Edited version of private advice

Authorisation Number: 5010072392853

Date of advice: 28 October 2021

Ruling

Subject: FBT and prepayments under a novated lease agreement

Issue 1

Fringe benefits and the provision of a car under a novated lease agreement

Question

Does providing a car (to an employee) under the novated lease agreement, constitute a car benefit for the purposes of subsection 7(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes, providing a car (to an employee) under a novated lease agreement, constitutes a car benefit for the purposes of subsection 7(1) of the FBTAA.

Issue 2

Prepayment of the novated lease payments, in the same FBT year

Question

Do 6 months of prepayments on the novated lease, in the same FBT year, constitute a car benefit for the purposes of subsection 7(1) of the FBTAA?

Answer

No, 6 months of prepayments on the novated lease, in the same FBT year, do not constitute a car benefit for the purposes of subsection 7(1) of the FBTAA. It is the car that is held by the employer under the novated lease agreement, and provided to the employee, that gives rise to a car benefit.

Issue 3

Prepayment of novated lease payments in two separate FBT years

Question

Do 6 months of prepayments on the novated lease, in two separate FBT years, constitute a car benefit for the purposes of subsection 7(1) of the FBTAA?

Answer

No, 6 months of prepayments on the novated lease, in two separate FBT years, do not constitute a car benefit for the purposes of subsection 7(1) of the FBTAA. It is the car that is held by the employer under the novated lease agreement, and provided to the employee, that gives rise to a car benefit.

Issue 4

Prepaid lease payments, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer)

Question

Do the prepaid lease payments on the car, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer), constitute a car benefit for the purposes of subsection 7(1) of the FBTAA?

Answer

No, the prepaid lease payments on the car, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer), do not constitute a car benefit for the purposes of subsection 7(1) of the FBTAA. It is the car that is held by the employer under the novated lease agreement, and provided to the employee, that gives rise to a car benefit.

Issue 5

Prepaid operating expenses of the car, attributable to the period the car is provided under a novated lease agreement and is held by the employer (i.e., prior to the termination of the employee's employment)

Question

Doprepayments of the operating expenses of the vehicle, attributable to the period the car is provided under a novated lease agreement and is held by the employer, constitute an expense payment benefit under section 20 of the FBTAA, that is an exempt car expense payment benefit for the purposes of section 53 of the FBTAA?

Answer

Yes, prepayments of the operating expenses of the vehicle, attributable to the period the car is provided under a novated lease agreement and is held by the employer, are an expense payment benefit under section 20 of the FBTAA and constitute an exempt car expense payment benefit for the purposes of section 53 of the FBTAA.

Issue 6

Prepaid payments intended for operating expenses, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer)

Question

Are the prepaid payments intended for operating expenses, that are attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer), expense payment benefits for the purposes of section 20 of the FBTAA?

Answer

No, the prepaid payments intended for operating expenses, that are attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer),are not expense payment benefits for the purposes of section 20 of the FBTAA because the payments were not made in respect of any operating costs that were incurred.

Issue 7

Prepaid lease payments on the car, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer)

Question

Do the prepaid lease payments on the car, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer), constitute an expense payment benefit under section 20 of the FBTAA?

Answer

Yes, the prepaid lease payments on the car, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer), constitute an expense payment benefit under section 20 of the FBTAA. However, the payments are not an exempt benefit for the purposes of section 53 of the FBTAA.

Issue 8

Prepaid lease payments on the car, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer)

Question

Are the prepaid lease payments on the car, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer), an employment termination payment (ETP) and therefore, excluded from being a fringe benefit as defined in subsection 136(1) of the FBTAA?

Answer

No, the prepaid lease payments on the car, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer), are not an ETP and therefore, are not excluded from being a fringe benefit as defined in subsection 136(1) of the FBTAA. They are an expense payment benefit under section 20 of the FBTAA, that is not an exempt benefit for the purposes of section 53 of the FBTAA.

This ruling applies for the following periods:

FBT year ending 31 March 2019

FBT year ending 31 March 2020

FBT year ending 31 March 2021

FBT year ending 31 March 2022

The scheme commences on:

1 April 2018

Relevant facts and circumstances

The employer will allow the employee to enter into a salary sacrifice arrangement involving a novated lease on a motor vehicle, that is a car for FBT purposes.

The lease may either be fully operational; or a finance lease. The payments on an operational lease will include the vehicle running costs. The novated lease period will be for 24 months. The car will be below the luxury car limit. The residual will be set up in accordance with ATO minimum residual guidelines of approximately 56.25%.

It was anticipated that the lease will commence on xxxx. It was proposed that the employer would begin making payments in advance, on xxxx for the first month's rental. The next payment would be made on xxxx.

If the employee terminates employment during the period of prepayment, they will not be required to pay back the prepaid lease payments upon termination of employment. However, they may choose to do so.

If the employee purchases a car from the lease company, prior to expiry date but during the period that the prepayments relate to, the employee would not be required to repay any unused amounts. The leasing company would not be required to refund any lease payments. The employee would purchase the car for the payout figure on the lease, with the prepayment amount reducing the amount required to be paid to the leasing company.

The employer generally uses the statutory value method to determine the taxable value of car fringe benefits it provides.

Relevant legislative 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 section 20

Fringe Benefits Tax Assessment Act 1986 section 53

Fringe Benefits Tax Assessment Act 1986 sub section 136(1)

Fringe Benefits Tax Assessment Act 1986 section 162

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

Reasons for decision

Issue 1

Fringe benefits and the provision of a car under a novated lease agreement

Question

Does providing a car (to an employee) under the novated lease agreement, constitute a car benefit for the purposes of subsection 7(1) of the FBTAA?

Summary

A car benefit arises under subsection 7(1) where the employer is lessee of a car that is provided (under a novated lease) for the private use of the employee, or associate of the employee. The car is 'held' by the employer, during to period that the car is provided to the employee under the novated lease agreement.

Reasoning

The car is to be provided to the employee under a novated lease agreement. As explained in Taxation Ruling TR 1999/15 Income tax and fringe benefits tax: taxation consequences of certain motor vehicle lease novation arrangements at paragraph [4]:

A novation is 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

Subsection 7(1) of the FBTAA provides that where, in respect of the employment of an employee, a car held by a person (such as an employer) is applied to a private use by the employee or an associate of the employee, or is taken to be available for the private use of the employee or an associate of the employee, then the application or availability of the car shall be taken to constitute a benefit provided by the person (employer) to the employee or associate in respect of the employment of the employee.

Paragraph 162(1)(b) of the FBTAA provides that a car is held by a person when the car is leased to that person. The employer is a 'person' as defined in subsection 136(1) of the FBTAA.

As the employer will assume the role of lessee under the novated lease and be the person to whom the car is leased by the lessor, the employer will hold the car for the purposes of subsection 7(1) of the FBTAA. The car will then be provided to the employee and taken to be available for their private use over the term of the lease.

The provision of the car to the employee under the novated lease will therefore be a car benefit under subsection 7(1) of the FBTAA. This is confirmed at paragraph [8] in TR 1999/15.

The provision of the vehicle to the employee under the novated lease will also constitute a car fringe benefit, defined in subsection 136(1) of the FBTAA to mean a fringe benefit that is a car benefit. Broadly, a fringe benefit is defined in subsection 136(1) of the FBTAA to include a benefit provided to an employee by an employer in respect of the employee's employment, and which is not otherwise excluded.

Issue 2

Prepayment of the novated lease payments, in the same FBT year

Question: Do 6 months of prepayments on the novated lease, in the same FBT year, constitute a car benefit for the purposes of subsection 7(1) of the FBTAA?

Summary

The lease payments cannot give rise to a car benefit. It is the car that is held by the employer under the novated lease agreement, and provided to the employee, that gives rise to a car benefit.

Reasoning

As explained above, subsection 7(1) of the FBTAA provides that where, in respect of the employment of an employee, a car held by a person (such as an employer) is applied to a private use by the employee or an associate of the employee, or is taken to be available for the private use of the employee or an associate of the employee, then the application or availability of the car shall be taken to constitute a benefit provided by the person (employer) to the employee or associate in respect of the employment of the employee. Accordingly, the relevant fringe benefit for the purposes of subsection 7(1), is the car benefit that is provided by the employer to the employee, in respect of the car held under the novated lease agreement.

The management of the novated lease by the employer (including lease payments and prepayments under that lease) is relevant to meeting the obligations in regard to the expenses incurred under the lease agreement. It is this benefit that gives rise to a car fringe benefit as defined in subsection 136(1). The payment of specific expenses relating to the provision of the car, such as the lease expenses, does not meet the necessary requirements of subsection 7(1) and therefore, cannot give rise to a car benefit.

Lease payments and calculating taxable value

The employer has advised that they generally use the statutory value method to determine the taxable value of the fringe benefits they provide. It is noted that where the employer makes a prepayment of novated lease payments six months in advance in the same FBT year, this is not included in determining the taxable value of car fringe benefits provided by the employer in the FBT year, under the statutory formula method in section 9 of the FBTAA.

The taxable value of a car fringe benefit under the statutory formula method is dependent of the base value of the car, the period during the year that the vehicle was applied or available for the private use of the employee or associate and the amount of any payment by the recipient. This is explained in Taxation Ruling TR 2011/3 Fringe benefits tax: meaning of 'cost price' of a car, for the purpose of calculating the taxable value of car fringe benefits:

53. The Statutory Formula method applies a statutory fraction to the base value of a car.

54. The base value of a car owned by a person is determined under subparagraph 9(2)(a)(i); this refers to the 'cost price' of the car.

55. The term 'cost price' is defined in subsection 136(1) in relation to a car owned by a person. Sub-subparagraph (a)(ii)(A) of that definition states 'cost price' means:

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 delivery 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...

56. The base value of a car that is leased, or otherwise held, is determined under subparagraph 9(2)(a)(ii); this refers to the 'leased car value'.

57. The term 'leased car value' is defined in subsection 136(1) in relation to a car held but not owned by a person to mean:

(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.

The ongoing lease payments (and prepayments) are not included in the 'base value' of the car under the statutory formula method, as they are not included in the leased car value of the car at the earliest holding time (subparagraph 9(2)(a)(ii) of the FBTAA).

However, where the employer makes the prepayment, it will have consequences in determining the taxable value of car fringe benefits provided by the employer in the FBT year, where the employer elects to use the operating cost method in section 10 of the FBTAA.

In a case where the car is leased to the provider, as is the case here, the operating cost of the car in the FBT year includes "so much of the charges paid or payable under the lease agreement as are attributable to the holding period" (sub-subparagraph 10(3)(a)(v)(A) [emphasis added]). Where the prepayment is made six months in advance in the same FBT year, this will be included in the operating cost of the car as leasing costs for the year or part of the year the employer uses the car to provide fringe benefits.

Issue 3

Prepayment of novated lease payments in two separate FBT years

Question

Do 6 months of prepayments on the novated lease, in two separate FBT years, constitute a car benefit for the purposes of subsection 7(1) of the FBTAA?

Summary

The lease payments cannot give rise to a car benefit. The car that is held by the employer under the novated lease agreement, and provided to the employee, is the relevant car benefit that gives rise to a car fringe benefit across both FBT years.

Reasoning

Subsection 7(1) of the FBTAA provides that where, in respect of the employment of an employee, a car held by a person (such as an employer) is applied to a private use by the employee or an associate of the employee, or is taken to be available for the private use of the employee or an associate of the employee, then the application or availability of the car shall be taken to constitute a benefit provided by the person (employer) to the employee or associate in respect of the employment of the employee.

As explained above, the relevant fringe benefit is the car fringe benefit that is provided by the employer to the employee, in respect of the car held by the employer under the novated lease agreement. It is this benefit that gives rise to a car fringe benefit as defined in subsection 136(1). The management of the novated lease by the employer (including lease payments and prepayments under that lease) is relevant to meeting the obligations in regard to the expenses incurred under the lease agreement. The payment of specific expenses relating to the provision of the car, such as the lease expenses, does not meet the necessary requirements of subsection 7(1) and therefore, cannot give rise to a car fringe benefit.

If a car is provided to an employee under a novated lease arrangement across two separate years; a car fringe benefit would be provided across both years, in respect of the car. For each year, the employer would be required to self-assess the amount of FBT payable on the fringe benefits provided, and to lodge an annual FBT return.

Issue 4

Prepaid lease payments, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer)

Question

Do the prepaid lease payments on the car, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer), constitute a car benefit for the purposes of subsection 7(1) of the FBTAA?

Summary

The lease payments on a car held under a novated lease cannot give rise to a car benefit. The provision of the car to the employee when the car was provided under the novated lease (and held by the employer) was a car benefit that gave rise to a car fringe benefit. Once the novated lease agreement ended, the car was no longer held by the employer neither a car benefit or a car fringe benefit were provided to the employee.

Reasoning

Subsection 7(1) of the FBTAA provides that where, in respect of the employment of an employee, a car held by a person (such as an employer) is applied to a private use by the employee or an associate of the employee, or is taken to be available for the private use of the employee or an associate of the employee, then the application or availability of the car shall be taken to constitute a benefit provided by the person (employer) to the employee or associate in respect of the employment of the employee.

That is, the relevant fringe benefit is the car benefit, that is provided by the employer to the employee, in respect of the car held by the employer under the novated lease agreement.. It is this benefit that gives rise to a car fringe benefit as defined in subsection 136(1). The management of the novated lease by the employer (including lease payments and prepayments under that lease) is relevant to meeting the obligations in regard to the expenses incurred under the lease agreement. The payment of specific expenses relating to the provision of the car, such as the lease expenses, does not meet the necessary requirements of subsection 7(1) and therefore, cannot give rise to a car fringe benefit.

That is, when the car is provided under the novated lease agreement, it is held by the employer, and a car fringe benefit is provided to the employee. However, if the employment is terminated, the novation is also terminated, and the lease obligation reverts to the employee. As a consequence, the car is no longer held by the employer, and neither a car benefit or a car fringe benefit is provided to the employee.

If for example, a lease is paid up until 31 December 2020 but the employee terminates their employment contract (and therefore the novation) on 30 September 2020, the car fringe benefit stops being provided from that date. The prepaid lease payments relating to the period from 1 October to 31 December are not a car fringe benefit as the payments do not meet the requirements of subsection 7(1) of the FBTAA and cannot give rise to a car benefit; or a car fringe benefit as defined in subsection 136(1).

Issue 5

Prepaid operating expenses of the car, attributable to the period the car is provided under a novated lease agreement and is held by the employer (i.e., prior to the termination of the employee's employment)

Question

Doprepayments of the operating expenses of the vehicle, attributable to the period the car is provided under a novated lease agreement and is held by the employer, constitute an expense payment benefit under section 20 of the FBTAA, that is an exempt car expense payment benefit for the purposes of section 53 of the FBTAA?

Summary

Under section 53 of the FBTAA, car expenses that are attributable to a period when a car fringe benefit is provided, are exempt where they are provided as expense payment benefits. The prepayments of the operating expenses of the vehicle, attributable to the period the car is provided to the employee, under the novated lease agreement, are section 20 expense payment benefits that constitute exempt car expense payment benefits.

Reasoning

An expense payment benefit is defined in subsection 136(1) of the FBTAA as a benefit referred to in section 20 of that Act. Section 20 provides that an expense payment benefit is a payment made by a person (the provider) in discharge of the whole or part of an obligation of another person (the recipient) to pay a third person in respect of an amount of expenditure incurred by the recipient, or the reimbursement by the provider of the recipient in whole or part in respect of an amount of expenditure incurred by the recipient.

Where the employee (as the recipient for the purposes of section 20) incurs expenditure in relation to the vehicle and the employer (as the provider for the purposes of section 20), under the terms of the novated lease, either reimburses the employee for such expenditure or pays a third party directly for these expenses, such reimbursements and payments will be expense payment benefits.

A car expense payment benefit is defined in subsection 53(3) of the FBTAA as 'an expense payment benefit where the recipient's expenditure is a car expense. A car expense is defined in subsection 136(1) of the FBTAA, in relation to a car, as an expense incurred in respect of the registration, insurance, repairs, maintenance or fuel for the car. Paragraph 53(1)(a) of the FBTAA provides that a car expense payment benefit in respect of a car that is a benefit, which is attributable to a period when the car was provided as a car fringe benefit is an exempt benefit.

The provision of the vehicle to the employee under the novated lease constitutes a car benefit that gives rise to a car fringe benefit. Under subsection 53(1), where a car fringe benefit is provided, a car expense payment benefit that is attributable to the period when the car fringe benefit is provided is an exempt benefit. Accordingly, for the period that the car is provided under the novated lease, all car expenses (i.e., operating expenses) are exempt benefits under section 53.

Issue 6

Prepaid payments intended for operating expenses, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer)

Question

Are the prepaid payments intended for operating expenses, that are attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer), expense payment benefits for the purposes of section 20 of the FBTAA?

Summary

The prepaid payments intended for operating costs, that were unused on termination of the novated lease, are not payments made in respect of any operating costs incurred when the car fringe benefit was provided therefore, they are not expense payment benefits for the purposes of section 20.

Reasoning

An expense payment fringe benefit is defined in subsection 136(1) of the FBTAA as a fringe benefit that is an expense payment benefit. The subsection defines an expense payment benefit to mean a benefit referred to in section 20 of the FBTAA. Section 20 provides that an expense payment benefit is a payment made by a person (the provider) in discharge of the whole or part of an obligation of another person (the recipient) to pay a third person in respect of an amount of expenditure incurred by the recipient, or the reimbursement by the provider of the recipient in whole or part in respect of an amount of expenditure incurred by the recipient.

Where the employee (as the recipient for the purposes of section 20) incurs expenditure in relation to the vehicle and the employer (as the provider for the purposes of section 20), under the terms of the novated lease, either reimburses the employee for such expenditure or pays a third party directly for these expenses, such reimbursements and payments will be expense payment benefits.

As explained above, when the car is provided under the novated lease agreement, it is held by the employer, and a car fringe benefit is provided to the employee. However, if the employment is terminated, the novation is also terminated, and the obligations revert to the employee. As a consequence, of the car no longer being held by the employer, a car fringe benefit is no longer provided to the employee. The employer cannot make any payments or reimbursements that are expense payment benefits (or car expense payment benefits), if the expenses relate to obligations incurred when they are no longer providing a car fringe benefit to the employee.

If for example, prepaid payments intended for operating expenses are paid up until 31 December 2020, but the employee terminates their employment contract (and therefore the novation) on 30 September 2020, there will be a surplus amount that was paid for the period 01 October 2020 to 31 December 2020. Any operating expenses incurred from 01 October 2020 to 31 December 2020 are incurred the after the car fringe benefit stops being provided to the employee, and the employer ceases to be a provider. It is considered that there was no obligation to pay these expenses prior to 30 September 2020. The surplus amount (i.e., the amount attributable to the period when the car was no longer provided under the novated lease agreement), therefore, cannot be a payment or reimbursement that is an expense payment benefit.

Issue 7

Prepaid lease payments on the car, attributable to the period when the car was no longer providedunder the novated lease agreement (i.e., when the car is no longer held by the employer)

Question

Do the prepaid lease payments on the car, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer), constitute an expense payment benefit under section 20 of the FBTAA?

Summary

The obligation to pay the prepaid lease payments was incurred prior to the novation being terminated therefore, the prepaid lease payments on the car, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer), still constitute an expense payment benefit under section 20. However, the payments are not an exempt benefit for the purposes of section 53 of the FBTAA because they do not meet the definition of a car expense.

Reasoning

An expense payment benefit is defined in subsection 136(1) of the FBTAA as a benefit referred to in section 20 of that Act. Section 20 provides that an expense payment benefit is a payment made by a person (the provider) in discharge of the whole or part of an obligation of another person (the recipient) to pay a third person in respect of an amount of expenditure incurred by the recipient, or the reimbursement by the provider of the recipient in whole or part in respect of an amount of expenditure incurred by the recipient.

Where the employee (as the recipient for the purposes of section 20) incurs expenditure in relation to the vehicle and the employer (as the provider for the purposes of section 20), under the terms of the novated lease, either reimburses the employee for such expenditure or pays a third party directly for these expenses, such reimbursements and payments will be expense payment benefits. On entering into a novated lease, the employer takes on the obligations to make lease payments. It is accepted that lease payments would be required to be made in advance and therefore, the obligation to pay the prepaid lease payments would have been incurred prior to the novation being terminated. Consequently, it is accepted that the prepaid lease payments on the car, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer), would still constitute an expense payment benefit under section 20.

For example, a car is held by the employer, and provided to the employee under a novated lease. Prepaid lease payments are required to be paid by the employer for a period up until 31 December 2020. However, the employee terminates their employment contract (and therefore the novation) on 30 September 2020. The employee is not required to reimburse the employer for the amount attributable to the period when the car was no longer provided under the novated lease agreement, from 01 October 2020 to 31 December 2020. The obligation to pay the lease expenses for the car, was incurred prior to 30 September, when the car was provided under the lease agreement therefore, the total amount is considered to be an expense payment benefit.

Are the expense payment benefits exempt?

A car expense payment benefit is defined in subsection 53(3) of the FBTAA as an expense payment benefit where the recipient's expenditure is a car expense. A car expense is defined in subsection 136(1) of the FBTAA, in relation to a car, as an expense incurred in respect of the registration, insurance, repairs, maintenance or fuel for the car. Paragraph 53(1)(a) of the FBTAA provides that a car expense payment benefit in respect of a car that is a benefit, which is attributable to a period when the car was provided as a car fringe benefit is an exempt benefit.

A car expense payment benefit is defined in subsection 53(3) of the FBTAA as 'an expense payment benefit where the recipient's expenditure is a car expense. A car expense is defined in subsection 136(1) of the FBTAA, in relation to a car, as an expense incurred in respect of the registration, insurance, repairs, maintenance or fuel for the car. Expenses relating to lease payments do not fit within this definition. This is confirmed by Taxation Ruling IT 2509 Income tax: income tax and fringe benefits tax consequences of an employee leasing a car to an employer which is subsequently provided back to the employee at paragraph [12]:

To the extent that the reimbursement of the car running expenses by the employer qualify as "car expense payment benefits" they are exempt from fringe benefits tax under section 53 of the Fringe Benefits Tax Assessment Act. A "car expense payment benefit" is defined in subsection 53(3) of the Fringe Benefits Tax Assessment Act as meaning an expense payment benefit where the recipient's expenditure is a "car expense". "Car expense" is defined in subsection 136(1) of the same Act as meaning an expense incurred in respect of registration, insurance, repairs, maintenance, or fuel for the car. Accordingly, only the reimbursement of those expenses would be exempt fringe benefits. No exemption would be available for reimbursement of other expenses such as rental payments.

Regardless of the period to which they are attributable, the amounts that are prepaid lease payments are not an exempt benefit for the purposes of section 53 of the FBTAA because they do not meet the definition of a car expense defined in subsection 136(1).

Issue 8

Prepaid lease payments on the car, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer)

Question

Are the prepaid lease payments on the car, attributable to the period when the car was no longer provided under the novated lease agreement (i.e., when the car is no longer held by the employer), an ETP and therefore, excluded from being a fringe benefit as defined in subsection 136(1) of the FBTAA?

Summary

The obligation to pay the prepaid lease payments arose when the car was provided under the novated lease agreement. These payments were made prior to the termination of employment, and not as a consequence of the termination of employment. Accordingly, as the payments are not an ETP, they are not excluded from being treated as a fringe benefit.

Reasoning

For example, a car is held by the employer, and provided to the employee under a novated lease. Prepaid lease payments are required to be paid by the employer for a period up until 31 December 2020. However, the employee terminates their employment contract (and therefore the novation) on 30 September 2020. The employee is not required to reimburse the employer for the amount attributable to the period when the car was no longer provided under the novated lease agreement, from 01 October 2020 to 31 December 2020.

The question arises as to whether the prepaid lease amount, attributable to the period when the car was no longer provided under the novated lease agreement is an ETP. Under the definition of a fringe benefit in subsection 136(1) of the FBTAA, an ETP is specifically excluded under paragraph (k) and would therefore, be dealt with under income tax legislation and not under the FBTAA.

A payment will be an ETP if it satisfies all of the requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135. To be an ETP in the current circumstances, the amount must be received in consequence of the termination of employment (sub-paragraph 82-130(1)(a)(i) of the ITAA97).

The meaning of the phrase term 'in consequence' is discussed in Taxation Ruling TR 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment:

[5]... a payment is received by a taxpayer in consequence of the termination of the taxpayer's employment if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been received by the taxpayer.

[6] The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

As has been discussed above in regard to the example, the obligation to pay the lease expenses was incurred when the car was held by the employer and provided to the employee under the novated lease agreement. That is, the prepaid lease payments were made in order to satisfy the requirements of the novated lease. The novated lease ended on the 30 September 2020; the lease payments were made prior to this date.

The prepaid amounts were all paid prior to the employment being terminated; it is considered that these payments were not made in consequence of the termination of employment. Accordingly, the amounts are not an ETP and therefore, are not excluded from being a fringe benefit as defined in subsection 136(1) of the FBTAA.

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