Edited version of private advice

Authorisation Number: 1051922187669

Date of advice: 25 November 2021

Ruling

Subject: Sale and leaseback arrangement with a novated lease

Issue 1: Sale and Leaseback Arrangement

Question 1

Where a vehicle owned by the Employee is sold to Company A under a formal Purchase Agreement, and that vehicle is subsequently leased back to the Employee under a formal Lease Agreement, will such an arrangement constitute a valid sale and leaseback arrangement?

Answer

Yes.

Issue 2: Tax Implications of the Sale and Leaseback Arrangement

Income Tax Implications

Question 1

Will the lease payments and running costs paid by the Employer be an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of a vehicle it provides to the Employee under the Novated Lease Agreement?

Answer

Yes.

Fringe Benefits Tax (FBT) Implications

Question 2

Will a 'car fringe benefit' as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) arise when the Employer makes a vehicle available for an Employee's private use under the Novated Lease Agreement?

Answer

Yes.

Question 3

If the answer to Issue 2 Question 2 is 'Yes', for the purpose of calculating the taxable value of the car fringe benefit under either the Statutory Formula method in section 9 of the FBTAA or the Cost Basis method in section 10 of the FBTAA, will the post-tax salary deductions contributed by the Employee constitute 'recipient's payments' and thus reduce the taxable value calculated under either of these methods?

Answer

Yes.

Goods and Services Tax (GST) Implications

Question 4

Will the Employer be entitled to input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for the lease payments paid to Company A?

Answer

Yes.

Question 5

Will the Employer be liable for GST on the pre-tax amounts sacrificed by the Employee under the Salary Sacrifice Arrangement pursuant to section 9-5 of the GST Act?

Answer

No.

Question 6

Will the Employer be liable for GST on the post-tax deductions made by the Employee under the Salary Sacrifice Arrangement pursuant to section 9-5 of the GST Act?

Answer

Yes.

Issue 3: Anti-Avoidance

Question 1

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to cancel a tax benefit obtained by the Employer, or make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount to the Employer by any amount?

Answer

No.

This private ruling applies for the following periods:

Income Tax year ended 30 June 20XX

Income Tax year ended 30 June 20XX

Income Tax year ended 30 June 20XX

Income Tax year ended 30 June 20XX

FBT year ended 31 March 20XX

FBT year ended 31 March 20XX

FBT year ended 31 March 20XX

FBT year ended 31 March 20XX

The scheme commences on:

1 April 20XX / 1 July 20XX

Relevant facts and circumstances

The Applicant for this ruling ('the Employer') has proposed the following scheme:

An employee of the Employer ('the Employee') sells a vehicle that they own outright to Company A at arm's length through a formal Purchase Agreement.

•         Company A is a subsidiary company of the Employer. Both the Employer and Company A are separately registered for Goods and Services Tax (GST).

•         The Employee sells the vehicle to Company A at its trade-in value (as determined from an unrelated car valuer's website). All purchase prices will be less than the luxury car 'depreciation limit' ($59,136 in the 2020-21 income year).

•         Further details about the purchase price, and how Company A will pay this amount to the Employee, is provided below.

Company A (as the Lessor) will lease the vehicle back to the Employee (as the Lessee) via a formal Lease Agreement.

•         The Lease Agreement will be a fixed term, fully-maintained, finance lease, with a minimum residual value in accordance with ATO Interpretative Decision ID 2002/1004 Income Tax: car lease residual values (ATO ID 2002/1004).

•         The Lease Agreement will be entered into in a commercial manner and on an arm's length basis between all the parties.

•         The lease period will vary between X to Y years.

•         There is no limit on the age that a vehicle can be at the end of the Lease Agreement.

•         As the applicable vehicles under the Lease Agreement will generally be older vehicles, there is a risk that the terminal value of the vehicle will be less than the residual value. To mitigate this risk, a portion of the sale proceeds equal to the residual value will be held as security by Company A (as the Lessor) and released to the Employee (the Lessee) at the end of the term of the Lease Agreement.

•         To ensure that finance is granted to all eligible employees and that Company A does not fall foul of Responsible Lending requirements, the balance of the purchase price (i.e. net of the residual value) will be paid to the Employee in monthly instalments, spread equally over the term of the lease (as agreed to by the Employee). The purpose of these arrangements is to obviate any credit risk and allow employees who have adverse records to access the benefits of a novated lease.

•         If the Employee defaults on the lease, Company A can repudiate or terminate the Lease Agreement and terminate the Employee's right of possession of the vehicle. If the Lease Agreement is terminated, Company A is entitled to take immediate possession of the vehicle and impose an early termination penalty which is calculated 'live' on each contract.

•         Unless the Lease Agreement is terminated prior to the expiry of the lease term, and provided the Employee does not default on any lease payments (including associated costs), Company A will pay the purchase price of the vehicle to the Employee - net of the residual value (which is held by Company A as security) - in monthly instalments over the term of the lease (instead of as one lump sum).

•         The balance, being the amount held as security, will be released to the Employee at the end of the lease. By the end of the lease term, the Employee will have received the full amount of the agreed purchase price, except to the extent any amount is offset against amounts owing by the Employee to Company A.

The Employer will then enter into a formal Novated Lease Agreement with Company A (as the Lessor) and the Employee:

•         The proposed arrangement will be a 'split full novation', such that all of the Employee's rights and obligations under the initial Lease Agreement entered into between Company A and the Employee - except for the responsibility for the payment of the residual value - are transferred to the Employer for the period of the Employee's employment, or until the lease is terminated. That is, the Employee will retain the obligation to pay the residual value of the vehicle upon expiration of the Novated Lease Agreement. The Employer will then make the vehicle available for the Employee's private use under the Novated Lease Agreement.

•         The Novated Lease Agreement will be entered into in a commercial manner and on an arm's length basis between all the parties.

•         The Novated Lease Agreement will enable salary packaging of older vehicles and vehicles already owned by an Employee ('the Salary Sacrifice Arrangement').

•         Under the Salary Sacrifice Arrangement, periodic lease payments will be made to Company A by the Employer, to whom the Employee's lease will be novated. Employees will also have access to discounted fuel, maintenance, tyres and insurance under the Salary Sacrifice Arrangement. The Employee will be issued with a fuel card, where all purchases for the vehicle would be maintained to obtain discounted pricing on fuel, maintenance and repairs.

•         Each month, Company A will issue an invoice to the Employer to pay the monthly costs of running the lease - including rental; fuel; maintenance; tyres; registration; insurance; and an administration fee. All costs are a budget or estimate and reconciled at the end of the lease.

•         Under the Salary Sacrifice Arrangement, a combination of pre-tax and post-tax salary deductions will be made by the Employee to offset the cost to the Employer of the lease repayments (including running costs) for the vehicle, including Fringe Benefits Tax (FBT) where relevant.

•         Post-tax deductions will generally be designed to reduce any FBT liability to nil, with pre-tax deductions covering the Invoice Value net of GST.

•         A division of the Employer - or, if required by the Employer, a third party - will act as the fleet manager for the vehicle.

•         On termination of the Lease Agreement/the Novated Lease Agreement (and the Salary Sacrifice Arrangement), the Employee may request to re-lease the vehicle, or may request to purchase the vehicle (directly from Company A), or may leave the vehicle with Company A.

­   If the Employee purchases the vehicle at the end of the lease, this will be for its residual value, plus GST. The final amount of the original purchase price payable to the Employee by Company A will be offset against the amount payable to Company A by the Employee for the re-purchase.

­   If the Employee does not wish to purchase the vehicle back again and leaves the vehicle with Company A to be sold, then as provided in the Lease Agreement, when Company A sells the vehicle:

o   the Employee will be responsible for any shortfall in the amount Company A receives for the vehicle and the residual value of the vehicle, and

o   if the vehicle is sold for more than its residual value, the Employee will only have a claim or interest in such surplus if the termination of the Lease Agreement/ Novated Lease Agreement is a result of gross negligence, a wrongful act or omission or a breach of the Lease Agreement by Company A.

Assumptions

Under the Salary Sacrifice Arrangement, the Employee will agree to receive part of his or her total amount of remuneration as benefits before the Employee has earned the entitlement to receive that amount as salary or wages, thus satisfying the definition of an 'effective salary sacrifice arrangement' in Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements (TR 2001/10).

The benefit (being a motor vehicle that will be made available for the private use of an Employee) is not one that would be specifically excluded as per paragraphs (f) to (s) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA.

The vehicle that is the subject of the Leaseback Agreement and the Novated Lease Agreement/Salary Sacrifice Arrangement will meet the definition of a 'car' in subsection 995-1(1) of the ITAA 1997 (and therefore subsection 136(1) of the FBTAA).

The car will be garaged at the Employee's place of residence.

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 10

Fringe Benefits Tax Assessment Act 1986 Section 67

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 162(1)

Goods and Services Tax Act 1999 Section 9-5

Goods and Services Tax Act 1999 Section 11-5

Goods and Services Tax Act 1999 Section 11-15

Goods and Services Tax Act 1999 Section 11-20

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 Division 71

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Issue 1: Sale and Leaseback Arrangement

Question 1

Where a vehicle owned by the Employee is sold to Company A under a formal Purchase Agreement, and that vehicle is subsequently leased back to the Employee under a formal Lease Agreement, will such an arrangement constitute a valid sale and leaseback arrangement?

Summary

The Commissioner considers that, where a vehicle owned by the Employee is sold to Company A under a formal Purchase Agreement, and that vehicle is subsequently leased back to the Employee under a formal Lease Agreement between Company A (as Lessor) and the Employee (as Lessee), such an arrangement will constitute a sale and leaseback arrangement.

Detailed reasoning

A sale and leaseback transaction is typically a two-party arrangement under which the owner of an asset disposes of the asset, usually by way of sale of the asset (or by disposing of rights to or including rights to the asset), but continues to use it as lessee (or bailee) under a lease (or bailment or licence) from the acquirer (the lessor).

A sale, sufficient to support a leaseback of the asset, may also be taken to have occurred if the lessor provides the lessee with consideration in exchange for a sufficient equitable interest in the asset.

The leasing component of the arrangement would ordinarily involve periodic payments by the lessee to the lessor in return for the right to possess and use the asset exclusively during the term of the lease.

Taxation Ruling TR 2006/13 Income tax: sale and leasebacks (TR 2006/13) explains the taxation consequences of sale and leaseback arrangements which involve depreciating assets subject to Division 40 of the Income Tax Assessment Act 1997. The taxation consequences described in TR 2006/13 apply to arrangements that are correctly characterised as a sale and leaseback. Whilst the character of a transaction will generally follow its legal form, it is necessary to consider whether the true legal characterisation is that of a sale and leaseback by examining what the transaction effects, having regard to the legal rights and obligations conferred on the parties.

In considering the legal characterisation of a transaction in the context of a sale and leaseback of depreciating assets (such as a motor vehicle), the Commissioner - at paragraph 80 of TR 2006/13 - notes the following factors which would indicate, in some circumstances, that the legal characterisation of a transaction is not that of a sale and leaseback:

a.    The intention of the parties as determined from the documentation and surrounding circumstances.

b.      The lessor has no right to obtain possession of the asset on default by the lessee.

c.      All the risks and benefits of ownership of the asset are with the lessee after the termination of the term of the lease (this could occur where the lessee was entitled to any excess of the sale price of the asset over the residual value).

d.      The lease is for a period that is likely to exhaust or exceed the remaining useful life of the asset.

e.      The lessee has a right or option to purchase the asset upon expiration of the term of the lease for less than the market value of the asset.

f.       The sale price of the asset to the lessor is substantially in excess of the market value of the asset.

Each of these factors are considered below having regard to the scheme proposed by the Employer.

a.    The intention of the parties as determined from the documentation and surrounding circumstances

In the present case, the Commissioner considers that there is an intention by the parties - being the Employee (as the Lessee) and Company A (as the Lessor) - for the transaction to be a sale and leaseback, and not another form of transaction.

b.    The lessor has no right to obtain possession of the asset on default by the lessee

Under the Lease Agreement, if the Employee (the Lessee) defaults on the lease, Company A (the Lessor) can repudiate or terminate the Lease Agreement and terminate the Employee's right of possession of the vehicle. If the Lease Agreement is terminated, the Lessor is entitled to take immediate possession of the Employee's vehicle.

It is considered that this factor is not satisfied.

c.      All the risks and benefits of ownership of the asset are with the lessee after the termination of the term of the lease (this could occur where the lessee was entitled to any excess of the sale price of the asset over the residual value)

All of the risks and benefits of ownership of the vehicle lie with the Employee (the Lessee) during the term of the Lease Agreement.

However, after the termination of the Lease Agreement, all the risks and benefits of ownership of the vehicle will be with either:

•         the Employee (the Lessee) in circumstances where the Employee purchases the vehicle; or

•         Company A (the Lessor) in circumstances where the Employee does not wish to purchase the vehicle back again and leaves the vehicle with Company A to be sold. If this occurs, then as per the Lease Agreement:

­   the Employee will be responsible for any shortfall in the amount Company A receives for the vehicle and the residual value of the vehicle, and

­   if the vehicle is sold for more than its residual value, the Employee will only have a claim or interest in such surplus if the termination of the Lease Agreement/Novated Lease Agreement is a result of gross negligence, a wrongful act or omission or a breach of the Lease Agreement by Company A.

This factor would therefore be satisfied in circumstances where the Employee (the Lessee) purchases (retains ownership of) the vehicle after the termination of the term of the Lease Agreement. However, it is considered that this factor would be not satisfied in circumstances where the Employee returns the vehicle to Company A (the Lessor) to sell.

d.      The lease is for a period that is likely to exhaust or exceed the remaining useful life of the asset

Under the proposed scheme, there is no limit on the age that a vehicle can be at the end of the Lease Agreement. As such, the term of the Lease Agreement may potentially exhaust or exceed the remaining useful life of the vehicle.

As the relevant vehicles under the proposed scheme are generally older, it is considered that this factor may potentially be satisfied in circumstances where the term of the Lease Agreement exhausts/exceeds the remaining useful life of the vehicle. However, this factor would not be satisfied if the term of the Lease Agreement does not exhaust or exceed the remaining useful life of the vehicle.

e.      The lessee has a right or option to purchase the asset upon expiration of the term of the lease for less than the market value of the asset

Upon expiration of the Lease Agreement, the Employee may request to purchase the vehicle (directly from Company A).

If the Employee purchases the vehicle at the end of the lease, this will be for its residual value, plus GST. The residual value constitutes a minimum residual value in accordance with ATO ID 2002/1004. As such, the Commissioner considers that the vehicle would not be purchased for an amount less than the vehicle's market value.

It is considered that this factor is not satisfied.

f.       The sale price of the asset to the lessor is substantially in excess of the market value of the asset

In the present case, the Employee will sell a vehicle that they own outright to Company A at itstrade-in value (as determined from an unrelated car valuer's website)..

The Commissioner is of the view that the market value of any asset depends on the particular facts. As such, whilst a vehicle's trade-in value (as determined from an unrelated car valuer's website) may be an indicator of market value, the Commissioner is unlikely to accept, as a general principle legally binding on the Commissioner, that the value of a vehicle as determined from an unrelated car valuer's website is its market value in all circumstances.

However, the Commissioner accepts that a purchase by Company A of the Employee's vehicle will be for an amount not substantially in excess of the vehicle's market value.

It is considered that this factor is not satisfied.

Conclusion

While there is a potential for the term of the Lease Agreement to exhaust or exceed the remaining useful life of the vehicle, and in some circumstances the Employee may take on the risks or benefits of ownership of the vehicle after the lease, per paragraphs 81 to 83 of TR 2006/13 these findings, without more, will not automatically mean the arrangement has a different legal characterisation.

In weighing each of the factors in paragraph 80 of TR 2006/13, the Commissioner considers that, on the whole, where a vehicle owned by the Employee is sold to Company A and subsequently leased back to the Employee under the Lease Agreement, such an arrangement will constitute a sale and leaseback arrangement.

Issue 2: Tax Implications of a Sale and Leaseback Arrangement

Income Tax Implications

Question 1

Will the lease payments and running costs paid by the Employer in respect of a vehicle it provides to the Employee under the Novated Lease Agreement be an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The lease payments and running costs paid by the Employer in respect of a vehicle it provides to the Employee under the Novated Lease Agreement constitute outgoings incurred in gaining or producing assessable income. As such, these expenses will be an allowable deduction under section 8-1 of the ITAA 1997.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for any loss or outgoing to the extent that it is incurred in gaining or producing assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, provided that the loss or outgoing is not of a capital, private or domestic nature. It is under this section that the deductibility or otherwise of items such as salaries and wages, rents paid, travelling expenses, and other business and administrative expenses is determined.

Section 8-1 of the ITAA 1997 states:

8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a ^*business for the purpose of gaining or producing your assessable income.

8-1(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your ^*exempt income or your ^*non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

8-1(3) A loss or outgoing that you can deduct under this section is called a general deduction.

In Taxation Ruling TR 1999/15 Income tax and fringe benefits tax: taxation consequences of certain motor vehicle lease novation arrangements (TR 1999/15), the Commissioner considers the taxation consequences of certain motor vehicle lease novation arrangements.

Paragraph 4 of TR 1999/15 defines a novation as 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.

According to paragraph 25 of TR 1999/15, a full novation occurs where the employee takes out a finance lease for a vehicle. The employee may then sub-lease the vehicle to his/her employer. The finance lease (and sub-lease where one exists) is novated in full to the employer. The employer becomes the lessee and all the rights and obligations of the lease and any sub-lease are transferred to the employer. The finance lease and any sub-lease are rescinded (contractually extinguished) and replaced by a new novated lease arrangement. The employer becomes the lessee for this novation period.

Paragraph 34 of TR 1999/15 provides that a variation of a full novation is a split full novation lease arrangement. Under a split full novation, the lessee's (employee's) rights and obligations under a finance lease are split between the employer and the employee without a sub-lease. The right to use or possession of the motor vehicle and other obligations, for example the lease payment obligations, are novated to the employer. However, the residual value payment obligation remains with the employee.

Paragraph 7 of TR 1999/15 provides that it is the employer in a full novated or split full novated lease arrangement that is generally entitled to a deduction for lease expenses where the vehicle is used in the business or provided to an employee as part of a salary packaging arrangement.

In the present circumstances, the Employer will enter into a split full Novated Lease Agreement. Under this arrangement, the Employer will become the Lessee and assumes the Employee's rights and obligations, including lease payment obligations, which previously existed under the initial Lease Agreement entered into between the Employee and Company A (the Lessor). However, the Employee will retain the obligation to pay the residual value of the vehicle upon expiration of the lease, pursuant to the Novated Lease Agreement.

As the vehicle will be leased in connection with the Employee's existing employment remuneration, the payment by the Employer of both the periodic lease payments and the vehicle running expenses to Company A in accordance with its obligations under the terms of the Novated Lease Agreement would constitute outgoings necessarily incurred by the Employer in carrying on a business for the purpose of gaining or producing assessable income pursuant to paragraph 8-1(1)(b) of the ITAA 1997. Such outgoings would not be of a capital, private or domestic nature.

Therefore, payments by the Employer of the periodic lease payments and vehicle running expenses under the Novated Lease Agreement would be deductible pursuant to section 8-1 of the ITAA 1997.

FBT Implications

Question 2

Will a 'car fringe benefit' as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) arise when the Employer makes a vehicle available for an Employee's private use under the Novated Lease Agreement?

Summary

A 'car fringe benefit' as defined in subsection 136(1) of the FBTAA will arise when the Employer makes a vehicle available for an Employee's private use under the Novated Lease Agreement (a bona fide lease). In particular, a 'car benefit' will arise under section 7 of the FBTAA as the vehicle will be a 'car' that the Employer 'holds' and makes available for the Employee's private use, and such a benefit will be provided in respect of the Employee's employment.

Detailed reasoning

Definition of a 'fringe benefit'

The definition of a 'fringe benefit' in subsection 136(1) of the FBTAA requires the following conditions to be satisfied:

1. A benefit is provided at any time during the year of tax.
2. The benefit is provided to an employee or an associate of the employee.
3. The benefit is provided by:

a.    their employer; or

b.    an associate of the employer; or

c.     a third party other than the employer or an associate under an arrangement between the employer or associate of the employer and the third party; or

d.    a third party other than the employer or an associate of the employer, if the employer or an associate of the employer:

                                       i.   participates in or facilitates the provision or receipt of the benefit; or

                                      ii.   participates in, facilitates or promotes a scheme or plan involving the provision of the benefit; and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

4. The benefit is provided in respect of the employment of the employee.
5. The benefit is not one that is specifically excluded as per paragraphs (f) to (s) of the definition of a fringe benefit in subsection 136(1) of the FBTAA.

A discussion is provided below in respect of whether each element or condition of the definition of a fringe benefit is satisfied.

1.    A benefit is provided

Subsection 136(1) of the FBTAA provides a broad definition of a 'benefit' as including:

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; ...

'Provide' in relation to a benefit is defined to include 'allow, confer, give, grant or perform'.

Under the proposed scheme, the benefit to be provided will be a motor vehicle that will be made available for the private use of an Employee.

As such, the first condition (i.e. the provision of a 'benefit') of the definition of a 'fringe benefit' as defined in subsection 136(1) of the FBTAA would be satisfied.

2.    The benefit is provided to an employee or an associate of the employee

An 'employee' is defined in subsection 136(1) of the FBTAA to mean a current, future or former employee.

As the benefit is provided to the Employee under the proposed scheme, the second condition (i.e. the benefit is provided to an employee) of the definition of a 'fringe benefit' as defined in subsection 136(1) of the FBTAA would be satisfied.

3.    Benefit is provided by the employer

An 'employer' is defined in subsection 136(1) of the FBTAA to mean a current, future or former employer.

As per the Facts of the proposed scheme, the benefit will be provided by the Employer, the Employee's employer.

Therefore, the third condition (i.e. the benefit is provided by an employer) of the definition of a 'fringe benefit' as defined in subsection 136(1) of the FBTAA would be satisfied.

4.    The benefit is provided in respect of the employment of the employee

Subsection 136(1) of the FBTAA defines the term 'in respect of' in relation to the employment of an employee, as including 'by reason of, by virtue of, or for or in relation directly or indirectly to, that employment'.

In J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22, the full Federal Court - in examining the meaning of 'in respect of' an employee's employment - held that the phrase required a 'nexus, some discernible and rational link, between the benefit and employment', though noted that 'what must be established is whether there is a sufficient or material, rather than a causal, connection or relationship between the benefit and the employment'.

To establish whether a 'sufficient or material connection' will exist between the benefit that will be provided to the Employee (being the private use of a vehicle held by the Employer) and the employment of the Employee, it is necessary to consider the circumstances in which the vehicle will be provided.

The Employer will make a vehicle available for the private use of the Employee under the Novated Lease Agreement and the Salary Sacrifice Arrangement (which, as per one of the Assumptions for this ruling, constitutes an 'effective salary sacrifice arrangement' as defined in TR 2001/10). On this basis, the Commissioner considers that a 'sufficient or material connection' will exist between the benefit that will be provided and the employment of the Employee such that the provision of this benefit will be 'in respect of an employee's employment'.

Therefore, the fourth condition (i.e. the benefit is provided in respect of the employment of the employee) of the definition of a 'fringe benefit' as defined in subsection 136(1) of the FBTAA would be satisfied.

5.    The benefit is not specifically excluded from the definition of a fringe benefit

With respect to paragraphs (f) to (s) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA, the relevant paragraph to consider is paragraph (g) which provides that an exempt benefit will not be a fringe benefit.

In considering whether the benefit that will be provided to an Employee under the Novated Lease Agreement will fall within any of the exempt benefits listed in Part III of the FBTAA, it is necessary to initially determine the type(s) of fringe benefits that are applicable under the FBTAA.

The applicable type of fringe benefit in respect of the proposed scheme is a 'car fringe benefit' as defined in subsection 136(1) of the FBTAA. Section 8 of the FBTAA outlines circumstances in which the private use of a car by a current employee may be exempt from FBT. Exempt car benefits include circumstances where:

• a car is a taxi, panel van or a utility designed to carry less than one tonne, or any other road vehicle designed to carry a load of less than one tonne (that is, a vehicle not designed principally to carry passengers), and an employee's private use of the car is limited to:

­   travel between home and work

­   travel incidental to travel in the course of performing employment-related duties, and

­   non-work-related use that is minor, infrequent and irregular (for example, occasional use of the vehicle to remove domestic rubbish)

• a car is unregistered for the full FBT year and used principally for business purposes (a car that may be lawfully driven on a public road is regarded as being registered), and
• modified vehicles originally designed as passenger cars, where modifications permanently change the car and cannot be readily reversed for the car to be regularly used alternately as a passenger or non-passenger car.

It is assumed for the purposes of the proposed scheme that the benefit (being a vehicle that will be made available for the private use of an Employee) is not one that would be specifically excluded as per paragraphs (f) to (s) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA.

Therefore, the fifth condition (i.e. the benefit is not specifically excluded) of the definition of a 'fringe benefit' as defined in subsection 136(1) of the FBTAA would be satisfied.

Conclusion: Definition of a 'fringe benefit'

The benefit that will be provided by the Employer under the Novated Lease Agreement (being a vehicle that will be made available for the private use of an Employee) satisfies all of the conditions of a 'fringe benefit' as per the definition of that term in subsection 136(1) of the FBTAA. As such, the benefit will be a fringe benefit.

Definition of a 'car fringe benefit'

A 'car fringe benefit' is defined in subsection 136(1) of the FBTAA to mean 'a fringe benefit that is a car benefit'.

It was established above that the benefit that will be provided by the Employer under the Novated Lease Agreement constitutes a 'fringe benefit' pursuant to the definition of that term in subsection 136(1) of the FBTAA. Therefore, in order to determine if a 'car fringe benefit' as defined in subsection 136(1) of the FBTAA will arise when the Employer makes a vehicle available for an Employee's private use under the Novated Lease Agreement, it is necessary to consider whether such a benefit also constitutes a 'car benefit'.

'Car benefit'

Subsection 7(1) of the FBTAA describes what constitutes a 'car benefit'.

7(1) [Car applied to, available for employee's private use] 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 employer, 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.

Subsection 7(2) of the FBTAA deals with the availability of a car for an employee's private use when the car is garaged at or near an employee's residence.

7(2) [Car garaged at employee's residence] Where, at a particular time, the following conditions are satisfied in relation to an employee of an employer:

(a)  a car is held by a person, being:

(i)      the employer;

(ii)     an associate of the employer; or

(iii)   a person (other than the employer or an associate of the employer) with whom, or in respect of whom, the employer or an associate of the employer has an arrangement relating to the use or availability of the car;

(b)  the car is garaged or kept at or near a place of residence of the employee or of an associate of the employee;

the car shall be taken, for the purposes of this Act, to be available at that time for the private use of the employee or associate, as the case may be.

Under subsection 162(1) of the FBTAA, a car is 'held' by a person if the car is owned by the person; leased to the person; or otherwise made available to the person by another person.

A car which is leased by the provider will be held by the provider. Under subsection 136(1) of the FBTAA, the term 'lease' means 'let on hire (including a letting on hire that is described in the relevant agreement as a lease) under an agreement other than a hire-purchase agreement'.

Taxation Determination TD 94/16 Fringe benefits tax: where an employee is provided with a car by the employer and the car is kept in safe storage (e.g. in a commercial garage) while the employee is travelling, under what circumstances is that car taken to be available for private use under section 7 of the Fringe Benefits Tax Assessment Act 1986 (TD 94/16) states that where an employer's car is kept in safe storage at or near the employee's place of residence, it will be taken to be available for the employee's private use regardless of any prohibition on the use of the car.

In considering whether a car benefit will be provided under the Novated Lease Agreement, each of the conditions as provided in subsections 7(1) and 7(2) of the FBTAA are discussed below.

Will the motor vehicle be 'held' by the provider (the Employer)?

As per subsection 7(1) of the FBTAA, the term 'provider' refers to a 'person' who 'holds' a car.

As stipulated in subsection 162(1) of the FBTAA above, a car is 'held' if it is owned by, or leased to, a 'person'.

Under the Novated Lease Agreement, the vehicle will be leased to the Employer (the current employer of the Employee). As stated previously, an 'employer' is defined in subsection 136(1) of the FBTAA to mean a current, future or former employer. A 'current employer' is defined in subsection 136(1) of the FBTAA to mean a 'person (including a government body) who pays, or is liable to pay, salary or wages...'.

According to the facts provided, the Employee will initially enter into the Lease Agreement with Company A (the Lessor) in respect of the vehicle. The Novated Lease Agreement (and the Salary Sacrifice Arrangement) will subsequently be entered into, through which the Employee will novate their rights and obligations (as Lessee) under the initial Lease Agreement to the Employer for the period of the Employee's employment, or until the lease is terminated.

The Employer will assume the role of Lessee under the Novated Lease Agreement, taking on all of the Employee's rights and obligations under the original Lease Agreement (except for the residual value payment obligation), and be the 'person' to whom the vehicle is leased by Company A (the Lessor). It is on this basis that the Employer will 'hold' the vehicle for the purposes of subsection 7(1) of the FBTAA.

Will the motor vehicle be a 'car'?

Subsection 136(1) of the FBTAA provides that a 'car' has the meaning given by subsection 995-1(1) of the ITAA 1997. That provision 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.

It is assumed for the purposes of this ruling that the vehicle that will be the subject of the Lease Agreement and the subsequent Novated Lease Agreement/Salary Sacrifice Arrangement will meet the definition of a 'car' for the purposes of the FBTAA.

Will the benefit be provided in respect of the Employee's employment?

The meaning of the term 'in respect of the employee's employment' was discussed above in considering whether the benefit satisfies the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA. It was concluded above that a 'sufficient or material connection' would exist between the benefit that will be provided and the employment of the Employee such that the provision of this benefit would be 'in respect of an employee's employment'. This is on the basis that the Employer will make a car available for the private use of the Employee under the Novated Lease Agreement and the Salary Sacrifice Arrangement (which, as per one of the Assumptions for this ruling, constitutes an 'effective salary sacrifice arrangement' as defined in TR 2001/10).

Will the car be applied to, or made available for, the private use of the Employee?

'Private use' is defined in subsection 136(1) of the FBTAA to mean any use that is not exclusively in the course of producing assessable income of an employee.

Pursuant to subsection 7(2) of the FBTAA, and as per the principles embodied in TD 94/16 and the Fringe Benefits Tax - A Guide for Employers publication, a car that is garaged at an employee's home is treated as being available for the private use of the employee regardless of whether they have permission to use it for private purposes.

It is assumed for the purposes of this ruling that a car that is the subject of the Novated Lease Agreement/Salary Sacrifice Arrangement will be garaged at the Employee's place of residence.

Therefore, the car will be deemed for the purposes of subsection 7(2) of the FBTAA to be available for the private use of the Employee whilst the car is garaged at the Employee's place of residence.

Conclusion: Definition of a 'car benefit' and 'car fringe benefit'

Under the proposed scheme, a vehicle (meeting the definition of a 'car') will be 'held' by the Employer. The Employer (as the 'provider' of the benefit and the Employee's employer) will make this car available for the private use of the Employee as the car will be garaged at the Employee's place of residence. Such a benefit will be provided in respect of the Employee's employment.

As each of the conditions in subsections 7(1) and 7(2) of the FBTAA would be satisfied in respect of the Novated Lease Agreement, the benefit will meet the definition of a 'car benefit' pursuant to section 7 of the FBTAA.

A 'car fringe benefit', as defined in subsection 136(1) of the FBTAA, will therefore arise when the Employer makes a car available for an Employee's private use under the Novated Lease Agreement. This is because such a benefit constitutes a 'fringe benefit' (pursuant to the definition of that term in subsection 136(1) of the FBTAA) that is a 'car benefit' (pursuant to section 7 of the FBTAA).

Is the Lease Agreement/Novated Lease Agreement a bona fide lease?

The above conclusion is predicated on an assumption that the Lease Agreement/Novated Lease Agreement constitute a bona fide lease. If the true legal character of the arrangement is something other than a lease, in some circumstances the requirements of section 7 of the FBTAA may not be met and the benefit provided may not be a 'car benefit'.

As such, it is necessary to confirm that the original Lease Agreement and the subsequent Novated Lease Agreement constitute a 'bona fide lease'.

An employer or lessor will only be providing an employee with a car fringe benefit if the car lease arrangement is bona fide. If a car lease arrangement is not bona fide, an employer or lessor will not be providing an employee with a car fringe benefit.

A bona fide lease occurs where:

• all dealings between the lessor, employer and employee are at arm's length and on commercial terms. An arm's length dealing is where each party acts independently and without influence or control over the other. It is dependent on the nature of their relationship and the quality of the bargaining between the parties
• terms are not based on the reduced (net) cost of the car (that is, the cost to the employer or lessor after any trade-in credit or employee cash contribution)
• the residual value of the car is:

­    based on a reasonable valuation of estimated market value at the end of the lease

­    not based on reduced (net) cost

­    not less than the minimum residual values set out in ATO ID 2002/1004

• there is no agreement the employee, their associate, nominee, or agent will

­    purchase the car after the end of the lease term

­    be allowed to keep using the car after the lease termination, and

• an option for the employee, their associate, nominee or agent to purchase the car is by request and agreement between the lessor and purchaser as to the purchase price.

It is considered that both the initial Lease Agreement and the subsequent Novated Lease Agreement feature all of the above characteristics of a bona fide lease. In particular:

• all dealings between Company A (the Lessor), the Employer and the Employee are at arm's length and on commercial terms
• terms are not based on the reduced (net) cost of the car
• the residual value of the car is not based on reduced (net) cost and has a residual value that represents a reasonable valuation of estimated market value at the end of the lease, being determined in accordance with the minimum residual values set out in ATO ID 2002/1004, and
• whilst there is no agreement that the Employee (or their associate, nominee, or agent) will purchase the car after the end of the lease term, or be allowed to keep using the car after the lease termination, the Employee will have the option to request to purchase the car (directly from Company A) upon termination of the Lease Agreement/Novated Lease Agreement.

Therefore, the Commissioner considers that both the Lease Agreement and the Novated Lease Agreement constitute a bona fide lease.

Question 3

If the answer to Issue 2 Question 2 is 'Yes', for the purpose of calculating the taxable value of the car fringe benefit under either the Statutory Formula method in section 9 of the FBTAA or the Cost Basis method in section 10 of the FBTAA, will the post-tax salary deductions contributed by the Employee constitute 'recipient's payments' and thus reduce the taxable value calculated under either of these methods?

Summary

When calculating the taxable value of the car fringe benefit under either the Statutory Formula method in section 9 of the FBTAA or the Cost Basis method in section 10 of the FBTAA, the post-tax salary deductions contributed by the Employee will constitute 'recipient's payments' such that the taxable value calculated under either of these methods will be reduced.

Detailed reasoning

The taxable value of a car fringe benefit can be determined under either the Statutory Formula method (pursuant to section 9 of the FBTAA) or the Operating Cost method (pursuant to section 10 of the FBTAA).

In both sections 9 and 10 of the FBTAA, the taxable value of a car fringe benefit will be reduced by the amount (if any) of the 'recipient's payments', detailed in paragraphs 9(2)(e) and 10(3)(c) of the FBTAA as the sum of:

(i) in a case where expenses were incurred to the provider or employer during the holding period by recipients of the car fringe benefits by way of consideration for the provision of the car fringe benefits - the amount of those expenses paid by the recipients less any amount paid or payable to the recipients by way of reimbursement of those expenses; and

(ia) in a case where car expenses in respect of fuel or oil for the car were incurred during the holding period by recipients of the car fringe benefits and:

(A) the persons incurring those expenses give to the employer, before the declaration date, declarations, in a form approved by the Commissioner, in respect of those expenses; or

(B) documentary evidence of those expenses is obtained by the persons incurring the expenses and given to the employer before the declaration date;

the amount of those expenses paid by the recipients less any amount paid or payable to the recipients by way of reimbursement of those expenses; and

(ii) in a case where:

(A) car expenses in respect of the car (other than car expenses in respect of fuel or oil for the car) were incurred during the holding period by recipients of the car fringe benefits; and

(B) documentary evidence of those expenses is obtained by the persons incurring the expenses and given to the employer before the declaration date;

the amount of those expenses paid by the recipients less any amount paid or payable to the recipients by way of reimbursement of those expenses.

The term 'recipient' is defined in subsection 136(1) of the FBTAA to mean in relation to a benefit, 'the person to whom the benefit is provided'.

The term 'person' is defined in subsection 136(1) to apply to a wide range of persons and includes an employee.

The term 'provided' in the context of a recipient is sourced to the definition of 'provide', which is defined in subsection 136(1) of the FBTAA to include 'allow, confer, give, grant or perform' in relation to a benefit.

'Car expense' is defined in subsection 136(1) of the FBTAA to include expenses incurred in respect of:

(a) the registration of, or insurance in respect of, the car;

(b) repairs to or maintenance of the car; or

(c) fuel for the car.

Subsection 136(1) of the FBTAA defines 'documentary evidence' as the same as that required to be obtained by an employee in order to substantiate a deduction under the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997 for his or her own expenditure (such as a receipt, invoice or similar document which sets out the date, amount, supplier and nature of the expenditure incurred). 'Declaration date' is also defined in subsection 136(1) the date by which the employer must furnish a FBT return for the year concerned or such later date as the Commissioner allows.

The ATO publication entitled Fringe Benefits Tax - A Guide for Employers states the following at Chapter 7 in relation to determining the recipient's/employee's contribution:

The amount that would otherwise be the taxable value of a car fringe benefit is reduced by the amount of any employee contribution.

An employee contribution may be an amount paid either:

•         directly to you by the employee for use of the car - the employee contribution must be made from the employee's after-tax income and is included in your assessable income

•         by the employee to a third party for some of the car's operating costs (for example, fuel) and these contributions are not included in your assessable income.

However, the employee must provide you with documentary evidence of the expenditure (for example, receipts or invoices). In the case of petrol and oil costs, a declaration from the employee is sufficient for this purpose and receipts are not required. The declaration must be in a form approved by the Commissioner.

The Employee comes within the definition of a 'recipient' in subsection 136(1) of the FBTAA in the context of the provision of a car fringe benefit.

Under the Salary Sacrifice Arrangement, a combination of pre-tax and post-tax salary deductions will be made by the Employee to offset the cost to the Employer of the lease repayments and the running expenses for the car. As provided in the facts, post-tax deductions by the Employee will generally be designed to reduce any FBT liability to nil, with pre-tax deductions covering the rest of the Employer's costs, which include expenses on rent, fuel, maintenance, tyres, registration, insurance (Comprehensive) and an administration fee.

The Employee will be issued with a fuel card, where all purchases for the vehicle would be maintained to obtain National Fleet pricing on maintenance and repairs, and to receive discounts on fuel. The Commissioner considers that the Employee will be able to provide the Employer with documentary evidence of expenditure on fuel, maintenance and repairs through records associated with this card, thus satisfying the requirements in subparagraphs 9(2)(e)(ia), 9(2)(e)(ii), 10(3)(c)(ia) and 10(3)(c)(ii) of the FBTAA. Further, as required under the Lease Agreement, the Employee will also be able to provide documentary evidence of insurance premiums paid in respect of the car.

Both the Statutory Formula and Operating Cost valuation methods similarly consider the application of employee post-tax deductions to reduce the taxable value of a car fringe benefit. In relation to the portion split as post-tax deductions, provided the Employee provides the Employer with documentary evidence of the car expenses incurred before the declaration date, these amounts are considered to constitute the Employee's 'recipient's contribution' (or 'employee's contribution') and may be applied to reduce the taxable value of the car fringe benefit pursuant to paragraphs 9(2)(e) and 10(3)(c) of the FBTAA.

GST Implications

Question 4

Will the Employer be entitled to input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for the lease payments paid to Company A?

Summary

The Employer will be entitled to input tax credits under section 11-20 of the GST Act for the lease payments paid to Company A.

Detailed reasoning

Pursuant to section 11-20 of the GST Act, the Employer will be entitled to the input tax credit for any creditable acquisition that it makes. However, they must hold a tax invoice for the acquisitions at the time to claim GST credits in their business activity statement.

Under section 11-5 of the GST Act, the Employer would make a creditable acquisition if:

a)    they acquire anything solely or partly for a creditable purpose; and

b)    the supply of the thing to them is a taxable supply; and

c)    they provide or are liable to provide, consideration for the supply; and

d)    they are registered or required to be registered for GST.

Under subsection 11-15(1) of the GST Act, the Employer would acquire a thing for a creditable purpose to the extent that it acquires it in carrying on their enterprise. However, under subsection 11-15(2) they do not acquire the thing for a creditable purpose to the extent that:

a)    the acquisition relates to making supplies that would be *input taxed; or

b)    the acquisition is of a private or domestic nature.

Under a novated lease agreement, the supply of the right to use the motor vehicle is effectively being made to the employer rather than the employee. Therefore, the supply is made to the employer. The novated lease is acquired by the employer and it would be acquired in the course of carrying on the employer's enterprise and as such it is not of a private or domestic nature.

However, under subsection 11-15(4) of the GST Act, an acquisition is not treated for the purposes of paragraph 11-15(2)(a) as relating to making supplies that would be input taxed if, the only reason it would be so treated is because it relates to making financial supplies and the entity does not exceed the financial acquisitions threshold.

The application of GST to supplies of fringe benefits is discussed in Goods and Services Tax Ruling GSTR 2001/3 Goods and Services Tax: GST and how it applies to supplies of fringe benefits (GSTR 2001/3). In discussing whether an acquisition or importation made to provide a fringe benefit is for a creditable purpose, paragraph 52 of GSTR 2001/3 states:

An acquisition or importation you make to provide a fringe benefit in respect of employment in your enterprise is made in carrying on the enterprise and is not of a private or domestic nature for the purposes of section 11-15 and section 15-10. It is your purpose at the time of making the acquisition or importation that is relevant to whether the acquisition or importation is for a creditable purpose. For example, an acquisition made to provide a car for the private use of your employee is made for a creditable purpose.

Therefore, an acquisition or importation made to provide a fringe benefit will generally be for a creditable purpose. However, as set out above, there is no entitlement to claim an input tax credit for an acquisition or importation that relates to making input taxed supplies.

In ascertaining the GST implications of the provision of a fringe benefit, GSTR 2001/3 distinguishes between two concepts, 'work benefit' and 'remuneration benefit'.

The concept of the term 'remuneration benefits' is discussed at paragraphs 55 to 59 of GSTR 2001/3. These paragraphs state:

55. 'Remuneration benefits' are benefits provided to employees which, together with salary and wages, are provided by employers in return for employee services. Acquisitions that relate to providing these remuneration benefits will not relate to other supplies that an entity makes, such as input taxed supplies that an entity makes to clients or customers.

56. Examples of Remuneration Benefits would include:

•         Use of a car to be used for employee's private travel;

•         Entertainment provided to employees;

•         Employee holiday travel and accommodation.

Example 9

57. International Bank acquires a car by way of lease, undertaking to make lease payments to a lessor so as to provide employee Eva with a motor vehicle for her private use, entirely as a remuneration benefit. The bank does not require the car to be used for work activities. The supply of the car to International is a taxable supply. International is entitled to input tax credits for the lease payments on the car and for car running costs such as petrol and repairs that it incurs to the extent that it meets the other requirements of section 11-5.

58. However if the supply of a remuneration benefit is one that relates to making an input taxed supply such as the provision of a loan or residential housing, you are not entitled to an input tax credit under paragraph 11-15(2)(a).

Example 10

59. Archimedes Ltd rents houses from various landlords to provide the use of the houses to its employees on an indefinite basis as remuneration benefits. Archimedes Ltd also pays another entity, Adminco, to administer the supply of houses to employees. The acquisition by Archimedes Ltd is not a creditable acquisition. The acquisition relates to the supply of benefits to employees that are input taxed supplies. Paragraph 11-15(2)(a) denies input tax credit entitlements on such payments. This result does not change whether or not the benefits are exempt or reduced in value for FBT purposes. Nor is the result affected by whether or not an amount of rent is received from an employee.

The concept of the term 'work benefits' is discussed at paragraphs 60 to 62 of GSTR 2001/3. These paragraphs state:

60. In contrast, a 'work benefit' is not provided for consideration (in the form of the employee's services) because the purpose of the benefit is to serve genuine and legitimate ends of the employer's enterprise, and any incidental advantage to the employee is disregarded as a minor outcome.

61. With a work benefit, the provision by an employer of pleasant working premises for employees clearly benefits an employee (when compared to unpleasant working conditions) but primarily serves the employer's purpose of creating an efficient working environment. An employee does not provide his or her services as consideration for the use of a desk or an office or other similar conditions of employment. Employee services are provided for the employer's provision of salary and wages, plus remuneration benefits.

62. Examples of work benefits would include:

•         Provision of a car to an employee to use for work activities;

•         Business travel and accommodation;

•         Uniforms;

•         Use/benefit of work property on work premises for work activities - desks, computer, chairs, tables, air conditioning.

The entitlement to claim an input tax credit is also affected by Division 71 of the GST Act. The operation of Division 71 of the GST Act is discussed in paragraphs 69 to 74 of GSTR 2001/3. These paragraphs state:

69. Division 71 will deny an input tax credit for acquisitions or importations for the purpose of providing a fringe benefit to employees of an input taxed supplier provided:

•         FBT is payable on the provision of the fringe benefit; and

•         the supplier would have been entitled to an input tax credit for the acquisition or importation (but for this Division).

This Division can apply to deny certain input tax credit entitlements where you make input taxed supplies in the course of your enterprise. The whole of the input tax credit is disallowed where Division 71 applies.

70. However Division 71 does not apply to an acquisition or importation if:

•         the only reason it relates to making input taxed supplies is it relates to making financial supplies; and

•         you do not exceed the financial acquisitions threshold.

Having regard to the proposed scheme, the provision of a car to an Employee under the Novated Lease Agreement/Salary Sacrifice Arrangement will be a remuneration benefit in accordance with paragraphs 55 to 57 of GSTR 2001/3. Further, the supply of the remuneration benefit does not relate to making input taxed supplies (for example, the provision of a loan or residential housing as stated in paragraph 58 of GSTR 2001/3). On this basis, Division 71 of the GST Act would not apply to the acquisition. Therefore, pursuant to paragraph 11-5(a) of the GST Act, the Employer will acquire a car to provide a fringe benefit solely or partly for a creditable purpose.

The other requirements under section 11-5 of the GST Act would also be satisfied as the supply to the Employer from Company A would be a taxable supply; the Employer would be providing consideration for the supply in the form of lease payments; and the Employer is registered for GST.

As such, the Employer will be entitled to input tax credits under section 11-20 of the GST Act for the lease payments paid to Company A.

Question 5

Will the Employer be liable for GST on the pre-tax amounts sacrificed by the Employee under the Salary Sacrifice Arrangement pursuant to section 9-5 of the GST Act?

Summary

The Employer will not be liable for GST on the pre-tax amounts sacrificed by the Employee under the Salary Sacrifice Arrangement pursuant to section 9-5 of the GST Act.

Detailed reasoning

Under section 9-5 of the GST Act, an entity makes a 'taxable supply' if:

(a)  they make the supply for consideration

(b)  the supply is made in the course or furtherance of an enterprise

(c)   the supply is connected with the indirect tax zone, and

(d)  the supplier is registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

With respect to consideration for supplies (paragraph 9-5(a) of the GST Act), paragraphs 18 to 20 of GSTR 2001/3 state:

18. One of the requirements for a supply to be a taxable supply is that 'you make the supply for *consideration'.

19. The services of an employee can be consideration for the supply of a fringe benefit to that employee.

20. Consideration for the supply of a fringe benefit may also take the form of a payment or contribution made by the recipient of the benefit. It is only this consideration that is taken into account in working out the amount of GST on the supply of a fringe benefit.

As stated at paragraph 28 of GSTR 2001/3 and the following example discussed at paragraphs 29 and 30 of that ruling, the entry into a salary sacrifice agreement is not consideration for the supply of a benefit.

Example 2

29. Kylie's employer has a policy in place which permits employees to enter into a salary sacrifice agreement in relation to the provision of a car to employees for wholly private use. The particular agreement between Kylie and her employer involves a reduction of her current gross salary by $15,000. Kylie makes no payments to her employer.

30. The $15,000 that has been 'sacrificed' is not consideration for the supply of the vehicle. Kylie has provided her services as consideration for the supply of the car. Although her employer has made a taxable supply of the car to Kylie, there has been no amount of recipients payment made to the employer. Her employer is not liable to pay any GST on the supply of the car.

Therefore, the pre-taxed amounts that would be sacrificed by the Employee under the Salary Sacrifice Arrangement would be a reduction in the Employee's salary and not consideration for the supply of the vehicle. As such, all of the requirements of section 9-5 of the GST Act would not be satisfied. Whilst the Employee is providing their services as consideration for the car, this is not taken into account in working out any GST payable. There is no taxable supply made in return for this pre-taxed reduction on which GST is payable.

Question 6

Will the Employer be liable for GST on the post-tax deductions made by the Employee under the Salary Sacrifice Arrangement pursuant to section 9-5 of the GST Act?

Summary

The Employer will be liable for GST on the post-tax deductions made by the Employee under the Salary Sacrifice Arrangement pursuant to section 9-5 of the GST Act.

Detailed reasoning

As per the response to Issue 2 Question 5, one of the requirements for a supply to be a taxable supply is that an entity makes the supply for consideration. Whilst the services of an employee are consideration for the supply of a fringe benefit, it is only consideration in the form of a payment or contribution made by the recipient of the benefit that is taken into account in working out the amount of GST on the supply of a fringe benefit.

Recipients' payments for car fringe benefits are discussed at paragraphs 31 to 33 of GSTR 2001/3, which states:

31. The whole amount of the recipients payment that is used in calculating the FBT value reduction for a car fringe benefit is not always taken into account in working out the amount of GST payable by the employer. This is because, under the FBTAA, the employee's recipients payment amount during an FBT year can be paid to third parties as consideration for supplies by third parties to the employee, but nevertheless reduce the FBT value of the car benefit for the employer.

Example 3

32. Kylie is an employee of Archimedes Ltd who provides a car benefit (FBT value of $3,300). Kylie pays $1,100 to Archimedes Ltd and $400 directly to her local service station for fuel, oil and servicing. The total recipients payment amount is $1,500 ($1,100 + $400). The FBT taxable value of the benefit is $1,800 ($3,300 - $1,500).

33. Archimedes is liable for GST of $100 (1/11 of $1,100) on Kylie's $1,100 contribution. This $1,100 amount of recipients payment is the amount of consideration that is used to work out the GST on the supply of the fringe benefit. Kylie's payment of $400 is not consideration for the taxable supply of a fringe benefit, but is consideration for supplies to Kylie from other suppliers.

In line with Example 3 in GSTR 2001/3, it is only the amount of the Employee's contribution paid directly to the Employer that is subject to GST under the proposed scheme, not payments to third parties.

Therefore, the amount of post-tax contributions made by the Employee will be consideration for the supply of the fringe benefit, thus satisfying paragraph 9-5(a) of the GST Act.

The other requirements in section 9-5 of the GST Act will also be satisfied as the supply is made in the course of the Employer's enterprise; the supply is made within Australia (thus being connected with the indirect tax zone); and the Employer is registered for GST. Further, the supply is neither GST-free nor input taxed.

As such, the Employer will be liable for GST on 1/11^th of the post-tax deductions made by the Employee under the Salary Sacrifice Arrangement pursuant to section 9-5 of the GST Act.

Issue 3: Anti-Avoidance

Question 1

Will the Commissioner seek to make a determination that Part IVA of the ITAA 1936 applies to cancel a tax benefit obtained by the Employer, or make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount to the Employer by any amount?

Summary

The Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to cancel any tax benefits obtained by the Employer because the Commissioner has not identified any relevant tax benefits being obtained by the Employer under the proposed arrangement compared to the arrangement not being entered into.

The Commissioner will also not make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of the Employer by any amount as there would be no reduction in FBT for the Employer under the proposed arrangement compared to the arrangement not being entered into.

Detailed reasoning

Part IVA of the ITAA 1936

Part IVA of the ITAA 1936 is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (PS LA 2005/24) deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Paragraph 45 of PS LA 2005/24 provides that, before the Commissioner can exercise his discretion to make a determination in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met:

1.    There must be a 'scheme' within the meaning of section 177A of the ITAA 1936.

2.    A tax benefit (as defined in section 177C of the ITAA 1936) must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out.

3.    Having regard to the eight factors in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies.

Having regard to each of these requirements, the Commissioner has not identified any relevant tax benefits being obtained by the Employer under the proposed arrangement compared to the arrangement not being entered into. On this basis, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to cancel any tax benefits obtained by the Employer.

Note: The Commissioner can not rule on whether or not a different participant in the proposed arrangement would obtain a tax benefit (as defined in section 177C of the ITAA 1936) or whether he would make a determination that Part IVA would apply to cancel a tax benefit for such a participant.

Section 67 of the FBTAA

PS LA 2005/24, as referred to above, has been written to assist those who are contemplating the application of Part IVA of the ITAA 1936 or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains the operation of section 67 of the FBTAA. In particular, paragraphs 145 to 148 of PS LA 2005/24 state:

145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit.

147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i) a benefit is provided to a person;

(ii) an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

The Commissioner would only seek to make a determination under section 67 of the FBTAA if the proposed arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement. Paragraph 151 of PS LA 2005/24 states:

151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

As discussed in the analysis in Questions 2 and 3 of Issue 2 above, the arrangement proposed by the Employer (whereby the Employer would make a vehicle available for an Employee's private use under the Novated Lease Agreement) would give rise to a taxable fringe benefit (specifically a 'car fringe benefit'), which may then be reduced by the post-tax salary deductions contributed by the Employee.

Therefore, the Commissioner will not make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of the Employer by any amount as there would be no reduction in FBT for the Employer under the proposed arrangement compared to the arrangement not being entered into.