Edited version of your written advice

Authorisation Number: 1051405393661

Date of advice: 24 July 2018

RULING

Subject: Residual benefits and exempt benefits

Question 1:

Will a ‘residual benefit’ arise from an employee’s use of a motorised two-wheeled vehicle pursuant to section 45 of the Fringe Benefits Tax Assessment Act 1986 (‘FBTAA 1986’)?

Answer:

Yes

Question 2:

If yes, will the residual benefit be an ‘exempt benefit’ pursuant to subsection 47(6) of the FBTAA 1986?

Answer:

Yes

This ruling applies for the following period

XX 20YY to YY 20ZZ

RELEVANT FACTS AND CIRCUMSTANCES

THE MOTORISED TWO-WHEELED VEHICLES

1. The motorised two-wheeled vehicles are purchased from manufacturers or Australian importers by Company A.

2. The motorised two-wheeled vehicle consists of a frame fitted with an electric motor.

3. The motorised two-wheeled vehicle’s engine provides support when the rider is actively pedalling.

4. The motorised two-wheeled vehicle’s motor is powered by a light lithium-based battery through an electronic speed controller.

5. No registration or driver’s licence is required to ride a motorised two-wheeled vehicle.

6. Every motorised two-wheeled vehicle is equipped with a speedometer and an odometer.

THE LEASE AGREEMENT

7. Under the scheme, the Employee enters into a lease agreement with Company A, who provide the motorised two-wheeled vehicle to the Employee as part of a salary sacrifice arrangement.

8. The Employee’s Employer and Company A enter into a Novated Lease Agreement, which transfers the liability for the lease payment from the Employee to the Employer, for the term of the Employee’s paid employment.

9. The Employer will not be liable for any lease payments when the Employee is on unpaid leave.

10. The agreed Novation Agreement includes the following terms and conditions:

● Company A leases the motorised two-wheeled vehicle to the Employee for the term of the agreement.

● The Employee agrees to pay Company A the amount specified in the agreement. Liability for this payment may be novated to the Employer, while the Employee is in paid employment with the Employer.

● The costs incidental to the instructions for and the preparation, execution and stamping of the lease and all stamp duties payable in respect of the lease are borne and paid by the Employee.

● Company A may terminate the agreement at any time should any changes in any legislation impose financial or other obligations that are unacceptable to Company A.

● All risk of loss of the motorised two-wheeled vehicle or damage to it shall be borne by the Employee.

● The Employee shall obtain full comprehensive insurance cover against loss or damage to the motorised two-wheeled vehicle.

● The Employee is responsible for all maintenance costs, including breakdown repairs, regular servicing and other consumables.

● At the end of the lease term, the Employee will deliver possession of the motorised two-wheeled vehicle to Company A.

PRIVATE USE OF THE MOTORISED TWO-WHEELED VEHICLE

11. Private use of the motorised two-wheeled vehicles will be restricted to:

a. Travel to and from work;

b. Use that is incidental to travel in the course of performing employment-related duties; and

c. Non-work-related use that is minor, infrequent and irregular.

Information provided

12. You have provided a number of documents containing detailed information in relation to the use of a motorised two-wheeled vehicle by employees, including:

a. Private Binding Ruling (PBR) Application, dated xx XX 20YY

b. Information describing the lease agreement between the employee and Company A

c. Information describing the novated lease agreement between the employee’s employer and Company A

d. References and further information in support of the PBR Application

e. Our telephone conversations with Taxpayer B on yy and zz YY 20YY

13. We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Division 2, Section 7

Fringe Benefits Tax Assessment Act 1986 Division 5, Section 20

Fringe Benefits Tax Assessment Act 1986 Division 11, Section 40

Fringe Benefits Tax Assessment Act 1986 Division 12, Section 45

Fringe Benefits Tax Assessment Act 1986 Division 12, Subsection 47(6)

Fringe Benefits Tax Assessment Act 1986 Part XII, Subsection 136(1)

REASONS FOR DECISION

All legislative references are to the Fringe Benefits Tax Assessment Act 1986 (‘FBTAA 1986’) unless otherwise stated.

QUESTION 1:

SUMMARY

A ‘residual benefit’ arises from an employee’s use of a motorised two-wheeled vehicle pursuant to section 45 of the FBTAA 1986.

DETAILED REASONING

14. For the purpose of this ruling, a determination is to be made to determine whether a ‘residual benefit’ arises from an employee’s use of a motorised two-wheeled vehicle pursuant to section 45 of the FBTAA 1986.

THE LEASE AGREEMENT

15. In your circumstance, the employee leases the motorised two-wheeled vehicle from the lessor (Company A). As the employer (Company C), you enter into a Novated Lease Agreement, which transfers the liability for the lease payment from the employee to yourself (the employer). So, you as the employer pay the lease payments.

16. Taxation Ruling TR 1999/15 ‘Income tax and fringe benefits tax: taxation consequences of certain motor vehicle lease novation arrangements’ provides guidance on the various kinds of novation arrangements. TR 1999/15 defines a partial novation as follows:

Para 4 - Partial novation is an industry expression that describes a novation (transfer) of a finance lease payment obligation. A partial novation may also occur where there exists both a finance lease and a sub-lease. Under a partial novation, the obligation to make lease payments is novated to an employer. Instead of the lessee making payments to the lessor, the employer makes these payments.

17. In your circumstance, the following recitals from your draft Deed of Novation, indicate that the lease payments are the only obligations novated to the employer:

# B. The Lessor has leased to the Employee the Vehicle subject to the conditions contained in the Lease.

# C. The Employer, Employee and Lessor agree to the novation to the Employer of certain obligations of the lessee under the Lease subject to the terms and conditions of this Deed.

# D. The Employer, Employee and Lessor agree that the Employee will retain certain care, use and maintenance obligations under the Lease.

18. The interpretation section at Clause A.A (Definitions) from your draft Deed of Novation provides the following definitions:

Employer Rights and obligations: the obligation of the lessee under the Lease to make lease payments as attached in Schedule 2 (Lease Payment Schedule).

Novated Vehicle Lease: the lease between the Employer and the Lessor made pursuant to this Deed under clause 2.

19. Clause D from your draft Deed of Novation provides the following with regard to the Novated Vehicle Lease:

The parties agree that on the date of this Deed:

(1) The Employer Rights and Obligations are novated to the Employer; and

(2) The Employee Rights and Obligations remain with the Employee.

20. Taking the previous paragraphs into consideration, it is determined that your Deed of Novation is therefore a partial novation.

RESIDUAL FRINGE BENEFIT

21. To determine whether the lease payment is considered a ‘residual benefit’ and so potentially falls within subsection 47(6), we must classify the lease payment.

Car fringe benefit

22. Section 7 (Division 2) of the FBTAA 1986 describes the circumstances in which a ‘car benefit’ will arise. Paragraph 7(1) states:

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… [emphasis added]

23. For this section to apply the vehicle must be a car.

24. The definition of ‘car’ in subsection 136(1) of the FBTAA 1986 provides that the term has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997 (‘ITAA 1997’).

25. Subsection 995-1(1) of the ITAA 1997 defines 'car' to mean:

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

26. The term ‘motor cycle’ is not defined in the FBTAA 1986 or the ITAA 1997. It therefore takes on its ordinary meaning.

27. The Macquarie Dictionary defines ‘motor cycle’ to mean:

A motor vehicle resembling a bicycle, for one or two riders, sometimes with a sidecar attached

28. The term ‘motor vehicle’ is defined in subsection 995-1(1) of the ITAA 1997 to mean:

any motor-powered road vehicle (including a 4 wheel drive vehicle)

29. The motorised two-wheeled vehicle consists of a frame fitted with an electric motor. It is therefore a 'motor vehicle' as it is powered by an electric motor. Even though it is powered by an electric motor, rather than a motor powered by petrol, the type of motor does not affect the classification of the vehicle. It is a vehicle powered by a motor. Therefore, it is considered to be a motorised two-wheeled vehicle.

30. As the motorised two-wheeled vehicle is a motorised vehicle, it is excluded from being a car by the definition in subsection 995-1(1) of the ITAA 1997.

31. Therefore, as the motorised two-wheeled vehicle is not a car, a car benefit will not arise from the employee's use of the motorised two-wheeled vehicle.

32. In conclusion, a ‘car benefit’ as described in section 7 of the FBTAA 1986 will not arise from the employee’s use of a motorised two-wheeled vehicle, as the motorised two-wheeled vehicle is not a car.

Property fringe benefit

33. Section 40 (Division 11) of the FBTAA 1986 provides that a ‘property benefit’ will arise:

Where, at a particular time, a person (in this section referred to as the provider) provides property to another person (in this section referred to as the recipient), the provision of the property shall be taken to constitute a benefit provided by the provider to the recipient at that time.

34. Under your scheme, Company A retains the ownership of the motorised two-wheeled vehicle and you merely pay the lease payments. Therefore, a ‘property benefit’ will not arise from the employee's use of the motorised two-wheeled vehicle.

Expense payment fringe benefit

35. Section 20 (Division 5) of the FBTAA 1986 provides that an ‘expense payment benefit’ will arise:

Where a person (in this section referred to as the provider):

(a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the recipient) to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the recipient), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

The making of the payment referred to in (a), or the reimbursement referred to in (b), shall be taken to constitute the provision of an ‘expense payment benefit’ by the provider to the recipient.

36. Under your scheme, the lease payment is not an ‘expense payment benefit’ as you, the employer, are under a legal obligation, pursuant to the Novated Lease, to pay the lease payments to the lessor (Company A). You are not paying the lease payments on behalf of the employees.

Residual fringe benefit

37. Section 45 (Division 12) of the FBTAA 1986 provides that a benefit will be a ‘residual benefit’ if:

…the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive).

38. Subsection 136(1) of the FBTAA 1986 defines ‘benefit’ to include:

any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property;

(ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money.

39. The right to use a motorised two-wheeled vehicle comes within this definition. As it is not a benefit covered by a provision of Subdivision A of Divisions 2 to 11, it will be a residual benefit.

40. Support for this conclusion is provided by Taxation Ruling MT 2034 ‘Fringe benefits tax: private use of motor vehicles other than cars’. In detailing the circumstances in which the use of a vehicle other than a car will give rise to an FBT liability and providing guidelines for the determination of the value of that benefit, MT 2034 provides rates that can be applied to the use of a motor cycle.

41. Further confirmation that a ‘residual benefit’ will arise from an employee’s use of a motorised two-wheeled vehicle pursuant to section 45 of the FBTAA 1986 comes from Taxation Ruling TR 1999/15, that provides the fringe benefit tax consequences of a partial novation are as follows:

Para 21 – In partial novations a residual benefit may arise under the FBTAA 1986 where all that occurs is the transfer to the employer of the lease payment obligation of the employee…

42. Taking the previous paragraphs into consideration, it is determined that a ‘residual benefit’ does arise from the employee’s use of a motorised two-wheeled vehicle pursuant to section 45 of the FBTAA 1986.

QUESTION 2:

SUMMARY

The ‘residual benefit’ which arises from an employee’s use of a motorised two-wheeled vehicle pursuant to section 45 of the FBTAA 1986 will be an ‘exempt benefit’ pursuant to subsection 47(6) of the FBTAA 1986.

DETAILED REASONING

43. For the purpose of this ruling, a determination is to be made to determine whether the ‘residual benefit’ (from Question 1) will be an ‘exempt benefit’ pursuant to subsection 47(6) of the FBTAA 1986.

Exempt residual benefit

44. Subsection 47(6) of the FBTAA 1986 applies to ‘residual fringe benefits’ and provides an exemption from fringe benefits as follows:

Where:

(a) a residual benefit consisting of the provision or use of a motor vehicle is provided in a year of tax in respect of the employment of a current employee;

(aa) the motor vehicle is not:

(i) a taxi let on hire to the provider; or

(ii) a car, not being:

(A) a panel van or utility truck; or

(B) any other road vehicle designed to carry a load of less than 1 tonne (other than a vehicle designed for the principal purpose of carrying passengers); and

(b) 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;

the benefit is an exempt benefit in relation to the year of tax.

45. In discussing the circumstances in which a fringe benefit will arise from the use of a motor vehicle that is not a car, paragraph 8 of MT 2034 refers to the exemption provided by subsection 47(6) of the FBTAA 1986.

46. Paragraph 8 of MT 2034 states:

A significant exemption from FBT is, however, provided under sub-section 47(6) of the Act. Under this sub-section, no liability for FBT will arise in respect of the provision of a vehicle to an employee where there is no private use of the vehicle by the employee or where private use of the vehicle by the employee during a year of tax is limited to certain work-related travel. Work related travel is defined in sub-section 136(1) of the Act to be travel between the employee's residence and place of employment or other place at which employment duties are performed and any travel that is incidental to travel in the course of performing duties of employment. It should be noted that in the event that private use is not so limited, FBT liability extends to all private use, including private home to work travel.

47. In accordance with this paragraph, the residual benefit that arises from an employee's use of a motorised two-wheeled vehicle will be an exempt benefit under subsection 47(6) of the FBTAA 1986 if the private use of the motorised two-wheeled vehicle is restricted to:

i. travel to and from work

ii. use that is incidental to travel in the course of performing employment-related duties, and

iii. non-work-related use that is minor, infrequent and irregular.

48. Where the private use is not restricted to these types of travel, the private use will be a residual fringe benefit.

49. Paragraph 47(6)(a) of the FBTAA 1986 only applies to residual benefits where the residual benefit consists of the provision or use of a ‘motor vehicle’. Further, paragraph 47(6)(aa) states that the motor vehicle must not be:

(i) a taxi let on hire to the provider; or

(ii) a car, not being:

(A) a panel van or utility truck; or

(B) any other road vehicle designed to carry a load of less than 1 tonne (other than a vehicle designed for the principal purpose of carrying passengers)

A determination must now be made whether the payment of a lease payment may be considered to be ‘the provision or use of a motor vehicle’.

50. The Commissioner has considered this question, but with regard to the ‘provision of bus passes’ by employers to their employees. Four Class Rulings have issued with regard to the classification of bus passes provided by employers to their employees.

● CR 2017/60 - (as at September 2017): salary sacrifice (para 10)

● CR 2017/35 - (as at June 2017)

● CR 2016/58 - (as at August 2017): salary sacrifice (para 10)

● CR 2015/111 - (as at August 2017): salary sacrifice (para 10)

51. In each of the above four Class Rulings, the Commissioner has determined that the provision of the bus passes, under a salary sacrifice arrangement does constitute an ‘exempt residual benefit’ as per subsection 47(6) of the FBTAA 1986. The phrase "provision or use" was important in reaching this conclusion, as in these cases it needed to be established that merely riding on a bus as a passenger was not enough to fall within the exemption.

52. Control of the vehicle is not an issue which arises in this scenario. What is relevant though is the fact that the employer paid for a bus pass in the same way in which the employer is paying the lease payments.

53. An analogy can be drawn here – in the same way the smartcard bus pass provided by the employer allows the employee to use the bus, so too, the payment by the employer of the lease payment within the terms of the novated lease allows the employee to use the motorised two-wheeled vehicle.

54. The employer is paying the lease payment which then gives the employee the legal right to use the motorised two-wheeled vehicle.

55. Taking the previous paragraphs into consideration, it is determined that the residual benefit is an ‘exempt benefit’ pursuant to subsection 47(6) of the FBTAA 1986.

ATO view documents

Taxation Ruling MT 2034

Taxation Ruling TR 1999/15

Class Ruling CR 2015/80