Private ruling: Fringe benefits tax; car fringe benefits, operating cost method
Published: August 2012
Ruling period: 1 April 2011 to 31 March 2012 | 1 April 2012 to 31 March 2013 | 1 April 2013 to 31 March 2014 | 1 April 2014 to 31 March 2015 | 1 April 2015 to 31 March 2016

Ruling: Q1: In accordance with sub-subparagraph 10(3)(a)(v)(A) of the Fringe Benefits Tax Assessment Act 1986 are amounts that are paid or refunded in a particular fringe benefits tax year as a result of an end of lease term reconciliation attributable to the holding period that they are paid or refunded? | A1: Yes | Q2: In accordance with sub-subparagraph 10(3)(a)(v)(A) of the Fringe Benefits Tax Assessment Act 1986 are amounts that are paid or refunded in a particular fringe benefits tax year as a result of a periodic recalculation process attributable to the holding period that they are paid or refunded? | A2: Yes | Q3: When calculating the taxable value of car fringe benefits in relation to a car under subsection 10(2) of the Fringe Benefits Tax Assessment Act 1986 , are the following amounts included as part of the operating costs during the holding period? (a) The charge in respect of the replacement vehicle. (b) The reconciliation amount which relates to the replacement vehicle. | A3: (a) No (b) No | Q4: Will the charges in respect of the replacement vehicles and reconciliation amounts relating to the replacement vehicles be exempt under subsection 53(1) of the Fringe Benefits Tax Assessment Act 1986 ? | A4: No

Relevant facts and circumstances: You lease vehicles which are made available for the private use of your employees. The lessor also provides fleet management services to you with respect to vehicles leased to you. You elect to use the cost basis method under section 10 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) when it gives a lower taxable value than the statutory formula method. The lessor charges you a monthly fee for its services which is based on either actual costs incurred in providing the services, anticipated costs of providing the services or a mix of both. An estimate of the anticipated costs for certain expenses relating to the vehicle are determined on commencement of the term and those estimated costs (budgeted costs) are invoiced to you in equal monthly instalments as part of the monthly lease payments. A reconciliation and surplus sharing process is performed at the end of the lease term including on early termination, which takes into account any variation between the actual costs incurred by the lessor and the budgeted costs invoiced over the term (reconciliation process). In addition, recalculations of the monthly lease payments may be performed at any time during the term of the lease whereby monthly lease payments for the entire term of the lease, including periods from prior FBT years, are reset to reflect a more accurate estimate of the running costs for the vehicle (recalculation process). If the recalculation results in an increase in the monthly lease payment, you are issued with an invoice for the difference between the amount previously invoiced for the periods prior to the recalculation and the amount payable for those periods based on the new monthly lease payment. If the recalculation results in a decrease in the monthly lease payments, you are issued with a refund for the difference between the amount previously invoiced for periods prior to the recalculation, and the amount payable based on the new monthly lease payment. You pay a charge in consideration of the right to use a replacement vehicle in certain circumstances (for example, repairs and maintenance being performed on the leased vehicle). If the actual costs to the lessor of providing a replacement vehicle differs to the total amounts that you have paid in respect of the replacement vehicle charge you are charged or reimbursed for that difference through the reconciliation process. You have been treating replacement cars as residual fringe benefits where the statutory formula has been used to calculate the taxable value of car fringe benefits.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 subsection 10(1), | Fringe Benefits Tax Assessment Act 1986 subsection 10(2), | Fringe Benefits Tax Assessment Act 1986 subsection 10(3), | Fringe Benefits Tax Assessment Act 1986 section 162C, | Fringe Benefits Tax Assessment Act 1986 subsection 53(1), | Fringe Benefits Tax Assessment Act 1986 subsection 53(3) and | Fringe Benefits Tax Assessment Act 1986 subsection 136(1).

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. Valuation of car fringe benefits - operating cost method You must elect to use the operating cost method to calculate the taxable value of car fringe benefits in relation to a car under subsection 10(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). Operating costs for the purposes of subsection 10(2) of the FBTAA are defined in subsection 10(3). According to subparagraph 10(3)(a)(v) where a car is leased to the provider the operating costs of that car include: (A) where sub-subparagraph (B) does not apply so much of the charges paid or payable under the lease agreement as are attributable to the holding period… (B) … The holding period for a car commences either on the first day of the year of tax or when a person commences to hold the car and it ends either at the end of the year of tax or when a person ceases to hold the car (section 162C of the FBTAA). A person who leases a car is considered to hold it according to subsection 162(1) of the FBTAA. Where the operating cost method is used, under subsection 162(2) of the FBTAA the car is taken to be held by a person if it is held for use in providing fringe benefits. If you elect the operating cost method for a particular car you will hold the car you are leasing if you are using it to provide fringe benefits. | Detailed Reasoning - Questions 1 and 2:: The amount paid or refunded pursuant to an end of lease term reconciliation process will become payable or refundable at the end of the term of the lease. That charge or reduction of charges will be attributable to the holding period within which it becomes payable or refundable. An amount paid as a result of the recalculation process will be invoiced to you at the next invoicing period. The charge will be attributable to the holding period within which that invoice becomes payable. In the same way any amount that is refunded will reduce the charges attributable to the holding period that it is refunded. | Detailed Reasoning - Question 3:: You cannot include the charges in respect of a replacement vehicle in the calculation of the taxable value of car fringe benefits arising from the cars that you lease. You cannot include any amount payable after the reconciliation of the replacement vehicle costs and you cannot reduce the operating costs of the leased vehicle where there is refund to you. When you elect to use the operating cost method, you make that election in relation to a particular car. The formula in subsection 10(2) of the FBTAA is to calculate the taxable value of any fringe benefits arising from that car. In the formula the operating costs of the car during the holding period include so much of the charges paid or payable under the lease agreement as are attributable to the holding period. That holding period is in relation to the holding of the car that you are leasing and using to provide fringe benefits. The replacement vehicle costs are not attributable to the holding of the car that is being leased, instead they relate to the provision of another vehicle. While the amount that is charged will initially be on an anticipated usage of a replacement vehicle by lease end it will be on actual usage of a replacement vehicle. If any fringe benefits arise from the use of that replacement vehicle the calculation of the taxable value of those benefits will be separate. Please note that the provision of the replacement vehicle may give rise to a residual benefit or a separate car benefit depending on the circumstances. | Detailed Reasoning - Question 4:: The exemption in subsection 53(1) of the FBTAA applies to car expense payment benefits, car property benefits and car residual benefits. The definitions of these terms applicable to this section are in subsection 53(3) of the FBTAA. They all are benefits arising from expenditure on car expenses. The term 'car expenses' is defined in subsection 136(1) of the FBTAA. Charges paid for replacement vehicles do not fit the definition of car expenses for the purposes of section 53 of the FBTAA. Therefore, the benefit will not be exempt in accordance with subsection 53(1) of the FBTAA.

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