Edited version of your written advice

Authorisation Number: 1012742954245

Ruling

Subject: Application of PAYG Withholding to allowances

Question 1

Is the 5,000 business kilometre threshold (before PAYG is applied by employer) a 'per employee' threshold or can it apply to multiple vehicles?

Answer

No, the business kilometre threshold is per vehicle

Question 2

Is an allowance paid under the 'cents per kilometre car expense payments using ATO rates' taxed when a car is provided by the employer to an employee under a fully novated salary sacrifice car lease?

Answer

Yes

Question 3

Is the allowance taxed from the first kilometre paid?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 2015

The scheme commences on: 1 July 2014

Relevant facts and circumstances

• An employee uses two vehicles for work purposes; one is a fully novated salary sacrifice car lease and the other is not.

• The employee uses both of these vehicles for work purposes.

• The employee receives a single car mileage allowance.

• The employee's salary sacrifice arrangement includes all motor vehicle costs, including fuel and maintenance.

• The employee does not provide substantiation of expenses as no expenses are incurred.

• The employee makes a Fringe Benefits Tax contribution equal to the Fringe Benefits Tax payable by the employer.

• The employee has requested the employer applies the 5,000 business kilometre PAYG no withholding to each vehicle he uses for business purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 28

Taxation Administration Act 1953 Division 12

Taxation Administration Act 1953 Division 15

Further issues for you to consider

No further issues

Anti-avoidance rules

Not applicable

Reasons for decision

Issue 1

How is PAYG Withholding applied in respect of employee car expense allowances?

Question 1

Is the 5,000 business kilometre threshold (before PAYG is applied by employer) a 'per employee' threshold or can it apply to multiple vehicles?

Summary

The cents per kilometre method may be applied to multiple vehicles and therefore the 5,000 business kilometre threshold may be applied to multiple vehicles.

Detailed reasoning

Work-related car expenses must satisfy the requirements of Division 28 of the Income Tax Assessment Act 1997 (ITAA 1997) which sets out the various methods for claiming car expenses. Guidelines for claiming car expenses under the cents per kilometre method are contained in Subdivision 28-C of the ITAA 1997.

Section 28-25 of the ITAA 1997 allows a deduction for car expenses calculated using the cents per kilometre method. Under the cents per kilometre method:

• The deduction is calculated by multiplying the number of business kilometres the car travelled during the year by the number of cents per kilometre based on engine capacity;

• A maximum of 5,000 business kilometres may be claimed for each car.

The cents per kilometre method may be applied to multiple vehicles and therefore the 5,000 business kilometre threshold may be applied to multiple vehicles.

Question 2

Is an allowance paid under the 'cents per kilometre car expense payments using ATO rates' taxed when a car is provided by the employer to an employee under a fully novated salary sacrifice car lease?

Summary

Your employee is not entitled to a motor vehicle expenses deduction in relation to the fully novated salary sacrifice vehicle. Your employee may be entitled to a deduction for motor vehicle expenses incurred in relation to his own vehicle. You pay a single allowance in relation to the use of two vehicles. As part of the allowance expressly relates to a non-deductible expense you must withhold PAYG according to Table 1 of PAYG bulletin no. 1.

Detailed reasoning

A novation is an arrangement whereby all or some of the rights or obligations of an employee (lessee) in relation to a leased property are transferred to the employer. The arrangement is achieved by way of a deed of novation between the finance company (lessor), the employee and the employer that will revoke the original lease between the finance company and the employee. Taxation Ruling TR 1999/15 Income tax and fringe benefits tax: taxation consequences of certain motor vehicle lease novation arrangements deals with taxation consequences of certain motor vehicle lease novation arrangements.

Paragraph 25 of TR 1999/15 states that in a full novation the lease payment obligations are transferred to the employer. It is explained in paragraph 27 of TR 1999/15 that the employer becomes the lessee under the novated lease.

Irrespective of whether the lease is a fully novated or partially novated lease, the employee is not deemed to have incurred an expense in relation to the car. This is because under the terms of the agreement the employee novates to their employer all of the expenses relating to the vehicle. As such, the employee is provided with a car by their employer and it is their employer who is incurring the expenses and fringe benefits tax liability during the period of the novated lease.

The word "allowance" is defined in the Macquarie dictionary as "a definite sum of money allotted or granted to meet expenses or requirements". An allowance will usually consist of the payment of a definite predetermined amount to cover an estimated expense, and will be paid regardless of whether the recipient incurs the expected expense.

You advised us that your employee uses two vehicles for business purposes. You also advised us that you pay your employee a car mileage allowance. A single allowance is paid, the payment is not split between your employee's fully novated salary sacrifice vehicle and his own vehicle.

Section 12-35 of the Tax Administration Act 1953 (TAA 1953) states that you must withhold an amount from allowances you pay to an employee. However, section 15-15 of the TAA 1953 allows the Commissioner to vary the amount required to be withheld for specific classes. PAYG bulletin no. 1 - taxing of allowances for the 200/01 and future income years (the Bulletin) outlines the correct treatment of motor vehicle allowances paid to employees. The Bulletin splits the correct tax treatment of allowances between two tables.

Table 1 lists the various types of allowances that a payee might receive and states how these allowances must be treated by the payer.

Table 2 lists the allowances for which the Commissioner has approved a variation of the PAYG Withholding required to be withheld by payers. To be eligible to access the variation contained in Table 2 your employee is expected to incur expenses that may be able to be claimed as a deduction at least equal to the amount of the allowance.

As your employee does not incur any expenses they are not eligible to receive a deduction for motor vehicle expenses in relation to the fully novated salary sacrifice vehicle, and therefore Table 1 applies. Subsection 28-12(1) of the ITAA 1997 states that you can deduct expenses if you owned or leased a motor vehicle. You, as the employer, are the lessee of the salary sacrifice motor vehicle, your employee does not own or lease the fully novated salary sacrifice vehicle. Therefore, your employee is not entitled to a motor vehicle expenses deduction in relation to the fully novated salary sacrifice vehicle.

Your employee may be entitled a deduction for motor vehicle expenses incurred in relation to his own vehicle. If the motor vehicle allowance paid by you to your employee only related to your employee's own vehicle then Table 2 would apply. However, you pay only one allowance in relation to the use of two vehicles. As part of the allowance expressly relates to a non-deductible expense you must withhold PAYG according to Table 1.

Table 1 states that PAYG is withheld from allowances for non-deductible expenses for motor vehicles.

Question 3

Is the allowance taxed from the first kilometre paid?

Summary

The motor vehicle allowance paid to your employee should be taxed from the first kilometre paid.

Detailed reasoning

Your employee is not entitled to a motor vehicle expenses deduction in relation to the fully novated salary sacrifice vehicle. As such, Table 1 of the Bulletin is applicable to allowances paid to him.

The 5,000 kilometre threshold is a component of the 'cents per kilometre method' found in section 28-25 of the ITAA 1997 - How to calculate your deduction. As no deduction is allowable the 5,000 kilometre threshold is not relevant. As such, the section entitled 'Allowances for non-deductible expenses' found in Table 1 does not include the 5,000 business kilometre threshold as no deduction is allowable. Therefore, the motor vehicle allowance paid to your employee should be taxed from the first kilometre paid.