on the expenditure you incurred in relation to the acquisition of the car when you first held the car at the specified date less than three years before the current date, not the trade in value at the current date. Therefore the base value of the car will not be $Y but will be calculated using a cost price based on the original acquisition costs at the specified original acquisition time.