JONES v FC of T

Members:
J Block DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2005] AATA 691

Decision date: 22 July 2005

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J Block (Deputy President)

The objection decision under review is the disallowance by the Respondent of an objection by the Applicant against an assessment, and in particular the disallowance of deductions claimed in respect of motor vehicle expenses, for the year ending 30 June 2003 (``the relevant year'').

2. The Applicant was self-represented, while Ms J. Gatland, an officer in the employ of the Australian Tax Office, appeared for the Respondent. The Tribunal had before it the T documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 together with a number of exhibits. I refer in these reasons to some only of those exhibits because, in the light of a concession made by the Respondent towards the end of the hearing, others became irrelevant.

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3. In the event, no oral evidence was given before the Tribunal and so that this decision relates to the T documents, the exhibits (to the extent relevant) and the oral and written submissions by the parties.

4. In respect of the relevant year, the Applicant claimed a deduction in respect of motor vehicle expenses amounting in total to $52,370. The expenses in question included periodic costs such as lease rental costs, depreciation, interest, cleaning expenses, and petrol. He also included claims in respect of a number of amounts of a ``one-off'' nature in the sense that they were expenses paid annually (or as in the case of his driving licence, less often), and including insurance, registration, and the subscription to a road service help organisation. The amount claimed was amended subsequently and in particular so as to reduce it by a personal use factor in respect of the vehicle. The actual amounts and the nature of those expenses became irrelevant in the light of the concession by the Respondent referred to in clause 2 of these reasons for decision.

5. The Applicant was during the relevant year, and until 4 April 2003, employed by Siemens Limited (``Siemens'' or ``the Employer'') in a senior capacity; his position was described in the employment contract as ``Executive Director, Energy & Transportation Division'' (Exhibits R1 and R2). On 4 April 2003 his position with the Employer was made redundant. The Applicant said that in respect of the remainder of the relevant year he was unemployed; by that he meant that he did not have any employed or salaried position. I refer to that latter period in the relevant year (4 April 2003 to 30 June 2003) as ``the second period''; the term ``first period'' relates to the period in the relevant year from 1 July 2002 to 4 April 2003, and during which period the Applicant was employed, as I have said, by Siemens. However, the Applicant was involved, during the second period, in the management of two rental properties which he owns. He was also involved in Enviro-Water Pty Ltd (``the Company''), a company of which he is the sole director and in which he owns all of the issued shares. The Applicant claimed that he incurred motor vehicle expenses in respect of the second period both in respect of the management of the Company and also in respect of travel between the rental properties which he owned. He did not, during the second period, derive any income from the Company which was in a loss position.

6. The Applicant's claim for motor vehicle expenses in respect of the second period, and as reduced, was $384.52. When the hearing commenced, the Tribunal was informed that there was an issue (but not the only issue) as to substantiation of the motor vehicle expenses claimed in respect of the second period. The Tribunal was also informed that the Applicant had very recently delivered a diary which might constitute substantiation, and so that the Tribunal would be asked to remit the expenses claim referable to the second period to the Respondent for reconsideration. However, and towards the end of the hearing, Ms Gatland notified the Tribunal that the Respondent would (unconditionally) allow a deduction in that amount of $384.52. It follows that all references and submissions as to the second period, and all exhibits referable to the second period then became irrelevant. Having regard to the nature of the expenses claimed, that concession was generous and motivated (presumably) by the comparatively small amount involved.

7. The term ``employment contract'' relates to a contract of employment between Siemens and the Applicant dated 7 October 1998 and pursuant to which the Applicant took up the senior position with Siemens referred to previously in these reasons. Under the employment contract, the Applicant became entitled (pursuant to clause 3.1 of the employment contract) to an annual ``Total Remuneration Package'' of $307,625; however, and as appears from clause 3.1 of the employment contract, one of its components (and there were others, but not relevant to this decision, and in respect of which the Applicant was entitled to salary sacrifice) was an annual amount of $29,700 in respect of a motor vehicle. The specific provisions as regards the motor vehicle are contained in clause 3.2 of the employment contract as follows:

``3.2 Company Vehicle

You will be provided with a fully maintained Company car in order to carry out the duties of your role and to provide for private usage. The benchmark vehicle for your level and position will be a Ford LTD + 10%, which carries a benefit value of $29,700.00 per annum. You will have some ability to upgrade or downgrade your vehicle and the details of the Company car

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policy in regard to vehicles will be provided to you on commencement. You have full private usage of the Company car with no personal contribution towards running and petrol costs.''

8. In fact the Applicant did not initially elect to take the motor vehicle salary sacrifice option, and so that he received salary in lieu of $29,700 per annum and in respect of which tax was duly paid.

9. In December 1999, the Applicant entered into two linked agreements. An agreement entitled ``Employee Finance Lease Agreement'' dated 11 December 1999 was entered into between Lease Plan Australia Limited (``Lease Plan'') and the Applicant (described in that agreement as ``the lessee''); that lease agreement is referred to in these reasons as the ``Lease''. Pursuant to the Lease, the Applicant became entitled to request Lease Plan to acquire a vehicle from a supplier, and to lease it to the Applicant, upon the terms and conditions set out in the Lease (T pages 84 to 97). There are three clauses in the Lease which, having regard to the Novation Agreement (referred to hereafter) require particular attention. Clause 4.1 is of little relevance; pursuant to clause 4.1 Lease Plan or the Applicant was entitled in certain circumstances (not relevant to the purposes of this decision) to terminate the Lease. Clause 4.2 of the Lease is similarly of little relevance. However, clauses 13.4 and 13.5 (which are contained in a section entitled ``Return of the Vehicle'') are relevant; and they read (T page 95) as follows:

``13.4 Lease Plan will dispose of the Vehicle at public auction or by tender or private treaty at the best price which it can reasonably obtain and subject to such conditions as Lease Plan shall determine to facilitate the sale.

13.5 Unless Clause 4 applies, if the net proceeds of sale after deduction from the proceeds of sale of all costs incurred in disposing of the Vehicle, including, but not limited to transport, preparation, tender, auction and repair fees;

• (i) is less than the Residual Value of the Vehicle then the Lessee shall forthwith on demand pay to Lease Plan the shortfall; or
• (ii) is greater than the Residual Value of the Vehicle then Lease Plan shall forthwith pay to the Lessee the excess.''

10. Also on 11 December 1999 a deed entitled ``Deed of Novation'' (``the Novation Deed'') was entered into between Lease Plan, Siemens and the Applicant in respect of an Alfa Romeo sedan (``the motor vehicle'') leased by Lease Plan to the Applicant under the Lease.

11. Under the Novation Deed, the Applicant (T pages 55 to 59) novated all of the Rights (as defined in the Novation Deed) and the Obligations (as defined in the Novation Deed) for the Novation Period (as defined in the Novation Deed) to Siemens. It is not necessary to include those definitions in full; it is sufficient to note that ``Rights'' and ``Obligations'' were defined so as to refer to all of the Applicant's rights and obligations under the Lease but excluding ``Retained Rights'' and ``Retained Obligations'' respectively; the term ``Novation Period'' was defined in broad terms so as to relate to the period from commencement to termination pursuant to clause 6. The specific provision as to Novation is set out in the Novation Deed in clause 1, which may be summarised in the following manner; in accordance with clause 1.1, the Applicant novated all Rights and Obligations (and including Retained Rights and Retained Obligations) to the Employer who accepted the novation. In accordance with clause 1.2 the Employer became entitled to exercise all of the Rights and obliged to perform all of the Obligations during the Novation Period. Clause 1.3 in turn provided for a novation back to the Applicant of the Retained Rights and the Retained Obligations. It should be noted that the ``Retained Rights'' were defined to mean the rights of the Applicant under clauses 4.1, 4.2, 13.4 or 13.5 (ii) of the Lease; the ``Retained Obligations'' were defined to mean the obligations of the Applicant under clauses 4.1, 4.2 or 13.5 (i) of the Lease. The Retained Rights and the Retained Obligations related in broad terms to rights and obligations arising after termination of the Lease and sale of the vehicle, and so that the Applicant would on sale be entitled to any excess over residual value, and correspondingly obliged to pay any shortfall. The Retained Rights and Retained Obligations related in their terms to what was to occur after termination and sale and so that the novation was during the period of the Lease

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(and notwithstanding clause 1.3) a full and not a partial novation (see in this regard Taxation Ruling TR 1999/15). The Employer (T page 75) regarded the novation as a full novation; it referred to ``a full novated lease''; the second paragraph of its letter at T page 75 reads as follows:

``Mr Jones entered into a full novated lease with Lease Plan Australia on the 11th December 1999 for vehicle registration AIB34J. The lease agreement and deed of novation jointly bind Mr Jones, Siemens Ltd and Lease Plan Australia in a 3-way agreement.''

12. In accordance with clause 4 of the Novation Deed the Applicant agreed to be liable for any fringe benefits tax (``FBT'') arising from his use of the vehicle.

13. The Applicant argued, at some length, that he remained liable under the Lease having regard to clause 5 of the Novation Deed reading as follows:

``5. Indemnities

5.1 The Employee indemnifies Lease Plan for all loss, damage, costs or expenses suffered or incurred by Lease Plan as a result of the Employer failing to perform the Obligations, including as a result of the Employer failing to pay the Rent to Lease Plan during the Novation Period promptly or at all.

5.2 The Employer indemnifies the Employee for all loss, damage, costs or expense suffered or incurred by the Employee as a result of the Employer failing to perform the Obligations, including as a result of the Employer failing to pay the Rent to Lease Plan during the Novation Period promptly or at all. The Employer also indemnifies the Employee for all loss, damage, costs or expenses suffered by the Employee as a result of the Employer failing to comply with its obligations under this deed.''

14. The Applicant contended that he remained liable under the Lease in particular because under clause 5.1 of the Novation Deed he was liable to Lease Plan for any default on the part of Siemens; although he obtained a full counter-indemnity from Siemens under clause 5.2 of the Novation Deed, the indemnity (set out in clause 5.1 of the Novation Deed) was, so he contended, primary. It was clear that the Applicant would have been liable during the period of the Lease only upon a default by Siemens. Such an occurrence was clearly remote.

15. The Applicant sought to rely on clauses 5.1 and 5.2 of the Novation Deed in order to contend, on the basis that he had an obligation (however contingent) during the period of the Lease, that the novation set out in the Novation Deed was a partial novation and not a full novation as referred to in Taxation Ruling TR 1999/15. The Applicant also referred, but only in passing, to the fact that he remained liable for any shortfall on termination and sale between the sale price and the residual value. Of course, and at the time of entry into the Lease and the Novation Deed, it could not be known whether in the event there would be a shortfall or a surplus in relation to the residual value.

16. The Tribunal considers that not- withstanding clause 5 of the Novation Deed, the novation was a full and not a partial novation. This is so despite clause 5 which constituted so remote a contingency that it need not be regarded in realistic terms as casting any burden on the Applicant. As to clause 1.3 of the Novation Deed, the relevant rights and obligations arose on termination and sale of the vehicle and not before.

17. TR 1999/15 is a ruling which deals with ``income tax and fringe benefits tax; taxation consequences of certain motor vehicle lease novation arrangements''. It is clear, having regard to its content, that even if the novation was partial and not full the Applicant would nevertheless be denied a deduction during the first period. See in particular clause 40 of the Ruling as follows:

``40. Section 8-1 of the ITAA 1997 (subsection 51(1) of the ITAA 1936) does not allow a deduction to the employee for lease payments made by the employer to the finance company in a partial novation, as no expense has been incurred or paid by the employee. In these novations, the employer enters into a novation where it makes the lease payments direct to the finance provider. The employee no longer has the legal obligation to make the lease payments. Likewise, as the expense is not incurred by the employee, section 51AF of the ITAA 1936 has no application.''

18. The Applicant sought to contend that his election to salary sacrifice in respect of the motor vehicle had the effect that he nonetheless

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``derived'' the relevant income, ($29,700 per annum) at least in such terms that he was entitled to deductions against it. (Ms Gatland's referred to that contention as an attempt to ``double-dip.'') The Applicant contended that the effect of his salary sacrifice was not one which had the result that he avoided tax; rather the result was that his tax liability took the form of an FBT liability rather than an income tax liability although, as he conceded, there was a significant rate differential in his favour.

19. There is of course no merit in the Applicant's contentions. When he elected to salary sacrifice in respect of the motor vehicle, the effect was precisely what those words ``salary sacrifice'' signify. He received less salary and thus paid less income tax. He did receive the right to use the motor vehicle; in respect of that use he was not confined to business purposes and was entitled to use it for personal use as well. That benefit was a fringe benefit which attracted FBT. He elected to salary sacrifice on this basis because it suited him to do so.

20. The Applicant nevertheless sought to contend that section 8-1 of the Income Tax Assessment Act 1997 applied to allow him to deduct, in respect of the first period, motor vehicle expenses; of course it did not. The expenses in respect of the first period were not incurred in the production of assessable income or in the course of business. In any event, a deduction was precluded by section 51AF of the Income Tax Assessment Act 1936, as follows:

``51AF Car expenses incurred by employee

(1) Where:

• (a) during a particular period, an employer provides a car for the exclusive use of a person who is, or of persons any of whom is, an employee of the employer or a relative of such an employee; and
• (b) at any time during that period, the employee or a relative of the employee is entitled to use the car for private purposes;

a deduction is not allowable under this Act in respect of a car expense that relates to the car and:

• (c) is incurred by the employee during that period; or
• (d) is incurred by the employee and is wholly or partly attributable to that period.

(2) In this section:

car has the meaning given by section 995-1 of the Income Tax Assessment Act 1997, but does not include a car covered by section 28-165 of that Act.

car expense has the meaning given by section 28-13 of the Income Tax Assessment Act 1997, but does not include a car expense covered by section 28-165 of that Act.

employee has the meaning given by section 221A.

employer has the meaning given by section 221A.''

21. It is unnecessary for me to comment upon the far-reaching nature of the Applicant's deduction claims and including, by way of example, the cost of his drivers licence. Nor is it necessary for me to note that some were clearly of a capital nature and moreover that some might have required apportionment. The concession made by the Respondent in respect of the second period had the effect of rendering any such considerations irrelevant.

22. Excepting only that the Applicant is allowed a deduction in an amount of $384.52, the objection decision under review is affirmed.