Edited version of private ruling

Authorisation Number: 1011614173639

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Ruling

Subject: Car expenses

Question and answer:

Are you entitled to a deduction for your car expenses?

No

This ruling applies for the following periods:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You entered into a salary sacrifice arrangement with your then employer whereby you received a car under a fully novated lease arrangement.

The vehicle is not a utility or a panel van.

You used the car for both work and private purposes.

You ceased your employment prior to the completion of the novated lease arrangement.

You began employment with your new employer a few months later. There was no novated lease arrangement with this employer.

From the time you ceased employment with your original employer, the car was used primarily for personal purposes, including commuting to work with your new employer.

You made the occasional work related trip when employed with your new employer visiting clients for sales purposes.

You estimate total work related kilometres travelled to be less than 5,000km. You did not keep any records such as receipts or diary entries as you thought the car was under a novated lease arrangement.

You did not keep a log book.

You purchased the car from the novated lease company.

You incurred the following expenses:

· Fuel

· Servicing costs

· Tyres

· Lease repayments

· Residual payment

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 8-1.

Income Tax Assessment Act 1997 Section 28-12.

Income Tax Assessment Act 1997 Section 28-25.

Income Tax Assessment Act 1997 Section 28-35.

Income Tax Assessment Act 1997 Section 28-45.

Income Tax Assessment Act 1997 Section 28-50.

Income Tax Assessment Act 1997 Section 28-60.

Income Tax Assessment Act 1997 Section 28-70.

Income Tax Assessment Act 1997 Section 28-75.

Income Tax Assessment Act 1997 Section 28-80.

Reasons for decision

Novated lease

A novation is an arrangement whereby all or some of the rights or obligations of an employee (lessee) in relation to a leased property are transferred to the employer.

Motor vehicle leases are the most common subjects of a novation arrangement.

The arrangement is achieved by way of a deed of novation between the finance company (lessor), the employee and the employer that will revoke the original lease between the finance company and the employee. 

Where the employee's use of the vehicle includes private as well as work-related travel, a fringe benefit is provided to the employee and this will generally incur a fringe benefits tax for the employer.  

Taxation Ruling TR 1999/15 deals with taxation consequences of certain motor vehicle lease novation arrangements.

Paragraph 25 of TR 1999/15 states that in a full novation the lease payment obligations are transferred to the employer. It is explained in paragraph 27 of TR 1999/15 that the employer becomes the lessee under the novated lease.

Irrespective of whether the lease is a fully novated or partially novated lease, the employee is not deemed to have incurred an expense in relation to the car. This is because under the terms of the agreement the employee novates to their employer all of the expenses relating to the vehicle. As such, the employee is provided with a car by their employer and it is their employer who is incurring the expenses and fringe benefits tax liability during the period of the novated lease.

In your case you entered into a salary sacrifice arrangement with your then employer whereby you received a car under a fully novated lease arrangement.

Early termination of lease

When an employee who is under a novation arrangement with an employer ceases employment with that employer, the novated lease ceases and the lease becomes a normal lease. All the liabilities and responsibilities under the terms of the lease revert to the employee.

In your case, you ceased employment with your former employer before the lease had finished. At the time you ceased your employment, the novated lease came to an end and you became responsible for the liabilities and responsibilities of the lease.

Are you entitled to a deduction for the car expenses following the termination of lease?

When you were employed with the employer with whom you had the novated lease arrangement, the employer was responsible for all the associated expenses as the employer became the lessee of the car.

When you commenced your second employment, there was no novated lease arrangement. In order to determine if you are entitled to claim any car expenses after commencing your employment with your second employer, we need to consider the general income tax deduction provisions.

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

As we are no longer dealing with a novated lease arrangement, the usual deductibility of car expenses rules apply. Division 28 of the ITAA 1997 specifically deals with the deductibility of car expenses. Section 28-12 of the ITAA 1997 allows a deduction for car expenses to the taxpayer who owns or leases a car.

Claiming work related car expenses

There are four methods available for claiming car expenses. These are:

· Logbook method

· One-third of actual expenses method

· 12% of original value method

· Cents per kilometre method

These methods are explained on pages 30 to 32 in Tax Pack 2010.

Logbook method

This method may be used where a taxpayer wishes to claim car expenses by reference to actual expenses paid. Where the car is used for both income producing and private purposes, it is necessary to work out a percentage to apply to the total expenses paid. This is done by keeping a logbook for at least 12 weeks in the first year and then every five years.

Odometer records are required for each journey. These are recorded in the logbook. In this way an apportionment can be made between income-producing use and private use of the car. Written evidence of all expenses is required. Fuel and oil expenses may be substantiated by odometer records.

One-third of actual expenses method and 12% of original value method

In order to use the 12% of original value method or the one-third of actual expenses method, the total business kilometres for the year must exceed 5,000 kilometres.

Under the one-third of actual car expense method, written evidence of expenses is required. Fuel and oil expenses may be substantiated by documentary evidence or by odometer records.

Under the 12% of original value method, no substantiation is required. The number of business kilometres is based on a reasonable estimate.

Cents per kilometre method

A taxpayer is allowed to use the cents per kilometre method where they have travelled up to 5,000 business kilometres in the income year. The deduction is calculated by multiplying the business kilometres the car has travelled up to 5,000kms, by the number of cents based on the cars engine capacity. 

The taxpayer does not need to substantiate their car expenses using this method however their total business kilometres should be based on a reasonable estimate.

Your case

In your case, you used your car for work purposes with your new employer in order to visit clients for sales purposes. You incurred expenses for fuel, services, tyres, lease payments, and residual payout when employed with your new employer. You did not keep any records as you were under the impression that the car was still under the novated lease arrangement.

You cannot claim for these expenses under the one-third of actual expenses method or 12% of original cost method as your business kilometres did not exceed 5,000. The log book method is not applicable in your case as you did not maintain a log book.

You cannot claim for your car expenses under the cents per kilometre method, as although you estimate your work related kilometres to be less than 5,000, you did not maintain any records such as diary entries. Whilst written evidence is not needed, a taxpayer needs to be able to show how they worked out their business kilometres.

Conclusion

You incurred car expenses whilst employed with your new employer. As there was no novated lease arrangement with your new employer, you became responsible for the expenses. Of the four methods of claiming for car expenses, the 12% of original value method and the one-third of actual expenses method are not applicable as your total work related kilometres did not exceed 5,000. As you did not maintain a log book you cannot claim the business portion of the expenses you paid under the log book method. The cents per kilometre method is most relevant to you, however as you are not able to show how you worked out your business kilometres, a deduction for car expenses is not allowable under this method.

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