Edited version of private advice

Authorisation Number: 1012645716763

Ruling

Subject: Fringe benefits tax and modified vehicles

Question 1

Does the term 'passenger' contained in the definition of a car in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) include the driver of the vehicle?

Answer

No

Question 2

If two seats are added to an eight seat vehicle does the vehicle cease to be a car as defined in subsection 136(1) of the FBTAA?

Answer

Yes

Question 3

If the answer to Question 2 is yes, does a residual benefit arise under section 45 of the FBTAA where the vehicle is used by an employee for a private purpose?

Answer

Yes

Question 4

If the answer to Question 3 is yes, does subsection 47(6) of the FBTAA apply to exempt the residual benefit that arises from the private use of the vehicle by an employee?

Answer

No

Question 5

If the answer to Question 3 is yes and Question 4 is no, can the taxable value of the residual benefit calculated under either section 50 or 51 of the FBTAA be calculated using the statutory formula contained in section 9 of the FBTAA?

Answer

No

Question 6

If the answer to Question 2 is no, does a car benefit arise under section 7 of the FBTAA where the vehicle is used by an employee for a private purpose?

Answer

Not answered as answer to Question 2 is yes

Question 7

If the answer to Question 6 is yes, does subsection 8(2) of the FBTAA apply to exempt the car benefit that arises from the private use of the vehicle by an employee?

Answer

Not answered as Question 6 was not answered.

This ruling applies for the following periods:

Year ended 31 March 2014

Year ended 31 March 2015

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The entity provides a vehicle to one of its employees.

The vehicle (a people-mover) was purchased new from the dealer and as purchased had eight seats. In other words, as purchased the vehicle was able to carry eight people.

Two additional seats were added to the vehicle. The additional seating was added by bolting frames to the floor (for example between the driver's seat and front left passenger's seat), and seats then attached to the frame bolted to the floor.

The extra seats have been engineered and certified and the vehicle is registered to carry ten people.

The vehicle is garaged as the employee's home every night and used for day-to-day travel by the employee, spouse and family for whatever need they have.

It is expected that the vehicle will be used primarily for private purposes.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 7

Fringe Benefits Tax Assessment Act 1986 section 9

Fringe Benefits Tax Assessment Act 1986 section 45

Fringe Benefits Tax Assessment Act 1986 subsection 47(6)

Fringe Benefits Tax Assessment Act 1986 section 50

Fringe Benefits Tax Assessment Act 1986 section 51

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 subsection 149(1)

Income Tax Assessment Act 1997 subsection 995-1

Reasons for decision

Question 1

Does the term 'passenger' contained in the definition of a car in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) include the driver of the vehicle?

Summary

The term passenger does not include the driver.

Detailed reasoning

A car is defined in subsection 136(1) of the FBTAA to have the same meaning as the meaning of a car in subsection 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 995-1 defines a car as:

A motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than 1 tonne and fewer than 9 passengers.

In looking at the term 'passenger' it is not defined in the FBTAA, the ITAA 1997 or the Income Tax Assessment Act 1936 and therefore the term takes on its ordinary meaning.

The Macquarie Dictionary defines a passenger as 'one who travels by some form of conveyance' and the Australian Oxford Dictionary defines a passenger as 'a traveller on or on a public or private conveyance (other than the driver, pilot, crew, etc.)'.

In following the definition in the Australian Oxford Dictionary the term passenger does not include the driver of the vehicle.

There is support for this conclusion that a driver is not a passenger in paragraph 2 of Miscellaneous Taxation Ruling MT 2024 Fringe benefits tax: dual cab vehicles eligibility for exemption where private use is limited to certain work-related travel when describing a dual cab vehicle. This paragraph states:

This Office has been asked whether vehicles known as dual cabs are capable of qualifying for this work-related use exemption. Broadly, dual cabs are variants of conventional goods vehicles under which additional seating positions are provided behind the driver and front-passenger seats. They share a common chassis to which the single or dual passenger cab and alternate tray sections may be fitted.

Therefore the driver is not a passenger when looking at whether a vehicle is designed to carry fewer than 9 passengers.

Question 2

If two seats are added to an eight seat vehicle does the vehicle cease to be a car as defined in subsection 136(1) of the FBTAA?

Summary

To be a car the vehicle has to be able to carry less than 9 passengers. By adding the additional seats the vehicle can now carry the driver and 9 passengers. As a result it does not satisfy the definition of a car.

Detailed reasoning

Although dealing with situations where the passenger carrying capacity is reduced Miscellaneous Taxation Ruling MT 2033 Fringe benefits tax: application of sub-section 8(2) exemption to modified cars, looks at how the Commissioner deals with modified vehicles and paragraphs 7 and 9 state:

As to the second category of cases, a vehicle's design is generally established at the time of manufacture. In order to change that design it would be necessary that the modifications effect a permanent alteration to the vehicle.

Whether or not modifications to a car satisfy the test detailed in paragraph 7 needs to be determined on the facts of the particular case. However, as a general rule, the requirement that modifications effect a permanent change to the car would be satisfied where they are not capable of being readily reversed such that the car could, if required, be used alternatively as a passenger or non-passenger car on a regular basis. The fact that re-conversion may be made difficult by the bulk of any equipment or goods regularly stored in the rear section is not relevant for this purpose; rather, satisfaction of the requirement is to be found in the nature of the modifications themselves.

In this case we have modifications that have been engineered and certified which has now allowed the vehicle to be registered to carry 10 people including the driver.

As the modifications are such that the vehicle is now registered to carry the driver and 9 passengers it has to be concluded that the modifications have effected a permanent change to the design of the vehicle.

As the change allows the vehicle to now carry 9 passengers it does not satisfy the definition of a car in subsection 995-1 of the ITAA 1997 and therefore does not meet the definition of a car in subsection 136(1) of the FBTAA.

Question 3

If the answer to Question 2 is yes, does a residual benefit aside under section 45 of the FBTAA where the vehicle is used by an employee for a private purpose?

Summary

As the vehicle is not a car a residual benefit arises where an employee has use of the vehicle.

Detailed reasoning

Section 45 of the FBTAA is the section that applies to fringe benefits that do not fall into one of the other benefit types. This includes a right to use a motor vehicle where a car fringe benefit does not arise from the right to use the motor vehicle.

As the vehicle (after its modification) does not satisfy the definition of a car, a car fringe benefit cannot arise where an employee has the right to use the vehicle.

Therefore a residual benefit will arise when the employee has the right to use the vehicle.

Question 4

If the answer to Question 2 is yes, does subsection 47(6) of the FBTAA apply to exempt the residual benefit that arises from the private use of the vehicle by an employee?

Summary

For the exemption to apply the private use of the vehicle must be restricted to work related travel. As the private use is nor restricted the exemption cannot apply.

Detailed reasoning

Subsection 47(6) of the FBTAA provides an exemption for a residual benefit that arises from the use of a motor vehicle that is not a car. For that exemption to apply there has to be a limitation on the private use of that vehicle. This is outlined in paragraph 47(6)(b) which states:

there was no private use of the motor vehicle during the year of tax and at a time when the benefit was provided other than:

(i) work-related travel of the employee; and

(ii) other private use of the motor vehicle by the employee or an associate of the employee, being other use that was minor, infrequent and irregular;

In this case the vehicle is used for day-to-day travel by the employee, their spouse and family for whatever need they have.

Work-related travel is defined in subsection 136(1) of the FBTAA and covers travel;

• between the employee's place of residence and place of employment or a place they are performing duties of employment; or

• travel that is incidental to travel in the course of performing the duties of employment

Any travel by the employee in the vehicle from home to work would be work-related travel however there is no restriction on the use of the vehicle outside of that home to work travel. However for the exemption to apply the 'other' private use must be limited to use that is minor, infrequent and irregular. Given the vehicle was specifically modified in order to carry the employee's entire family and that the employee and their spouse are free to use the vehicle as they wish it cannot be accepted that the 'other' private use will be limited to travel that is minor, infrequent and irregular.

Therefore the exemption under subsection 47(6) of the FBTAA cannot apply.

Question 5

If the answer to Question 3 is yes and Question 4 is no, can the taxable value of the residual benefit calculated under either section 50 or 51 of the FBTAA be calculated using the statutory formula contained in section 9 of the FBTAA?

Summary

Both sections 50 and 51 of the FBTAA require the determination of a market value. The statutory formula does not represent a market value and therefore cannot be used.

Detailed reasoning

Sections 50 of the FBTAA deals with the taxable value of an external non-period residual benefit and section 51 of the FBTAA deals with the taxable value of an external period residual benefit

A non-period residual benefit is not defined in the FBTAA but a period residual benefit is defined in subsection 136(1) of the FBTAA as 'a residual fringe benefit that is provided during a period'.

Under subsection 149(1) of the FBTAA to be provided during a period the benefit has to be provided during a period of more than one day.

Therefore if an employee has used of the vehicle for a day (or part of a day) it will be a non-period residual benefit. If they use of the vehicle for more than one day the benefit will be a period residual benefit.

As the vehicle here is being provided to an employee who will have full use of it can be concluded that the benefit that will be provided to that employee over a period. The taxable value of the benefit would need to be determined using section 51 of the FBTAA which states:

Subject to this Part, the taxable value of an external period residual fringe benefit in relation to an employer in relation to a year of tax is:

(a) where the provider was the employer or an associate of the employer and the recipients overall benefit was purchased by the provider under an arm's length transaction - the amount paid or payable by the provider in respect of the recipients current benefit;

(b) where the provider was not the employer or an associate of the employer and the employer, or an associate of the employer, incurred expenditure to the provider under an arm's length transaction in respect of the provision of the recipients current benefit - the amount of that expenditure; or

(c) in any other case - the notional value of the recipients current benefit;

reduced by the amount of the recipients contribution insofar as it relates to the recipients current benefit.

In this case an employee has the use of an employer's vehicle on a continuing basis including private use. This is similar to the dual cab vehicle example in paragraph 10 of Miscellaneous Taxation Ruling MT 2034 Fringe benefits tax: private use of motor vehicles other than cars. In respect of that example and determining the taxable value of the benefit paragraph 9 and 10 of states:

The example of an employee who is provided with the use of an employer's vehicle (e.g., a one tonne dual cab) on a continuing basis for both business and private use will serve to illustrate the basic valuation approach in this area.

In this example, the value of the benefit of the right to use the employer's vehicle is determined in accordance with paragraph 51(c) of the Act as the notional value of the benefit. Notional value is defined in sub-section 136(1) for these purposes as the amount that the employee could reasonably be expected to have been required to pay to obtain the benefit under an arm's length transaction.

How to calculate the taxable value under section 51 of the FBTAA was also dealt with in MT 2034 and the Commissioner offered a number of alternatives on how to calculate the notional value of a vehicles use by an employee. This included using:

• lease expenses where they vehicle is leased on a long-term basis

• operating costs associated with running the vehicle; or

• a cents per private kilometre method.

In the ruling the Commissioner did not offer the formula contained in section 9 of the FBTAA as a method to determine the notional value of the benefit. This is because it is a statutory valuation based on the value of the vehicle when first held and a percentage of that value. This formula does not look at the true value of the benefit to the employee and cannot determine what an employee would reasonably be expected to pay to obtain the use of the vehicle under an arm's length transaction.

The formula in section 9 of the FBTAA can only be used in determining the taxable value of car benefit as defined in section 7 of the FBTAA. It cannot be used in determining the taxable value of a benefit under section 51 of the FBTAA.

Question 6

If the answer to Question 2 is no, does a car benefit arise under section 7 of the FBTAA where the vehicle is used by an employee for a private purpose?

Not answered

Question 7

If the answer to Question 6 is yes, does subsection 8(2) of the FBTAA apply to exempt the car benefit that arises from the private use of the vehicle by an employee?

Not answered