Edited version of private advice

Authorisation Number: 1051600554299

Date of advice: 21 November 2019

Ruling

Subject: Novated Lease Arrangement - FBT, IT and GST Implications for a Local Council

Issue 1: Fringe Benefits Tax Implications of Novated Lease Arrangement

Question

Would the provision by the Local Council of a car to an employee under a novated lease arrangement for the employee's private use constitute a car fringe benefit pursuant to section 7 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes.

Issue 2: Income Tax Implications of Novated Lease Arrangement

Question

Would the Local Council be entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)for the payment of the lease expenses in respect of a car it provides to an employee under a novated lease arrangement?

Answer

No. This is because the Local Council is an income tax exempt entity. Its ordinary and statutory income is exempt from income tax. Accordingly, lease expenses incurred by the Local Council would not be deductible on the basis that they were incurred in gaining or producing exempt income.

Issue 3: Goods and Services Tax Implications of Novated Lease Arrangement

Question

Would the Local Council be entitled to claim input tax credits for acquisitions related to the provision of a car to an employee (that is, the lease payments) under a novated lease arrangement?

Answer

Yes. The input tax credits for the lease expenses would be attributable to each tax period in which the lease payments are made (or earlier invoiced).

This ruling applies for the following periods

For Issue 1:

1 April 2019 to 31 March 2023

For Issues 2 and 3:

1 July 2019 to 30 June 2023

The scheme commences on

For Issue 1:

1 April 2019

For Issues 2 and 3:

1 July 2019

Relevant facts and circumstances

The Local Council is a local government council.

Company A, a provider of fleet management and car leasing solutions, has approached the Local Council with an offer to provide a novated lease arrangement to the Local Council's employees.

Company A's proposal is that Company A (the Lessor/financier), the Local Council (as employer and Lessee) and an employee of the Local Council enter into a three-way agreement under Company A's novated lease arrangement. The structure of such a novation agreement is that Company A uses its buying power to purchase the car chosen by the employee at a discount on retail price. The car is immediately transferred into the ownership of the Local Council. Under the novation agreement, the Local Council makes the lease payments to Company A from a portion of the employee's pre-tax salary.

At the end of the lease period when the balloon payment is due, or upon termination of the employee, the ownership of the car transfers to the employee, who is then responsible for the balloon payment or ongoing lease payments respectively.

Running costs are included in the same way as a standard novated lease, with lease payments incorporating the total cost of the car, including car finance and running costs such as maintenance, fuel, roadside assistance, tyres, registration and insurance.

Company A's novated lease process is as follows:

1.       An enquiry is made with Company A in respect of their novated lease arrangement.

2.       Company A provides a quote.

3.       Both the Local Council and the relevant employee sign off on the quote provided by Company A. The employee also provides a completed 'individual credit application'.

4.       If the application is approved, the employee confirms the colour of the car and relevant accessories. Company A then orders the specific car based on government pricing. Company A ensures that the car is registered in the name of the Local Council.

5.       Company A generates novated lease documentation for signing, including a:

a.     Deed of Novation

b.     Finance Schedule, and

c.      Transfer of Ownership Document (this document is pre-signed by the employee and retained by Company A. This is only actioned in the event that the employee leaves the Local Council).

6.       Company A then:

a.     Settles the contract.

b.     Pays the delivering dealer for the car.

c.      Advises employee of settlement.

d.     Coordinates delivery of the car with the dealer.

In the event the relevant employee decides to leave the Local Council, or is terminated by the Local Council, Company A processes the pre-signed transfer of ownership form to transfer ownership of the car to the employee. On the final day of the employee's contract, the Local Council will cease to have any rights and obligations in relation to the car under the novated lease.

The salient terms of a standard Deed of Novation in respect of Company A's novated lease arrangement are outlined below:

1.        The employee and the 'Finance Company' (Company A) are parties to the 'Lease' under which the employee has leased the car from the Finance Company.

2.        The employee and the Finance Company agree to contractually extinguish and substitute the Lease in respect of the car on the terms and conditions set out in the Deed of Novation.

3.        The 'Employer' (the Local Council) and the Finance Company agree to enter into a novated lease and assume rights and obligations under the novated lease on substantially the same terms as the Lease between the Employee and the Finance Company subject to the terms and conditions set out in the Deed of Novation.

4.        A key clause states that, from the date of execution of the Deed of Novation, the Lease between the Finance Company and the Employee will be terminated and the Finance Company and the Employer will novate obligations towards each other and acquire rights against each other, which will be identical to the rights and obligations which previously existed in the (terminated) Lease between the Finance Company and the Employee.

The term 'Lease' is defined in the Deed of Novation to mean the lease between the Finance Company (being Company A) and the employee. The term 'Novated Vehicle Lease' to mean the lease between the Employer (the Local Council, in the current circumstances) and the Finance Company (Company A) made pursuant to the Deed of Novation whereby the Employer agrees to lease the vehicle from the Finance Company.

The Deed of Novation provides that, on the 'termination date', all of the Employer's rights and obligations under, and in respect of, the Novated Vehicle Lease will become rights and obligations of the Employee. Immediately after the 'termination date', the Employee agrees to transfer the registration of the motor vehicle from the Employer's name to the Employee's name and pay any duties, taxes and fees in relation to this transfer.

The 'termination date' is defined in the Deed of Novation as the earlier of the date of termination (for whichever reason) of the Employee's employment with the Employer (the Council); the Employee's date of death; the date on which the Employer determines that the Employee has commenced leave without pay and has failed to make arrangements to the satisfaction of the Employer for the payment or reimbursement of lease payments during any period in which the Employee is on leave; and the date of termination of the Novated Vehicle Lease.

Under the Deed of Novation:

·         the Local Council (as the employer) is required to make the car available to the employee as part of the employee's agreed remuneration package, and Company A shall consent to the car being made available to the employee

·         the employee will be responsible for all maintenance and running costs in relation to the car. This includes registration fees, third party insurance premiums, repairs, replacement parts, oil and fuel. In addition, the employee is to maintain comprehensive insurance on the car

·         the employee remains liable for the payment of any 'Residual Obligation' under the novated lease. The 'Residual Obligation' is defined in clause [XX] as the obligation to make a payment of the residual value of the car upon the expiration of the lease.

A car provided to an employee under Company A's novated lease arrangement will be available to the employee for full private use. Any use for work purposes will be incidental and would only occur if a fleet car was unavailable. In that case, the employee would be reimbursed on a mileage basis for use of their car.

The relevant car provided under Company A's novated lease arrangement will be garaged at or near the applicable employee's place of residence.

The applicable employee may choose to make employee contributions out of their after-tax pay for use of the car.

The Local Council is registered for Goods and Services Tax (GST).

Company A, as the supplier of the relevant car to the Local Council under a novated leasearrangement, is also registered for GST.

The supply of the relevant car to the Local Council under Company A's novated lease arrangement is neither GST-free nor input taxed under any provision of the GST legislation.

Company A supplies the relevant car to the Local Council by way of the novated lease arrangement through an enterprise that Company A carries on in Australia.

Assumptions

1.     A motor vehicle provided by the Local Council to an employee under Company A's novated lease arrangement will meet the definition of a 'car' for the purposes of the FBTAA.

2.     In respect of a lease agreement between Company A and the relevant employee, the only payment obligations assumed by the Local Council (as the employer) under a novated lease is the obligation to pay the lease payments.

3.     The applicable car under Company A's novated lease arrangement is not a luxury car (the luxury car tax threshold for 2019 income year is $75,526 for a fuel efficient car and $66,331 otherwise). The car is designed to carry a load of less than one tonne and fewer than nine passengers, and is not a motor cycle or similar vehicle.

4.     The employee has entered into an effective salary sacrifice arrangement (in accordance with the requirements in Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements) in respect of Company A's novated lease arrangement.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 51AF

Income Tax Assessment Act 1936 Subsection 51AF(1)

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Paragraph 8-1(2)(c)

Income Tax Assessment Act 1997 Section 28-12

Income Tax Assessment Act 1997 Section 28-13

Income Tax Assessment Act 1997 Subdivision 50-A

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-25

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

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

Fringe Benefits Tax Assessment Act 1986 Subsection 10

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)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-15(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-25(5)(b)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 11-5(a)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 11-5(b)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 11-5(c)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 11-5(d)

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

A New Tax System (Goods and Services Tax) Act 1999 Subsection 29-10(3)

A New Tax System (Goods and Services Tax) Act 1999 Section 29-70

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 29-70(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 29-70(1)(c)

A New Tax System (Goods and Services Tax) Act 1999 Subparagraph 29-70(1)(c)(ii)

Reasons for decision

Issue 1: Fringe Benefits Tax Implications of Novated Lease Arrangement

Question

Would the provision by the Local Council of a car to an employee under a novated lease arrangement for the employee's private use constitute a car fringe benefit pursuant to section 7 of the FBTAA?

Summary

The provision by the Local Council of a car to an employee under Company A's novated lease arrangement for the employee's private use would constitute a car fringe benefit pursuant to section 7 of the FBTAA.

Detailed reasoning

Relevant law

Car fringe benefits

Section 7 of the FBTAA sets out the circumstances in which the use of a car will be a fringe benefit.

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

Key terms in section 7 of the FBTAA are explained below.

'In respect of 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 by the Local Council and the employment of its employee, it is necessary to consider the circumstances in which the car will be provided.

'Car'

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (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 motor cycle or similar vehicle) designed to carry a load of less than 1 tonne and fewer than 9 passengers.

'Held'

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.

'Private use'

'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.

'Available for private use'

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.

7(3) [Car not at 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.

Novated leases

A novated lease is generally a three-way arrangement between an employer, employee and a finance (or lease) company.

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.

Under a 'full novation' arrangement in respect of a car, an employer is responsible for making the lease payments and guaranteeing the residual value of the car at the end of the lease.

A variation on the full novation is an arrangement known as a 'split full novation'. Under this arrangement, the lessee's rights and obligations under a finance lease (except the residual payment obligation) are transferred to an employer.

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.

Taxable value of car fringe benefits

Chapter 7 ('Car Fringe Benefits') of the ATO's publication entitled Fringe benefits tax - a guide for employers, available on the ATO's website, provides guidance on how the Local Council can calculate the taxable value of a car fringe benefit provided to an employee under either the Statutory Formula method or the Operating Cost method.

In general, where there is minimal business use, the Statutory Formula method (as outlined in section 9 of the FBTAA) will be used to value the car for Fringe Benefits Tax (FBT) purposes because it will typically produce a lower taxable value. On the other hand, where there is high business use, typically the Operating Cost method (as outlined in section 10 of the FBTAA) will produce a lower taxable value.

Application to the Local Council's circumstances

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 Company A's novated lease arrangement, each of the conditions as provided in subsections 7(1), 7(2) and 7(3) of the FBTAA are discussed below.

Will the car be 'held' by the provider (the Local Council)?

The Local Council's employees are able to salary-sacrifice the costs associated with a car under a novated lease.

Where the Local Council, an employee of the Local Council, and Company A enter into a novated lease agreement, the Local Council has ownership of car and makes the lease payments to Company A from a portion of the employee's pre-tax salary.

Therefore, pursuant to subsection 162(1) of the FBTAA, the car will be held by the provider, who is the Local Council.

Is the Local Council's motor vehicle a 'car'?

It is assumed that a motor vehicle provided by the Local Council to an employee under Company A's novated lease arrangement 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 the facts, the Local Council will provide a car to an employee under an effective salary sacrifice arrangement (SSA). As such, it is clear that the provision by the Local Council of a car to an employee 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?

A car held by the Local Council that is salary-sacrificed by an employee of the Local Council (under Company A's novated lease arrangement) 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.

Conclusion

Each of the applicable conditions in section 7 of the FBTAA are satisfied. As such, a car fringe benefit arises in respect of a car provided by the Local Council to an employee under Company A's novated lease arrangement.

On this basis, the Local Council will be subject to FBT in respect of such a benefit, of which the taxable value can be determined through application of either the Statutory Formula method or the Operating Cost method. Any employee contribution made from the employee's after-tax income will reduce the taxable value of the fringe benefit, though the amount of any employee contribution will be included in the Local Council's assessable income.

Issue 2: Income Tax Implications of Novated Lease Arrangement

Question

Would the Local Council be entitled to a deduction under section 8-1 of the ITAA 1997for the payment of lease expenses in respect of a car it provides to an employee under a novated lease arrangement?

Summary

The Local Council would not be entitled to a deduction under section 8-1 of the ITAA 1997for the payment of lease expenses in respect of a car it provides to an employee under Company A's novated lease arrangement. This is because the Local Council is an income tax exempt entity. As such, its total ordinary and statutory income is (presumably) exempt from income tax. Accordingly, paragraph 8-1(2)(c) of the ITAA 1997 would apply to deny a deduction for the lease expenses as they were incurred in relation to gaining or producing exempt income of the Local Council.

Detailed reasoning

Relevant law

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 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 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.

Section 8-1 sets out the general rules for deductibility under the ITAA 1997. Most commonly encountered deductions fall within this 'general deduction' provision. 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.

Application to the Local Council's circumstances

In the present circumstances, the Local Council will enter into a split full novated lease arrangement. Under this arrangement, the Local Council will become the Lessee and assumes the employee's rights and obligations, including lease payment obligations, which previously existed under the lease entered into between the employee and Company A. This is with the exception of the employee's residual payment obligation. In this regard, the Local Council's employee will retain the obligation to pay the residual value of the car upon expiration of the lease, pursuant to the Deed of Novation.

As the car is provided by the Local Council to the employee as part of a salary packaging arrangement, the Local Council would otherwise be entitled to a deduction under section 8-1 of the ITAA 1997 for the payment of lease expenses as they are outgoings incurred in gaining or producing assessable income.

As concluded in the response to Question 1, given the Local Council will be providing a car for the private use of an employee, a car fringe benefit will arise which will be subject to FBT. The amount of the FBT paid would also otherwise be an allowable deduction under section 8-1 of the ITAA 1997 for an employer.

However, in effect, there will be no income tax consequences for the Local Council. Section 50-1 of the ITAA 1997 provides that the total ordinary and statutory income of the various entities covered in Subdivision 50-A of the ITAA 1997 are exempt from income tax. Item 5.1 of the table in section 50-25 (in Subdivision 50-A) of the ITAA 1997 provides that income tax exempt entities include either a municipal corporation or a local governing body.

As the Local Council is a local government body, it qualifies as an income tax exempt entity under sections 50-1 and 50-25 of the ITAA 1997. As such, the Local Council's total ordinary and statutory income would be exempt from income tax.

Accordingly, paragraph 8-1(2)(c) of the ITAA 1997 would apply to deny the Local Council a deduction for the lease expenses in respect of a car it provides to an employee under Company A's novated lease arrangement, as these expenses were incurred in relation to gaining or producing the exempt income of the Local Council.

Issue 3: Goods and Services Tax Implications of Novated Lease Arrangement

Question

Would the Local Council be entitled to claim input tax credits for acquisitions related to the provision of a car to an employee (that is, the lease payments) under a novated lease arrangement?

Summary

The Local Council would be entitled to claim input tax credits for acquisitions related to the provision of a car to an employee under Company A's novated lease arrangement. The input tax credits for the lease expenses would be attributable to each tax period in which the lease payments are made (or earlier invoiced).

Detailed reasoning

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that 'you are entitled to the input tax credit for any creditable acquisition that you make'.

'Creditable acquisition' is defined in section 11-5 of the GST Act, which states:

You make a creditable acquisition if:

(a)     you acquire anything solely or partly for a *creditable purpose; and

(b)     the supply of the thing to you is a *taxable supply; and

(c)     you provide, or are liable to provide, *consideration for the supply; and

(d)     you are *registered, or *required to be registered.

Each of the paragraphs in section 11-5 of the GST Act are considered below.

Paragraph 11-5(a): You acquire anything solely or partly for a creditable purpose

In order for the Local Council to be entitled to the full input tax credit on an acquisition it makes to provide a car benefit to an employee, the Local Council must have acquired the leased car for a creditable purpose.

Section 11-15 of the GST Act, which explains the meaning of 'creditable purpose', states:

(1)

You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2)

However, you 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.

...

Paragraph 52 of 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) states:

52.  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.

In addition, the concept of 'remuneration benefit' is also discussed in GSTR 2001/3. In particular, paragraph 55 of GSTR 2001/3 states:

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.

Benefits provided by an employer to an employee under a salary packaging arrangement are generally 'remuneration benefits' and, as such, they are not related to other supplies that the employer makes to clients or customers. This is supported by the examples set out in paragraphs 56 and 57 of GSTR 2001/3, as follows:

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.

Therefore, where the Local Council makes an acquisition to provide a car for the private use of an employee, it is made for a creditable purpose for the following reasons:

·        As concluded in the response to Question 1, where the Local Council provides a car to an employee under Company A's novated lease arrangement, a car fringe benefit is provided by the Local Council to that employee. Pursuant to paragraph 52 of GSTR 2001/3, such an acquisition by the Local Council to provide a car fringe benefit in respect of employment in the Local Council's enterprise is made in carrying on the enterprise and is not of a private or domestic nature for the purposes of section 11-15 of the GST Act.

·        The provision of a car by the Local Council to an employee under Company A's novated lease arrangement constitutes a 'remuneration benefit' pursuant to paragraphs 55 and 56 of GSTR 2001/3. Accordingly, car fringe benefits provided by the Local Council to an employee under such a salary packaging arrangement would not be related to other supplies that the Local Council makes to its city's ratepayers.

As such, paragraph 11-5(a) of the GST Act is satisfied.

Paragraph 11-5(b): The supply of the thing to you is a taxable supply

For a supply to be taxable under paragraph 11-5(b) of the GST Act, all the requirements of section 9-5 of the GST Act must be satisfied. Section 9-5 of the GST Act states:

9-5 Taxable supplies

You make a taxable supply if:

(a)     you make the supply for *consideration; and

(b)     the supply is made in the course or furtherance of an *enterprise that you *carry on; and

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

(d)     you are *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.

'Consideration' is defined in subsection 9-15(1) of the GST Act as including:

(a)   any payment, or any act or forbearance, in connection with a supply of anything; and

(b)   any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

From the facts given, the Lessor's (finance company's) supply of the lease of the car by way of a lease to the Local Council satisfies the requirements of paragraphs (a), (b), (c) and (d) of section 9-5 of the GST Act for the following reasons.

(a)         The Lessor makes a supply of the car by way of a lease to the Local Council and in return receives lease payments under Company A's novated lease arrangement, which constitutes 'consideration' as defined in subsection 9-15(1) of the GST Act;

(b)         It is considered that the supply of the car by way of a lease by the Lessor would be made in the course of the leasing enterprise carried on by the Lessor pursuant to section 9-20 of the GST Act.

(c)         As per the facts, the Lessor supplies the relevant car by way of a lease to the Local Council through an enterprise that the Lessor carries on in the indirect tax zone. As such, the supply is connected with Australia pursuant to paragraph 9-25(5)(b) of the GST Act; and

(d)         As per the facts, the Lessor is registered for GST.

Further, the facts provide that the supply of the car by way of a lease by a Lessor to the Local Council is neither GST-free nor input taxed under any provision of the GST legislation.

Hence, paragraph 11-5(b) of the GST Act is satisfied.

Paragraph 11-5(c): You provide, or are liable to provide, consideration for the supply

As per the discussion above with respect to paragraph 11-5(b) of the GST Act, it was considered that where the Local Council receives a taxable supply from the Lessor (in the form of a lease of a car), the Local Council provides consideration by way of lease payments under Company A's novated lease arrangement.

Therefore, paragraph 11-5(c) of the GST Act is satisfied.

Paragraph 11-5(d): You are *registered, or *required to be registered

As per the facts, the Local Council is registered for GST.

As such, paragraph 11-5(d) of the GST Act is satisfied.

Conclusion

As each of the paragraphs in section 11-5 of the GST Act are satisfied, the Local Council will make a creditable acquisition in circumstances where the Local Council acquires a car by way of a lease from a Lessor for the purpose of providing the car to an employee of the Local Council for the employee's private use.

Therefore, as the Local Council makes a creditable acquisition in such circumstances, the Local Council would be entitled to an input tax credit for the acquisition pursuant to section 11-20 of the GST Act.

Further issues for you to consider (not part of the Private Ruling)

GST documentation requirements to claim input tax credit

In general, pursuant to subsection 29-10(3) of the GST Act, an input tax credit for a creditable acquisition cannot be claimed unless the recipient holds a 'tax invoice' at the time it lodges its GST return for the tax period to which the input tax credit is attributable.

However, the Commissioner can waive or modify the requirement in subsection 29-10(3) of the GST Act for an entity to hold a tax invoice before an input tax credit can be claimed. The Commissioner has waived the tax invoice requirements in relation to acquisitions of a motor vehicle under a novated lease through the A New Tax System (Goods and Services Tax) Waiver of Tax Invoice Requirement (Acquisition of a Motor Vehicle Under a Full or Split Full Novated Lease Arrangement) Legislative Instrument 2013.

This legislative instrument, which commenced on 1 July 2010, provides that, for the purposes of attributing an input tax credit for a creditable acquisition to a tax period, an employer that makes a creditable acquisition by way of a lease of a motor vehicle through a full or split full novation arrangement is not required (under subsection 29-10(3) of the GST Act) to hold a tax invoice for the creditable acquisition if the requirements provided by that legislative instrument are satisfied.

As required under that legislative instrument, an employer must hold the following at the time the employer gives its GST return for the tax period to the Commissioner:

1. A tripartite agreement (or deed of novation) between the employer, their employee and the finance company for the creditable acquisition by way of a lease of the motor vehicle; and
2. A tax invoice issued to their employee for the acquisition by way of a lease of the motor vehicle by the employee prior to the novation.

The tripartite agreement (or deed of novation) must contain enough information to enable the following to be clearly ascertained:

·        the employer's identity or ABN as the recipient of the supply of the motor vehicle under the lease;

·        a description of the motor vehicle being leased; and

·        that the employer has taken over all or part of their employee's rights and obligations under the original lease of the motor vehicle.

With respect to a tax invoice issued to an employee of the Local Council, this document must meet the requirements of paragraphs 29-70(1)(a) and 29-70(1)(c) of the GST Act (other than subparagraph 29-70(1)(c)(ii) of the GST Act).

Income tax implications for the Local Council's employees of a novated car lease

Income

Where a car is provided to an employee by the Local Council under an effective SSA (as set out in Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements), the value of the benefits provided will not be treated as salary or wages of the employee, and the employee will be assessed on a reduced amount of salary or wages.

Deductions

An employee would not be entitled to a deduction for any lease expense under a split full novation arrangement as the employee's lease obligations, including lease payment obligations, are novated to the employer. An employer would generally be entitled to claim a deduction for these expenses.

As the lease payment obligations are to be novated to the Local Council, an employee of the Local Council would not be entitled to claim a deduction for the car's lease expenses.

In relation to the car's operating costs, an employee of the Local Council will be required to pay under the Deed of Novation the maintenance and running costs of the car (for example, insurance and registration fees). The car will be used for private purposes. Any use for work purposes will be incidental.

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 a car provided to an employee of the Local Council (under Company A's novated lease arrangement) will be used for private purposes by the employee, the expenses incurred for maintaining and operating the car will not be an allowable deduction under section 8-1 of the ITAA 1997.

Even if a deduction is partly allowable under section 8-1 of the ITAA 1997 because, for example, the car was used for income producing purposes during the term of the novated lease, section 51AF of the Income Tax Assessment Act 1936 (ITAA 1936) would operate to deny the Local Council employee a deduction for any car expenses that they incur. Subsection 51AF(1) of the ITAA 1997 provides that where an employer provides a car for the exclusive use of an employee (or a relative of the employee) and the employee is allowed to use the car for private purposes, expenses incurred by the employee (or relative of the employee) in connection with the car are not deductible. Section 28-13 of the ITAA 1997 defines a car expense as a loss or outgoing to do with a car or operating a car and the decline in value of the car.

In this case, an employee of the Local Council will incur certain car expenses under Company A's novated lease arrangement pursuant to the Deed of Novation. These include maintenance and running costs such as registration fees, insurance premiums, repairs, replacement parts and oil and fuel. As the Local Council will be providing the car to the employee for their use during the term of the novated lease and the employee is entitled to use the car for their private use, section 51AF of the ITAA 1997 will deny the employee a deduction for these operating expenses while the Prestige Novated Lease is in place.

Additionally, the operating car expenses cannot be claimed under section 28-12 of the ITAA 1997. This provision allows a deduction for car expenses for a car that a taxpayer owns or leases. As the Local Council is the lessee under the novated lease, an employee will neither own nor lease the car.

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