Edited version of your written advice

Authorisation Number: 1013061535503

Date of advice: 5 August 2016

Ruling

Subject: Fringe benefits tax - base value of car

Question 1

If you provide the use of a car to an employee under a novated lease, and the same car is provided by you to another employee under another novated lease, will the base value of the car that is calculated under subsection 9(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) be the cost price of the car to the lessor in the second novated lease agreement?

Answer

No

This ruling applies for the following periods

Year ended 31 March 2017

The scheme commenced on

1 April 2016

Relevant facts

An employee of an employer transferred car leasing obligations to the employer in a novated lease. The first employee is moving overseas and another employee intends to enter into a novated leasing arrangement in respect of the same car.

The car is used by the employee solely for private use. A car fringe benefit is provided to the first employee and will continue to be provided to another employee of the employer if that employee enters into a novated lease.

The statutory formula method is used by the employer to determine the taxable value of the car fringe benefits.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 7

Fringe Benefits Tax Assessment Act 1986 Subsection 9(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 9(2)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 162(1)

Reasons for decision

Generally, a fringe benefit will arise where a benefit is provided to an employee by their employer in respect of the employee's employment, provided it is not an exempt benefit: subsection 136(1) of the FBTAA.

The meaning of a car benefit is discussed in subsection 7(1) of the FBTAA:

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 employee, 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.

The holding of a car is discussed in subsection 162(1) of the FBTAA:

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.

A novation is a tripartite arrangement whereby the three parties (lessor, lessee and employer) agree to change or transfer all or some of the rights and obligations in a motor vehicle lease entered into between two of the parties.

The obligations of a lessee, an employee, are usually transferred to the employee's employer.

The employer provides the car to the employee in respect of their employment giving rise to a car fringe benefit.

Subsection 9(1) of the FBTAA states that the taxable value of a car fringe benefit using the statutory formula is as follows:

Subject to this Part, where one or more car fringe benefits in relation to an employer in relation to a year of tax relate to a particular car held by a particular person (in this section referred to as the provider), the taxable value of that fringe benefit, or the aggregate of the taxable values of those fringe benefits, as the case may be, in relation to that year of tax, is the amount calculated in accordance with the formula supplied.

As the car was leased by the employer, the base value of a car is relevantly defined in subsection 9(2) of the FBTAA as follows:

For the purposes of this section:

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

…

(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;

(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;

'Leased car value' is defined in subsection 136(1) of the FBTAA to mean:

in relation to a car held but not owned by a person at a particular time, means:

(a) in a case to which paragraph (b) does not apply - the amount that the person could reasonably be expected to have been required to pay to purchase the car from the owner at the time under an arm's length transaction; or

(b) if the person commenced to lease the car at that time from a lessor who purchased the car at or about that time - the cost price of the car to the lessor.

The base value where the car was leased by the provider, the employer, is therefore the cost price to the lessor at the commencement of the lease. The earliest holding time is the earliest time before the current time when the car was held by the provider, the employer, or an associate of the employer. The earliest holding time is therefore the date the novated lease was entered into between the employer, the first employee and the finance company. This time does not change if the same, or a different, employee enters into a second, or later, novated lease agreement with the same financier or another financier in respect of the same car.

ATO Interpretative Decision ATO ID 2004/528 Fringe Benefits Tax Car fringe benefits: base value of a car where the car has been previously leased by the employer (ATO ID 2004/528) discusses the situation where an employee enters into an effective salary sacrifice arrangement with his employer who provides him with a car through a novated lease agreement, the employee then purchases the car from the lease company, and the employee enters into a second lease agreement with the employer involving the same car. Under the second lease arrangement the employee sold the car to a new leasing company and is then provided with the same car through a novated lease agreement between the employer and that company.

It was ruled that the base value of the car was calculated at the earliest time that the employer first held the car, being the cost price to the lessor under the first lease arrangement, and not the cost price of the car to the second lessor, as follows:

Issue

If an employer provides the use of a car to an employee, where the car has been previously provided to the employee under an earlier lease agreement that involved a different lease company, will the base value of the car that is calculated under subsection 9(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) be the cost price of the car to the second lessor?

Decision

No. The base value of the car, for the purpose of subsection 9(2) of the FBTAA, is determined by reference to the earliest time that the employer first held the car.

Facts

…

Reasons for Decision

…

Where the car is leased by the employer, subparagraph 9(2)(a)(ii) of the FBTAA provides that the base value of the car is the 'leased car value at the earliest holding time'. 'Leased car value' is defined in subsection 136(1) of the FBTAA to mean, where a car is 'held but not owned by a person', the cost price of the car to the lessor. Earliest holding time is explained at paragraph 9(2)(b) of the FBTAA to be the earliest time before the current time when the car was held by the provider or an associate of the provider.

Therefore, the base value will be the cost price to the lessor under the first lease arrangement, being the earliest time that the car was held.

In the current circumstances, the earliest holding time that the employer held the car was therefore at the commencement of the novated lease with the first employee. The base value of the car will continue to be the leased car value at that time. If another employee of the employer is provided with the same car under another novated lease, there may be a short period between the termination of the first lease and the commencement of the second lease when the employer does not hold the car. However, the base value of the car will continue to be the leased car value at the commencement of the first novated lease agreement.

Although the base value of the car cannot be revalued to market value or purchase price if the same car is provided to another employee, the base value can be reduced to 2/3 of the leased car value after the fourth anniversary of the earliest holding time under subsection 9(2)(a)(ii)(A) of the FBTAA. For example, if the car was first held by the employer on 1 July 2013 and was provided to an employee on that date, and then the same car was provided to a second employee on 1 September 2016, the calculation of the base value of the car under the statutory formula will be same for the second employee as for the first employee for the fringe benefits tax (FBT) years ended 31 March 2017 and 31 March 2018. The fourth anniversary of the earliest holding time is 1 July 2017. The FBT year commencing after the fourth anniversary of the earliest holding time is the FBT year commencing 1 April 2018. Therefore, for the FBT year commencing 1 April 2018, and later FBT years, the base value will be 2/3 of the leased car value at the earliest holding time.