Edited version of your written advice

Authorisation Number: 1051216192256

Date of advice: 21 April 2017

Ruling

Subject: Base value for car fringe benefits

Question 1

Can the 'importer price' be used to determine the base value of a car for the purpose of calculating car fringe benefits that arise from the use of that car?

Answer

Yes.

This ruling applies for the following periods:

1 May 2017 to 31 March 2018

1 April 2018 to 31 March 2019

1 April 2019 to 31 March 2020

1 April 2020 to 31 March 2021

1 April 2021 to 31 March 2022

The scheme commenced on:

1 May 2017.

Relevant facts and circumstances:

You are a motor vehicle manufacturer.

Your parent company is based overseas, and is also a motor vehicle manufacturer.

You have provided a copy of the Group structure, which shows the voting and capital rights of the corporations in your conglomerate.

You propose to lease cars from another subsidiary of the overseas company.

The cars are manufactured by the overseas company.

The overseas company sells the newly manufactured cars to an Australian subsidiary for a price known as the 'importer price'.

The 'importer price' is a globally consistent price representative of a commercially acceptable mark-up to the cost of manufacture.

You advise that transfer pricing documentation reflects that the 'importer price' charged to the subsidiary by the overseas company is at arm's length.

In addition to paying the 'importer price' the importing subsidiary company is responsible for all costs of the cars entering Australia, including:

● freight costs

● insurance

● inspection costs

● customs duty

● import duty, and

● storage costs.

For fringe benefits tax purposes, you propose to value some cars using the statutory formula method under section 9 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

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) and

Income Tax Assessment Act 1936 subsection 318(2).

Summary

The base value of the car which you provide to an employee will be the cost price of the car to your parent company at the earliest holding time, being the 'importer price'.

Detailed reasoning

Does a car fringe benefit arise?

In accordance with section 7 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), a car fringe benefit arises in respect of the employment of an employee (or an associate) or is taken to be available for the private use of the employee (or an associate).

It is not in dispute that you provide your employees with the private use of the vehicles and, therefore, a car fringe benefit will arise in relation to each of these vehicles.

Taxable value of car fringe benefits

In determining your FBT liability that arises from providing the cars to employees for their private use, you propose to value some of the cars using the statutory formula method under section 9 of the FBTAA.

Subsection 9(1) of the FBTAA states that the taxable value of the car fringe benefit using the statutory formula method 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:

Number of days during Amount (if any) of the

0.2 × Base value of the car X that year of tax on which — recipient's payment

the car fringe benefits were

provided by the provider

___________________________________

Number of days in that tax year

What is the base value of the car?

Subsection 9(2) of the FBTAA provides the calculations for determining the base value of the car as:

(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 fourth anniversary of the earliest holding time - 2/3; or

(B) in any other case - 1; and ….

Therefore, in order to determine the base value of the car, it is necessary to identify the 'cost price' of the car at the 'earliest holding time' the car was owned by 'an associate' of 'the provider'.

Who is the 'provider' of the car?

Subsection 9(1) of the FBTAA provides that, for the purposes of using the statutory formula method, the provider is the person who holds the car.

Subsection 162(1) of the FBTAA provides that a car will be held by a person if it is either owned by the person, leased to the person or otherwise made available to the person by another person.

As you are the lessee of the car, you will be the provider.

Are you (the 'provider'), a subsidiary of the overseas company and the overseas company associates?

The term 'associate' is defined in subsection 136(1) of the FBTAA as having the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

The definition of 'associate' in subsection 318(2) of the ITAA 1936 provides that:

(2) For the purposes of this Part, the following are associates of a company (in this subsection called the primary entity):

(…)

(d) another entity (in this paragraph called the controlling entity) where:
(i) the primary entity is sufficiently influenced by:

(A) the controlling entity; or

(B) the controlling entity and another entity or entities; or

(…)

(f) any other entity that, if a third entity that is an associate of the primary entity because of paragraph (d) of this subsection were the primary entity, would be an associate of that third entity because of subsection (1), because of another paragraph of this subsection or because of subsection (3).

Subparagraph 318(2)(d)(ii) of ITAA 1936 provides that a company will be associated with another entity (the controlling entity) where a 'majority voting interest' in the company is held by the controlling entity.

Paragraph 318(6)(c) of ITAA 1936 provides that:

(6) For the purposes of this section:

(…)

(d)  an entity or entities hold a majority voting interest in a company if the entity or entities are in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the company.

In your situation, you and the overseas company will be associates if the overseas company holds a majority voting interest in you.

Your overseas company has over 50% of the voting rights in a company which holds 100% of the voting rights in you. Therefore the overseas company is an associate for the purposes of subsection 9(2) of the FBTAA.

You propose to lease the cars from a subsidiary of the overseas company. As the subsidiary purchased the cars from the overseas company, it is necessary to consider whether the subsidiary is also an associate.

Under paragraph 318(2)(f) of the ITAA 1936, the subsidiary from which you propose to lease the cars is considered to be your associate if they are an associate of the overseas company.

As the overseas company holds 100% of the voting rights of the subsidiary from which you propose to lease the cars, the subsidiary is an associate of the overseas company under paragraph 318(2)(d).

Therefore the subsidiary of the overseas company from which you propose to lease the cars, is also your associate for the purposes of subsection 9(2) of the FBTAA.

What is the 'earliest holding time' the car was held by an associate of the provider?

To determine the earliest holding time, paragraph 9(2)(b) of the FBTAA relevantly provides that:

(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.

As both the subsidiary from which you propose to lease the cars and the overseas company are associates, the 'earliest holding time' is the earliest time before the current time when the cars were held by an associate of the provider. Accordingly, the 'earliest holding time' will be when the manufacturing process by the overseas company was completed and the car has come to exist as a 'car' under subsection 136(1) of the FBTAA.

What is the 'cost price' of the car to your parent company?

Where the statutory formula method is used to determine the taxable value of a car fringe benefit, the taxable value of the benefit is calculated by reference to the base value of the car which, per subsection 9(2) of the FBTAA, includes the 'cost price' of the car.

The term 'cost price' is defined in subsection 136(1) of the FBTAA.

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 wholesale under an arm's length transaction at or about the time when the car was applied to the person's own use.

The 'cost price' is determined by reference to the time the car was applied to the manufacturer's own use.

In ATO Interpretative Decision 2003/585 entitled “Fringe Benefits Tax Car fringe benefits: cost price for manufacturer - 'application to the person's own use'” the Commissioner acknowledges that where a car is manufactured by a parent company and sold to a subsidiary, the sale of the car will be considered to be an application of the car to the parent company's own use.

Therefore, the 'cost price' of the car to the manufacturer will be the amount the manufacturer could reasonably expect to receive had it sold the car by wholesale under an arm's length transaction, at or about the time that the car was sold by the manufacturer to the subsidiary.

This will be the 'importer price' which is the arm's length sale price of the car prior to any additional charges associated with importing the car into Australia.

The 'importer price' is the appropriate 'base value' to be used for the purposes of calculating the taxable value of the cars under subsection 9(2) of the FBTAA.