Edited version of your private ruling

Authorisation Number: 1012598273828

Ruling

Subject: Refund from novated lease

Question

Does the full amount of the refund of the budgeted surplus on your novated lease form part of your assessable income?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You entered into a three year novated lease arrangement with your employer. This lease was for a motor vehicle and running expenses, with a budgeted amount for operating expenses.

The lease payments were made subject to the Employee Contribution Method (ECM). Your employer deducted the lease payments from your fortnightly pay. The payments came from both pre-tax (salary sacrifice) and post-tax income.

You resigned and your novated lease was repaid in full.

The provider of the novated lease refunded an amount to your employer as your actual operating expenses were less than the amounts paid.

Neither the lease provider nor your employer have provided you with details of what proportion of the refund relates to pre-tax or post-tax lease payments.

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 entered into a novated lease with your employer. The lease payments were partially funded through a salary sacrifice arrangement (from pre-tax income). The lease ceased when your employment also ceased.

You received a refund from the novated lease calculated as the difference between the actual and estimated operating costs of the motor vehicle.

As you received a refund of unused budgeted operating costs it is considered that the full value of benefit provided as part of your salary sacrifice was not delivered. As such under normal conditions, the refund you received is considered to be salary and wages and thus constitute assessable income.

However, as only part of the lease payments were funded through pre-tax income, only part of the refund will be included in your assessable income. The portion of the refund which relates to payments made from post-tax income is not included in your assessable income.

As you have not been provided with details as to which lease payment components form the refund, it is reasonable to apportion the refund in accordance with the component proportions.

Thus, you will be required to include in your assessable income that portion which represents the refund of the pre-tax component of the lease payments. The remaining portion of the refund is not required to be included in your assessable income.