Edited version of private ruling

Authorisation Number 88920

This ruling is a private ruling for the purposes of Division 359 of Schedule 1 of the

Taxation Administration Act 1953.

Issue 1:

What this ruling is about:

1. Where a car fringe benefit is provided to an employee and a car allowance is paid, does a subsequent recipient's payment reduce the taxable value of the car fringe benefit?

2. Will the Commissioner apply section 67 of the Fringe Benefits Tax Assessment Act 1986 in relation to the scheme?

3. Will the Commissioner apply Part IVA of the Income Tax Assessment Act 1936 in relation to the scheme?

Ruling:

1. Where a car fringe benefit is provided to an employee and a car allowance is paid, does a subsequent recipient's payment reduce the taxable value of the car fringe benefit?

Yes.

2. Will the Commissioner apply section 67 of the Fringe Benefits Tax Assessment Act 1986 in relation to the scheme?

No.

3. Will the Commissioner apply Part IVA of the Income Tax Assessment Act 1936 in relation to the scheme?

No.

Year(s) of income or period(s) to which this ruling applies:

Year ended 31 March 2009

Year ended 31 March 2010

Year ended 31 March 2011

Commencement date of scheme:

1 April 2008

The scheme that is the subject of the ruling:

The employer has a fleet of motor vehicles and currently provides a number of car fringe benefits to its employees by way of a company car (leased or owned) as well as novated leases.

The employer has a number of different remuneration packages currently offered to employees.

The employer is proposing to restructure the remuneration packages of certain employees in order to reduce the FBT taxable value to nil.

As part of the restructure the employer is considering the use of the employee contribution method under the proposed remuneration package. Under this arrangement, the employees will enter into an agreement with the employer to make recipient's contributions to the employer which will effectively reduce the taxable value of the car fringe benefit provided to nil.

Under the proposed structure the employer will continue to pay the employees their salary and/or wages and superannuation. In addition to this, a car allowance will be paid to the employees.

Under the new package, the employees will make post-tax contributions from the car allowance received. Specifically, the after-tax contributions made by the employees will approximately equate to the taxable value of the car fringe benefit provided. The car allowance will be subject to the normal PAYG withholding rules. The amount received by the employee will then be used to make a post-tax contribution to reduce the taxable value of the employee's car fringe benefit to nil.

The amount of car allowance paid to the employees will be determined having regard to each employee's marginal tax rate and Medicare levy such that after tax contributions may be made by the employees sufficient to reduce any FBT on the vehicles.

Assumptions:

Relevant 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 Subsection 9(1).

Fringe Benefits Tax Assessment Act 1986 Paragraph 9(2)(e).

Fringe Benefits Tax Assessment Act 1986 Subsection 10(2).

Fringe Benefits Tax Assessment Act 1986 Paragraph 10(3)(c).

Fringe Benefits Tax Assessment Act 1986 Section 67.

Income Tax Assessment Act 1997 Subsection 4-15(1).

Income Tax Assessment Act 1997 Subsection 6-5(1).

Income Tax Assessment Act 1997 Section 15-2.

Income Tax Assessment Act 1936 Section 177D.

Explanation: (This does not form part of the notice of private ruling)

Issue 1

1. Where a car fringe benefit is provided to an employee and a car allowance is paid, does a subsequent recipient's payment reduce the taxable value of the car fringe benefit?

A car benefit is provided when the provisions of section 7 of the FBTAA are met. The taxable value of car fringe benefits can be calculated through either the statutory formula method or the operating cost method. In calculating the taxable value of the car fringe benefit both methods allow for a recipient's payment or employee contribution to reduce the taxable value of the benefit.

Section 7 of the FBTAA provides that a car benefit can arise when an employer makes a car that they hold available for the private use of an employee.

Section 9 of the FBTAA deals with how to calculate the taxable value of a car fringe benefit according to the statutory formula method and section 10 deals with how to calculate the taxable value according to the operating cost method.

Under subsection 9(1) of the FBTAA the taxable value of a car fringe benefit is given by the formula:

ABC/D - E

where:

A is the base value of the car;

B is the statutory fraction;

C is the number of days during that year of tax on which the car fringe benefits were provided by the provider;

D is the number of days in that year of tax; and

E is the amount (if any) of the recipient's payment.

Paragraph 9(2)(e) specifies the basis for determining component E in the statutory formula, i.e. the amount of any recipient's payment. By virtue of paragraph (e), the amount of any consideration paid to the employer as consideration for the use of the car apply to reduce the taxable value of the car fringe benefit. To qualify for this purpose, the expense must be incurred during the period when the car was provided for the employee's (or an associate of the employee's) use.

Under subsection 10(2), which provides details of how to calculate the taxable value based on the operating cost method, the taxable value is calculated in accordance with the formula:

(C x (100% - BP)) - R

where:

C is the operating cost of the car during the holding period;

BP is:

· nil, if, under section 10A or 10B, the employer is not entitled to a reduction in the operating cost of the car on account of business journeys undertaken in the during the holding period;

· in any other case - the business use percentage applicable to the car for the holding period; and

R is the amount (if any) of the recipient's payment.

Paragraph 10(3)(c) mirrors paragraph 9(2)(e), but is in relation to the operating cost method, and provides that the recipient's payment will be the sum of various amounts including consideration paid for the use of the car.

It is a requirement that this contribution be made from after-tax income. An employee's taxable income is, according to subsection 4-15(1) of the ITAA 1997 equal to assessable income less deductions. Under Division 6 of the ITAA 1997 assessable income includes income according to ordinary concepts. It can include amounts derived from employment. Section 15-2 of the ITAA 1997 provides that assessable income includes an allowance provided through an employment relationship. Therefore, once an allowance has been derived by an employee it will become assessable income to the employee.

TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements, deals with salary sacrifice arrangements and provides guidance on when income may be derived. Paragraph 25 of TR 2001/10 states (in part):

An employee does not derive ordinary or statutory income from the provision of personal services until the income has either been received by him or her or is taken by subsection 6-5(4) or 6-10(3) of the ITAA 1997 to have been received when the employer deals with the amount in some way on behalf of the employee.

In the circumstances of this case the car allowance is paid to the employee and so has been derived by the employee. It will form part of the employee's assessable income and will be an amount from which an after-tax contribution can be made.

In applying section 9 or section 10 of the FBTAA the value of the taxable value of a car fringe benefit can be reduced by recipient's contributions, these contributions being made from after-tax income. Since the car allowance is paid to the employee, employee contributions from these amounts will qualify as after-tax contributions. These employee contributions will reduce the taxable value of the car fringe benefit. The actual extent to which the taxable value is reduced will depend on the amount paid by each employee from after-tax income. Depending on these individual circumstances the taxable value of the car fringe benefit received may be reduced to nil.

The recipient's payment or employee contribution made in this particular case will therefore reduce the taxable value of a car fringe benefit. An employee contribution paid to the employer is included in the employer's assessable income and may be treated as a taxable supply for GST purposes.

2. Will the Commissioner apply section 67 of the Fringe Benefits Tax Assessment Act 1986 in relation to the scheme?

Section 67 of the FBTAA is a general anti-avoidance provision that is intended to apply where, on an objective view of a particular arrangement and its surrounding circumstances, it would be concluded that the arrangement was entered into for the sole or dominant purpose of having an amount omitted from an employer's fringe benefits taxable amount of any year of tax in respect of a benefit provided to a person.

Section 67 of the FBTAA will not be applied by the Commissioner to this scheme of arrangement. The taxable value of any car fringe benefits provided will only be reduced by a recipient's or employee contribution, from after-tax income which should not be subjected to an application of section 67.

3. Will the Commissioner apply Part IVA of the Income Tax Assessment Act 1936 in relation to the scheme?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance provision of income tax law that serves a similar purpose to that of section 67 of the FBTAA. Part IVA is intended to apply where, on an objective view of a particular arrangement and it surrounding circumstances, it would be concluded that the arrangement was entered into for the sole or dominant purpose of obtaining a tax deduction or having an amount left out of assessable income.

As this is not the case, Part IVA of the Income Tax Assessment Act 1936 will not be applied by the Commissioner to this scheme of arrangement. The scheme is not an arrangement to which this general anti-avoidance will be applied.