Edited version of private advice

Authorisation Number: 1052290391509

Date of advice: 17 December 2024

Ruling

Subject:FBT - novated lease

Question 1

Does a car benefit arise under section 7 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where a Rental Agreement is entered into by an Employee and the Company and a Novation Agreement is subsequently entered into, transferring the obligations existing under the Rental Agreement to the Employer?

Answer

Yes.

This ruling applies for the following periods:

FBT year ending 31 March 20XX

FBT year ending 31 March 20XX

FBT year ending 31 March 20XX

FBT year ending 31 March 20XX

The scheme commenced on:

1 December 20XX

Relevant facts and circumstances

The Company operates a car subscription service which enables individual customers to access a variety of cars for a weekly subscription price.

The Employer offers this service to its employee population on an arms-length basis (i.e. subject to the same terms and conditions as would be offered to non-employees in commensurate circumstances).

The Employer is seeking to implement novation agreements whereby the rights and obligations under the Rental Agreement are novated to the Employer, thereby resulting in a tripartite arrangement between the Employee, the Company and the Employer.

There is a salary sacrifice agreement between the Employer and the Employee which allows the Employee to salary sacrifice the subscription fee under the Rental Agreement.

In addition to the subscription fee, other charges are also payable by the Employee under the Rental Agreement, for example fuel and a cleaning fee.

The other charges are not able to be salary sacrificed. The Employer may however separately pay or reimburse the Employee for these other charges which is consistent with the Novation Agreement.

The parties to the Rental Agreement are the Company and the Hirer (i.e the Employee).

The Company's obligations under the Rental Agreement are to provide the specified XXX to the Hirer, and to pay for the listed vehicle expenses.

The Novation Agreement novates the rights provided to the Hirer (Employee) under the Rental Agreement to the Employer. The right to use the car is then provided back to the Employee.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 7

Fringe Benefits Tax Assessment Act 1986 subsection 7(1)

Fringe Benefits Tax Assessment Act 1986 subsection 7(2)

Fringe Benefits Tax Assessment Act 1986 subsection 7(3)

Fringe Benefits Tax Assessment Act 1986 subsection 9 (1)

Fringe Benefits Tax Assessment Act 1986 subsection 10(3)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 subsection 148(1)

Fringe Benefits Tax Assessment Act 1986 subsection 162(1)

Reasons for decision

A 'fringe benefit' as defined in subsection 136(1) of the FBTAA is a benefit provided to an employee (or associate) by an employer (or associate) or a third party under an arrangement with the employer (or associate) in respect of the employee's employment and such benefit is not otherwise exempt.

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

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

7(1) 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;

Under a standard novated lease arrangement, an employer assumes all or part of the lessee's rights and obligations under the lease. This transfer of rights and obligations is agreed to in a deed of novation between the employer, the finance company and the lessee. The lessee is usually the employee, or an associate of the employee.

Cars under either a full novated lease or a split full novated lease are subject to the same car fringe benefit valuation rules as other cars an employer may lease.

Taxation Ruling 1999/15 (TR 1999/15) provides an explanation of full novation agreements:

25. Full novation arrangements occurs when the employee takes out a finance lease for a car. The employee may then sub-lease the car to his/her employer. The finance lease (and sub-lease where one exists) is novated in full to the employee. 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.

26. In a full novation and a split full novation the lease obligations are transferred to the employer. Accordingly, there are no income tax consequences for the employee during the period when the employer makes the lease payments.

27. The employer becomes the lessee under the novated lease and is 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 case of a luxury car the deduction is based on an accrual amount and depreciation, subject to the luxury car depreciation limit in section 42-80 of the ITAA 1997 (section 57AF of the ITAA 1936).

28. On the happening of a termination event, such as the payment of the last lease payment under the novated lease or employment termination, a further novation may occur. Under the further novation the employer's subsiding rights and obligations are novated to the employee. The employee becomes lessee and is able to take this lease to another employer.

29. A car benefit arises under Division 2 of the FBTAA in these novation's where the employer provides the car for the private use of the employee or associate of the employee.

Has a car fringe benefit been provided in the current circumstances?

In considering whether a car fringe benefit has been provided in the current circumstances under the novation agreement, each of the conditions as provided in subsections 7(1), 7(2), 7(3) and 7(7) of the FBTAA are discussed below.

Will the car be 'held' by the provider?

Under the Rental Agreement the Employee will be provided with a car; this right will be novated to the Employer under the Novation Agreement. The right to use the car will then be provided back to the Employee.

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.

In terms of car subscription or hire arrangements, subsection 7(7) of the FBTAA provides that a reference to a car 'held' by a person does not include a reference to:

(a)          ...

(b)          a car let on hire to the provider under an agreement of a kind ordinarily entered into by persons taking cars on hire intermittently as occasion requires on an hourly, daily, weekly or other short-term basis unless the car has been or may reasonably be expected to be on hire under successive agreements of a kind that result in substantial continuity of the hiring of the car.

In considering if the proposed subscription arrangement satisfies the requirements of the FBTAA of a car being 'held' and therefore is a car fringe benefit, it must be determined if the arrangement is a 'car on hire intermittently as occasion requires on an hourly, daily, weekly or other short term basis.'

A car under the proposed subscription arrangement is not a car on hire intermittently as occasion requires. Rather, a vehicle will be made available for a period of time for use for any purpose. In this way, the arrangement is not excluded from the definition of car fringe benefit by paragraph 7(7)(b) of the FBTAA.

In terms of the application of the subsection 7(7) qualification regarding 'holding' a car for short-term arrangements, the National Tax Liaison Group's (NTLG) FBT Sub-committee Minutes dated 15 June 1995 and the ATO's Fringe Benefits Tax - a guide for employers publication respectively prescribe that:

If you hire a car for less than three months, you are not considered to 'hold' the car and it will not result in a car fringe benefit. However, if you make a rental car or taxi available for the private use of an employee, and the car is hired for less than three months, a residual fringe benefit may arise....

The ATO agreed that where the hire period is for 12 weeks or more, it will constitute a car fringe benefit. Less than 3 months it is to be treated as a residual fringe benefit.

This guidance is specific to short term car hire arrangements. However, in accepting whether a minimum 3-month period can constitute a car being 'held' for the proposed subscription arrangement, it is relevant to note this position is consistent with the minimum 3-month period accepted as constituting a car fringe benefit for short term car hire arrangements.

In light of this interpretation, it is accepted that a subscription car will be 'held' by the Employer under a novation agreement where the terms of the subscription is for three months or more.

Is the motor vehicle a 'car'?

Subsection 136(1) of the FBTAA provides that a 'car' has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). That provision defines a 'car' as:

...a motor vehicle (except a motorcycle or similar vehicle) designed to carry a load of less than 1 tonne and fewer than 9 passengers.

A motor vehicle provided by the Employer to an employee under a Novation Agreement will meet the definition of a 'car' for the purposes of the FBTAA.

Is the car provided in respect of the Employee's employment?

As per subsection 136(1) of the FBTAA, the term 'in respect of' - in relation to the employment of an employee - includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.

Subsection 148(1) of the FBTAA stipulates that a benefit will be provided in respect of the employment of an employee:

•                     whether or not the benefit also relates to some other matter or thing

•                     whether the employment is past, present or future

•                     whether or not the benefit is surplus to the recipient's requirements

•                     whether or not the benefit is also provided to another person

•                     whether or not the benefit is offset by any inconvenience or disadvantage

•                     whether or not the benefit is provided or used, or required to be provided or used, in connection with any employment

•                     whether or not the provision of the benefit is in the nature of income, and

•                     whether or not the benefit is provided as a reward for services rendered, or to be rendered, by the employee.

In J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 (Knowles), 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'. A similar view was also held in Essenbourne Pty Ltd v FC of T 2002 ATC 5201 and Starrim Pty Ltd v FCT (2000) 102 FCR 194; [2000] FCA 952; 2000 ATC 4460; (2000) 44 ATR 487.

To establish whether a sufficient or material connection will exist between the provision of a car and the employment of its employee, it is necessary to consider the circumstances in which the car will be provided.

In this case a car that is held by the Employer that is salary-sacrificed by an Employee under a Novation Agreement, would be considered to be 'in respect of an employee's employment"

Is the car applied or taken to be available for the private use of the Employee?

Private use is detailed in section 7(2) of the FBTAA where it states:

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.

Subsection 7(3) of the FBTAA deals with the availability of a car for an employee's private use when the car is not at the employer's business premises.

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 not at business premises of:

(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;

(c)          any of the following conditions is satisfied:

(i)            the employee is entitled to apply the car to a private use;

(ii)           the employee is not performing the duties of his or her employment and has custody or control of the car;

(iii)         an associate of the employee is entitled to use, or has custody or control of, the car;

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.

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.

Application to your circumstances

The provision of a car to an Employee is provided under a 'subscription' rather than a 'hire' arrangement. As a point of comparison, the Macquarie Dictionary Online defines 'subscription' to mean:

...a monetary contribution towards some object or a payment for shares, a book, a periodical, etc

In light of this interpretation, it is accepted that a subscription car will be 'held' by the Employer under a novation where the term of the subscription is for more than three months.

Under the novated subscription the car provided to the Employee will meet the definition of a 'car' for the purposes of the FBTAA.

As stated in the facts, the Employer will provide a car to an Employee under an effective novated subscription arrangement. As such, it is clear that the provision by the Employer of a car to an Employee would be considered to be 'in respect of an Employee's employment'.

A car held by the Employer that is salary-sacrificed by an Employee will be deemed for the purposes of subsections 7(2) and 7(3) 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.

The Employer will enter into a salary sacrifice agreement with the Employee. The Employee will compensate the Employer for all costs that are incurred. The Employer will be entering into the arrangement on the understanding that the car is being provided to the Employee for their private use. On this basis it is considered that the necessary requirements will be met.

Conclusion

As each of the applicable conditions in section 7 of the FBTAA are satisfied, the novation of a subscription agreement between the Employee and the Company (as the subscription facilitator) and the Employer gives rise to a car benefit. The requirements for a fringe benefit are also satisfied, it is considered that a car fringe benefit arises.

Question 2

If the answer to Question One is 'Yes', when calculating the taxable value of a car fringe benefit in those circumstances:

a.            would the base value of the car under the Statutory Formula method equate to the 'leased car value' of the car at the earliest holding time pursuant to subparagraph 9(2)(a)(ii) of the FBTAA?

b.            would the operating cost of the car under the Operating Cost method include the total weekly subscription fee and any other charges specified in relation to the car under the Rental Agreement pursuant to the operating cost components in paragraph 10(3)(a) of the FBTAA?

Answer

a.            Yes

b.            Yes

Detailed reasoning

For the purposes of calculating the taxable value of a car fringe benefit provided to the Employee using the statutory formula method, the base value of the car subscribed for is determined by reference to paragraph 9(2)(a) of the FBTAA.

Statutory Formula Method

Subject to Section 9(1) of the FBTAA, where one or more car fringe benefits in relation to an employer in relation to a year of tax relate to a particular car held by a particular person (in this section referred to as the provider), the taxable value of that fringe benefit, or the aggregate of the taxable values of those fringe benefits, as the case may be, in relation to that year of tax, is the amount calculated in accordance with the formula:

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For the purposes of Section 9(2):

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

(i)             Where, at the earliest holding time, the car was owned by the provider or an associate of the provider, the amount calculated in accordance with the formula AB, where:

A is the cost price of the car to the provider or associate, as the case may be; and

B is:

(A)         In a case where the commencement of the year of tax is later than the fourth anniversary of the earliest holding time - 2/3; or

(B)         In any other case -1; and

(ii)            In the case to which subparagraph (i) does not apply - the amount calculated in accordance with the formula AB, where:

A is the leased car value of the car at the earliest holding time;

B is:

(A)         in a case where the commencement of the yar of tax is later than the fourth anniversary of the earliest holding time - 2/3; or

(B)         in any other case -1; and

(iii)           The cost price of each non-business accessory that:

A was fitted to the car after the earliest holding time and before the end of the year of tax; and

B remained fitted to the car at a time during the year of tax when the car was held by the provider

Subsection 136(1) of the FBTAA defines 'leased car value' as:

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

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

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

Subsection 136(1) of the FBTAA defines 'cost price' as:

(a)          In relation to a car owned by a person, means:

(i)             Where the car was manufactured by the person - the amount for which the car could reasonably have been expected to have been sold by the person by wholesale under an arm's length transaction at or about the time when the car was applied to the person's own use; or

(ii)            Where neither subparagraph (i) nor (ii) applies, an amount equal to the sum of:

(A)         The expenditure incurred by the person (other than expenditure in respect of registration or in respect of a tax on, or on a transfer of, registration) that is directly attributable to the acquisition or deliver of the car or, if subsection 7(6) applies in relation to the car, the leased car value of the car when the person first took the car on hire; and

(B)         The amount of any additional expenditure incurred by the person for or in relation to the fitting on non-business accessories to the car at or about the time when the car was acquired by the person, reduced by the amount of any reimbursement of the whole or a part of that expenditure paid, at or about the time when the expenditure was incurred, by a recipient of a car benefit in relation to the car; or

(iii)           Where subparagraph (i) does not apply and the person was entitled to privileges or exemptions in relation to customs duty in respect of a transaction by which the person acquired the car or by which the person arranged for the fitting of non-business accessories to the car at or about the time when the car was acquired by the person, the amount that could reasonable have been expected to have been applicable under subparagraph (ii) if the person had not been entitled to those privileges to exemptions

The meaning of the 'cost price' of a car is further explained in Taxation Ruling TR 2011/3 Fringe Benefits Tax: meaning of 'cost price' of car, for the purposes of calculating the taxable value of car fringe benefits (TR 2011/3)

Application to your circumstances

Under the Novation Agreement, the Employer will be the provider of the car and the lease is transferred from the Employee to the Employer. Consequently, as the car is leased by the provider, the 'base value' is determined under subsection 9(2)(ii) of the FBTAA, using the 'leased car value' of the car at the earliest holding time.

Where the car was purchased by the Company at or about the time the Employer commenced to lease the car under the Novation Agreement, the 'leased car value' is the 'cost price' of the car to the company.

The base value of the car is the amount specified in the Rental Agreement.

Where the commencement of the FBT year would be later than the fourth anniversary from which the car was first held, the base value of the car can be reduced by one third.

Operating Cost Method

Subsection 10(3)(a) of the FBTAA provides that the 'operating cost' of the car includes:

(i)             any 'car expenses' (other than insured repair expenses or expenses in respect of registration and insurance) relating to the car incurred during the holding period;

(ii)            so much of any expense paid or payable in respect of the registration of, or insurance in respect of, the car as is attributable to the holding period;

(v) ... so much of the charges paid or payable under the lease agreement as is attributable to the holding period;

Subsection 136(1) of the FBTAA defines car expenses as:

(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.

Application to your circumstances

Under the Novation Agreement, the obligations of the Hirer/Employee under the Rental Agreement are novated to the Employer. Under the Rental Agreement, the amounts that the Hirer is obliged to pay are the rental/lease payments for the car and the charges not paid by the Company, for example fuel and a cleaning fee.

The costs paid for by the Company are covered by the Subscription Fee, and the application of subsection 10(3) of the FBTAA would therefore include the total weekly subscription rate charged.