Private ruling: Fringe benefits tax - car benefits - other
Date of advice: 23 February 2018
Published: June 2018
Ruling period: Fringe benefits tax year ended 31 March 2018 | Fringe benefits tax year ended 31 March 2017 | Income tax year ended 30 June 2017 | Income tax year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Under section 7 of the Fringe Benefits Tax Assessment Act 1986 , is the Rulee subject to fringe benefits tax for a motor vehicle, held by the Rulee, which is provided to an associate of the sole director/shareholder (who is also an employee) solely for private use? | A1: No Issue 2 – Income tax | Q2: Would the monthly accrual of motor vehicle finance charges and any other costs for the vehicle be treated as a loan under Division 7A of the Income Tax Assessment Act 1936 ? | A2: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Mr A is the sole shareholder of A Company (the Rulee). Mr A is also a current employee of the Rulee as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). The Rulee has not entered into an employment contract with Mr A. Mr A’s remuneration is determined each year in reference to the profits of the business in the relevant year. The Rulee purchased a vehicle. The vehicle satisfies the definition of ‘car’ in subsection 136(1) of the FBTAA. The vehicle was initially used for business purposes by the Rulee. While the vehicle was being used for business purposes, the fringe benefit tax provisions applied to the Audi in relation to any private use. Later the Rulee purchased a second vehicle to replace the first vehicle for business use. At this time, the Rulee provided the first vehicle to Mr A’s wife, to be used exclusively for private purposes. It is not company practice for the Rulee to provide vehicles to employees exclusively for their private use. The Rulee obtained finance for the first vehicle in the form of a chattel mortgage from an unrelated third party finance company. The Rulee will pay monthly finance charges and any additional costs incurred by the Rulee in relation to the first vehicle. Mrs A will repay the Rulee for costs incurred. Mrs A pays the vehicle’s maintenance and running costs herself. Mrs A does not perform any duties or services for the Rulee. The Rulee will not claim any income tax deductions for expenses incurred or depreciation in relation to the vehicle. Input tax credits have been claimed in relation to 100% of the purchase of the first vehicle as it was being used for business purposes. The Rulee will make an adjustment in relation to the input tax credits claimed as a result of the change of creditable purposes from business use to 100% private use.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 7 | Subsection 136(1) | Section 137 | Section 148 | Paragraph 148(1)(a) | Income Tax Assessment Act 1936 Division 7A | Subsection 109D(3) | Section 109ZD | Section 318

Reasons for decision: Detailed Reasoning - Question 1: Under section 7 of the Fringe Benefits Tax Assessment Act 1986 , is the Rulee subject to fringe benefits tax for a motor vehicle, held by the Rulee, which is provided to an associate of the sole director/shareholder (who is also an employee) solely for private use? | Summary: No. The Rulee is not subject to FBT under section 7 of the FBTAA for providing the vehicle to the shareholder’s associate as the Commissioner is satisfied that the car was not provided by reason of, or because of, the employee’s employment, but by reason of his position as a shareholder of the Rulee. | Detailed Reasoning - Detailed reasoning: A car fringe benefit arises under section 7 of the FBTAA where, in respect of the employment of an employee, an employer makes a car they ‘hold’ available for the private use of an employee or an associate of an employee. For the purposes of the FBTAA: ● ‘employment’, in relation to a person, means the holding of any office or appointment, the performance of any functions or duties, the engaging in of any work, or the doing of any acts or things that results, will result or has resulted in the person being treated as an employee (subsection 136(1) of the FBTAA), ● a car ‘held’ by an entity generally means a car they own or lease (section 162 of the FBTAA), and ● an employee’s spouse is the employee’s ‘associate’ (subsection 136(1) of the FBTAA and section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). As recorded in the facts, the Rulee provided a vehicle to the spouse of its sole shareholder (the Associate). The shareholder is also an ‘employee’ of the Rulee, and the vehicle satisfies the definition of ‘car’, for FBT purposes. The car was purchased by way of a chattel mortgage, under which the Rulee has full legal ownership. As such, the vehicle is ‘held’ by the Rulee. The car was initially used for business purposes by the Rulee, but was later provided to the Associate to be used solely for private purposes. As such, if the car was provided to the Associate ‘in respect of the employment of the employee’ it would be a car fringe benefit and subject to tax under section 7 of the FBTAA. | Detailed Reasoning - Provision of a benefit in respect of employment: The phrase “in respect of” is defined in subsection 136(1) of the FBTAA, in relation to the employment of an employee, to include by reason of, by virtue of, or for or in relation directly or indirectly to, that employment. In J & G Knowles & Associates v FC of T 2000 ATC 4151 (Knowles), the phrase “in respect of” was held to require a “nexus, some discernible and rational link, between the benefit and employment”. Miscellaneous Taxation Ruling MT 2019 Fringe benefits tax: shareholder employees of family private companies and directors of corporate trustees (MT 2019) deals with the application of FBT to benefits provided by a family private company to a shareholder who is also an employee. Where a benefit is provided to a shareholder/employee in connection with the performance of their duties as an employee, it is considered that the benefit is provided in respect of the person’s employment (MT 2019 paragraph 8). For benefits that are not expressly linked to the carrying out of the employee’s duties, it is necessary to examine all the facts and circumstances of the case to establish whether the benefit was provided in respect of the employment, or in respect of the shareholding (MT 2019 paragraph 9). Paragraph 6 of MT 2019 clarifies that paragraph 148(1)(a) of the FBTAA that a benefit provided to a person who is both a shareholder and an employee (shareholder/employee) by reason of both their employment and their shareholding will be taken to be provided in respect of the person’s employment. However, if it can be established that a benefit is provided to a shareholder/employee solely by reason of that person’s position as a shareholder of the company, and not to any extent by reason of that person’s employment by the company, the benefit will not be subject to FBT (MT 2019 paragraph 6). Where a family company claims an income tax deduction for expenditure incurred in respect of providing the benefit, it is indicative that the benefit was provided by way of remuneration for employment and thus subject to FBT (MT 2019, paragraph 10). The non-claiming of deductions in relation to the benefit provided is strongly indicative of a non-remunerative character in the arrangements. However, that will not be the case if the benefit is of a kind more readily seen as business related, eg. private use of a business vehicle (MT 2019, paragraph 14). Under the circumstances detailed in the facts, the Commissioner is satisfied that the car was not provided to the shareholder/employee’s wife by reason of, or because of, his employment, but by reason of his position as a shareholder of the Rulee. As such, the Rulee is not subject to FBT under section 7 of the FBTAA for providing the vehicle to the Associate. It should be noted that since the car was originally used for business purposes and input tax credits were claimed it will be necessary for the rulee to make an adjustment to the input tax credits as a result of the change of creditable purpose from business to 100% private use. | Detailed Reasoning - Question 1: Would the monthly accrual of motor vehicle finance charges and any other costs for the vehicle be treated as a loan under Division 7A of the ITAA 1936? | Summary: Yes. The accrual of the monthly finance charges and any amounts paid by the Rulee in relation to the car, with the obligation for them to be repaid by the Associate, amounts to a loan for Division 7A purposes under paragraph 109D(3)(c) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Under Division 7A of the ITAA 1936 (Division 7A), a loan made by a private company to a shareholder of the company or to an associate of the shareholder may be taken to be a dividend by virtue of section 109D. For Division 7A purposes, a loan includes: (a) an advance of money; and (b) a provision of credit or any other form of financial accommodation; and (c) a payment of an amount for, on account of, on behalf of or at the request of, an entity, if there is an express or implied obligation to repay the amount; and (d) a transaction (whatever its terms or form) which in substance effects a loan of money (subsection 109D(3)). Taxation ruling TR 2010/3 Income tax: Division 7A loans: trust entitlement (TR 2010/3) at paragraph 5 explains further that a Division 7A loan includes: ● a loan within its ordinary meaning (an 'ordinary loan'), consisting of a payment and an obligation to repay; ● an advance of money ahead of a due date or with an expectation of repayment; ● the provision of credit or any other form of financial accommodation, in the context in which it appears being the supply or grant of some form of pecuniary assistance or favour, under a consensual agreement where a principal sum or its equivalent is ultimately payable; ● a payment of an amount for, on behalf of, on account of or at the request of an entity, where there is an obligation of repayment; and ● transactions that in substance effect such a Division 7A loan of money (as described in any of the above dot-points). The term ‘associate’ is defined to include the spouse of a shareholder (section 109ZD and section 318 of the ITAA 1936. As detailed in the facts, the Rulee obtained finance for the car from an unrelated third party finance company, and will pay the monthly finance charges and may pay other costs associated with the car. As the Associate is obligated to repay any costs paid by the Rulee in relation to the car, the amounts paid will not be claimed as income tax deductions by the Rulee, but will be debited to an outstanding loan account in the name of the Associate. The accrual of the payments, with the obligation for them to be repaid by the Associate, amounts to a loan for Division 7A purposes under paragraph 109D(3)(c) of the ITAA 1936.