Edited version of your written advice

Authorisation Number: 1051225251111

Date of Advice: 23 May 2017

Ruling

Subject: Fringe benefits tax - Car benefits - Recipient's payments

Question 1

Will the payment of car running costs by the associate/lessor (as described in the facts and circumstances) constitute recipient's payments for the purposes of section 9 of the FBTAA and thus reduce the taxable value of the relevant car fringe benefit?

Answer

Yes

Question 2

Will the Commissioner apply section 67 of the FBTAA to the arrangements described?

Answer

No

This ruling applies for the following periods:

1 April 2016 to 31 March 2021

The scheme commences on:

1 April 2016

Relevant facts and circumstances

The Entity proposes to provide motor vehicles to employees for their private use by entering into associate operating leases with the associates of those employees. The associate will be the lessor and the employer (the Entity) the lessee.

The Entity will lease a vehicle from an associate of its employee (the associate) having the meaning it has for the purpose of the FBTAA.

The vehicle will constitute a “car” as defined for the purposes of the FBTAA.

The lease will be a “fully maintained” operating lease - that is, the associate/lessor will bear the risk of fluctuation in the running costs associated with the vehicle and there will be no residual value.

The lease payment will be set at a flat amount that does not fluctuate.

The Entity will provide the use of the car to the employee and the associate/lessor.

There is no provision for buyout of the vehicle at the end of the lease term or upon cancellation of the lease or during the term of the lease.

There is no novation of obligations under the lease.

Each of the lessor and lessee may terminate this lease at any time by written notice to the other party, and the notice will operate with immediate effect or in effect from any future date specified on that notice.

The lessee shall pay a total instalment lease rental to the lessor as nominated on the schedule with the choice of monthly, fortnightly or weekly in advance, determined by the lessee's payroll cycle.

The lessor and the lessee agree that the lessor is a recipient of the car fringe benefit.

The lessor agrees to pay all the car operating costs and to provide relevant details of these to the lessee such that they can be applied as recipient's payments, to reduce or offset the car's taxable value for FBT purposes.

The lessor bears the risk of overspending operating costs with no guarantee of compensation and also takes the risk in relation to the future market value of the vehicle upon termination of the lease.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986, subsection 7(1)

Fringe Benefits Tax Assessment Act 1986, section 9

Fringe Benefits Tax Assessment Act 1986, subsection 9(2)

Fringe Benefits Tax Assessment Act 1986, paragraph 9(2)(e)

Fringe Benefits Tax Assessment Act 1986, subparagraph 9(2)(e)(ia)

Fringe Benefits Tax Assessment Act 1986, subparagraph 9(2)(e)(ii)

Fringe Benefits Tax Assessment Act 1986, subsection 10(3)

Fringe Benefits Tax Assessment Act 1986, section 53

Fringe Benefits Tax Assessment Act 1986, section 67

Fringe Benefits Tax Assessment Act 1986, subsection 136(1)

Question 1

Will the payment of car running costs by the associate/lessor (as described in the facts and circumstances) constitute recipient's payments for the purposes of section 9 of the FBTAA and thus reduce the taxable value of the relevant car fringe benefit?

Answer

Summary

Car expenses paid by the associate/lessor constitute recipient's payments and will reduce the taxable value of the relevant car fringe benefit.

Detailed reasoning

The Entity intends to provide a leased vehicle to the employee and the employee's associate, who is the lessor, making the lessor also a recipient of car fringe benefits.

In determining whether the payment of car running costs incurred by the associate/lessor constitute recipient's payments for the purposes of section 9 of the FBTAA it is necessary to start by referring to the definition of 'recipient's payment' in paragraph 9(2)(e).

Recipient's payment

Subparagraph 9(2)(e)(ia) and (ii) of the FBTAA explains that where a car is provided for use by both the employee and an associate (i.e. in an associate lease arrangement), expenses paid by the recipient are included in the amount of the recipient's payment.

9(2)(e) [Taxable value of car fringe benefits]

For the purposes of this section:

(i) in a case where expenses were incurred by the provider or employer during the holding period by recipients of the car fringe benefits by way of consideration for the provision of the car fringe benefits - the amount of those expenses paid by the recipients less any amount paid or payable to the recipients by way of reimbursement of those expenses;

(ia) in a case where car expenses in respect of fuel or oil for the car were incurred during the holding period by recipients of the car fringe benefits and:

(A) the persons incurring those expenses give to the employer, before the declaration date, declarations, in a form approved by the Commissioner, in respect of those expenses; or

(B) documentary evidence of those expenses is obtained by the persons incurring the expenses and given to the employer before the declaration date;

the amount of those expenses paid by the recipients less any amount paid or payable to the recipients by way of reimbursement of those expenses; and

(ii) in a case where:

(A) car expenses in respect of the car (other than car expenses in respect of fuel or oil for the car) were incurred during the holding period by recipients of the car fringe benefits; and

(B) documentary evidence of those expenses is obtained by the persons incurring the expenses and given to the employer before the declaration date;

the amount of those expenses paid by the recipients less any amount paid or payable to the recipients by way of reimbursement of those expenses.

In considering these paragraphs, subparagraph 9(2)(e)(i) of the FBTAA will not apply as the expenses paid by the associate are for the purpose of facilitating a full operating lease to the employer, rather than for the provision of the car fringe benefit.

Subparagraphs 9(2)(e)(ia) and (ii) of the FBTAA will apply in relation to the car expenses incurred during the holding period if the necessary documentation is provided.

However it should be noted that not every expense to be paid by the associate will be a car expense. A 'car expense' is defined in subsection 136(1) of the FBTAA to mean an expense incurred in respect of:

a) the registration of, or insurance in respect of, the car;

b) repairs to or maintenance of the car; or

c) fuel for the car

These definitions enable car expenses incurred by recipients of the car fringe benefit to be treated as a recipient's payment if the necessary documentation is provided.

In the situation being considered, you stated that the Entity will provide the use of the car to the employee and the employee's associate/lessor, making the associate/lessor also a recipient of the car benefits.

You also stated that the associate/lessor will bear all the running costs associated with the car and that the associate/lessor will provide the necessary documentation to the Entity by the declaration date.

Recipients of car fringe benefit

'Recipient' is defined in subsection 136(1) of the FBTAA to mean 'the person to whom the benefit is provided'. In this context, the car benefit in an associate lease arrangement will be provided to both the employee and the employee's associate.

Subsection 7(1) of the FBTAA provides that a car benefit will arise where at any time on a day a car held by the employer is either:

● applied to a private use by the employee or associate, or

● taken to be available for the private use of the employee or associate under either subsection 7(2) or 7(3).

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.

Under the arrangement proposed in the scheme, you stated that the car will be applied to a private use by either, or both, the employee and the associate/lessor, making the associate/lessor a recipient of the car benefit.

This is supported by the ATO at the National Taxation Liaison Group FBT (NTLG) FBT Sub-committee Meeting of 17 August 2006:

“It is accepted that the 'associate' is an associate of the employee as defined for the purposes of the FBTAA. In determining whether the associate is a recipient, 'recipient' is defined in subsection 136(1) to mean 'the person to whom the benefit is provided'. In the context of the car benefits provided in an associate lease arrangement, car benefits may be provided to both the employee and the associate.

Therefore, the 'associate' will be a 'recipient' and the taxable value of the car fringe benefits that arise will be able to be reduced by the car expenses incurred during the holding period by the associate which are included by reason of subparagraph 9(1)(e)(ia) or (ii).”

In this situation, as an associate of the employee and a recipient of car fringe benefits, the associate/lessor is receiving the use of the car leased by the employer of the associated employee on a fully maintained basis.

Associate lease

Taxation Ruling IT 2509 (IT 2509) issued in November 1988 accepts that a novation of a lease and 'associate leases' can operate effectively.

The taxation consequences of an associate lease were considered in IT 2509 in the context of an associate lease where the employer provides the car to the employee and reimburses all the expenses the employee incurs in relation to the car.

Paragraph 10 of the Taxation Ruling IT 2509 sets out the following implications:

For an associate of the employee:

. where an associate of the employee is a party to the finance lease and the sublease, the rentals paid under the sublease will be assessable income of the associate who will be entitled to claim deductions for rentals paid under the finance lease. However, where the employer has become legally liable to pay the rentals under the finance lease no deductions for such payments would be available for the associate.

. in certain circumstances the profit - calculated in accordance with section 26AAB of the Income Tax Assessment Act - made on the disposal of a car which had formerly been the subject of a lease, would be included in the assessable income of the associate.

Unfortunately, IT 2509 did not consider the tax consequences if the employee's associate incurs the car expenses.

Conclusion

In the proposed arrangement, car expenses will be incurred and paid by the associate/lessor on the basis of providing the car to the Entity as part of a “fully maintained” operating lease for a car. They are related to the potential provision of car fringe benefits to the lessor as an associate of the employee. The car expenses paid by the associate/lessor are considered recipient's payments for the purposes of section 9 of the FBTAA and will reduce the taxable value of the car fringe benefit provided to the employee's associate.

Question 2

Will the Commissioner apply section 67 of the FBTAA to the arrangements described?

Answer

Summary

Section 67 of the FBTAA will not apply as the Entity will not obtain a tax benefit from this arrangement.

Detailed reasoning

Section 67 of the FBTAA contains an anti-avoidance provision, which applies where an employer may otherwise obtain a tax benefit in connection with an arrangement he has entered into or carried out for the sole or dominant purpose of enabling the employer to obtain an FBT benefit.

The section requires:

- the identification of an arrangement

- a tax benefit obtained by the employer that was the sole or dominant purpose for a person entering into the arrangement and

- that it is activated by the making of a determination by the Commissioner.

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules provides guidance on the application of section 67 of the FBTAA. It has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains how section 67 of the FBTAA operates. Most notably, paragraphs 145-148 provide as follows:

145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit.

147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i) a benefit is provided to a person;

(ii) an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

Subsection 67(2) of the FBTAA:

67(2) [Reference to obtaining a tax benefit]

A reference in this section to the obtaining by an employer of a tax benefit in respect of a year of tax in connection with an arrangement under which a benefit is provided to a person is a reference to an amount not being included in the aggregate fringe benefits amount of the employer of the year of tax in respect of that benefit where the amount would have been included, or could reasonably be expected to have been included, in that aggregate fringe benefits amount if the arrangement had not been entered into or carried out.

It is clear that the Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 under the heading “Appendix, Question 18” where, on the application of section 67, the Commissioner states:

…As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement...

Further, paragraph 151 of Practice Statement 2005/24 provides:

151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

You state that if the associate lease arrangement is not entered into, the Entity will not provide any car fringe benefit and there will be no amount to include in the aggregate fringe benefit amount. Therefore the Entity would not be paying less FBT by entering into this agreement.

On the assumption that this is the case, the Commissioner will not make a determination that section 67 of the FBTAA applies to include an amount in the aggregate fringe benefits amount of the Entity.