Private ruling: Fringe benefits tax - novated lease - subscription agreements
Date of advice: 28 May 2020
Published: July 2020
Ruling period: 1 April 2020 to 31 March 2025
Date scheme commenced: 1 April 2020

Ruling: A2:  | Q1: Does a 'fringe benefit' as defined in subsection 136(1) of the FBTAA arise in circumstances where an employee decides to purchase a car (as facilitated by the Subscription Agreement) that was provided to the employee under a Novation Agreement? | A3: No.

Relevant facts and circumstances: The Company operates a car subscription service which enables individuals to access a variety of vehicles for a weekly subscription price. In addition to offering this service to members of the public, the Company currently offers this service to their employee population on an arms-length basis (i.e. subject to the same terms and conditions as would be offered to non-employees in commensurate circumstances). The Company is seeking to implement novation agreements whereby these subscriptions are able to be novated to the Company in their capacity as an employer, thereby resulting in a tripartite arrangement between the employee, the Company (as subscription facilitator) and the Company (as the employer). This arrangement is facilitated through the application of the Company's Subscription Agreement and a Novation Agreement .

Relevant legislative provisions: 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)

Reasons for decision: Summary: The novation of a Subscription Agreement between an employee and the Company (as the subscription facilitator) and the Company (as the employer) gives rise to a car fringe benefit under section 7 of the FBTAA. | Detailed Reasoning - Relevant law: A 'fringe benefit' as defined in subsection 136(1) of the FBTAA is a benefit provided to an employee (or associate) by an employer (or associate) or a third party under an arrangement with the employer (or associate) in respect of the employee's employment and such benefit is not otherwise exempted. 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 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 motorcycle 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. In terms of car subscription or hire arrangements, subsection 7(7) of the FBTAA provides that a reference to a car 'held' by a person does not include a reference to: (a) ... (b) a car let on hire to the provider under an agreement of a kind ordinarily entered into by persons taking cars on hire intermittently as occasion requires on an hourly, daily, weekly or other short-term basis unless the car has been or may reasonably be expected to be on hire under successive agreements of a kind that result in substantial continuity of the hiring of the car. In considering if the proposed subscription arrangement satisfies the requirements of the FBTAA of a car being 'held' and therefore is a car fringe benefit, it must be determined if the arrangement is a 'car on hire intermittently as occasion requires on an hourly, daily, weekly or other short term basis.' We do not believe the provision of a car under the proposed subscription arrangement is a car on hire intermittently as occasion requires . Rather, a vehicle will be made available for a period of time for use for any purpose. In this way, we do not believe the arrangement is excluded from the definition of car fringe benefit by paragraph 7(7)(b) of the FBTAA. In terms of the application of the subsection 7(7) qualification regarding 'holding' a car for short-term arrangements, the National Tax Liaison Group's (NTLG) FBT Sub-committee Minutes dated 15 June 1995 and the ATO's Fringe Benefits Tax - a guide for employers publication respectively prescribe that: If you hire a car for less than three months, you are not considered to 'hold' the car and it will not result in a car fringe benefit. However, if you make a rental car or taxi available for the private use of an employee, and the car is hired for less than three months, a residual fringe benefit may arise. ... The ATO agreed that where the hire period is for 12 week or more, it will constitute a car fringe benefit. Less than 3 months it is to be treated as a residual fringe benefit. This guidance is specific to short term car hire arrangements. However, in accepting a minimum 3 month period can constitute a car being 'held' for the proposed subscription arrangement, it is relevant to note this position is consistent with the minimum 3 month period accepted as constituting a car fringe benefit for short term car hire arrangements. '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. Specifically, this definition indicates that a hire arrangement could be considered to exist where an individual pays to use a car for a short period. '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. | Detailed Reasoning - 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 motor 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. | Detailed Reasoning - 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 the novation agreement, each of the conditions as provided in subsections 7(1), 7(2), 7(3) and 7(7) of the FBTAA are discussed below. Will the car be 'held' by the provider? Employees are able to salary-sacrifice the costs associated with a car under a novated lease. Where the Company (as the employer), an employee of the Company, and the Company (as the subscription facilitator) enter into a novated lease agreement, the Company (the employer) has ownership of the car and makes the lease payments to the Company (the subscription facilitator) from a portion of the employee's pre-tax salary. The provision of a car to an employee is provided under a 'subscription' rather than a 'hire' arrangement. As a point of comparison, the Macquarie Dictionary Online defines 'subscription' to mean: ...a monetary contribution towards some object or a payment for shares, a book, a periodical, etc. Comparatively, the definitions of these terms differ in their application with respect to the period of time in which something is used and the payment frequency. However, it is considered that these differences do not limit the breadth of these definitions and their ability to be interchanged in order to reflect the lease of an item for a certain period of time. In light of this interpretation, it is accepted that a subscription car will be 'held' by the Company under a novation where the terms of the subscription is for more than three months. Paragraph 7(7)(b) of the FBTAA indicates that a car fringe benefit excludes a person who holds a car on hire intermittently as occasion requires, on an hourly, daily or weekly or other short-term basis. The Company's circumstances do not result in the hire of a car intermittently as occasion requires and indicates that the subscription has more similarities to a longer-term leasing agreement than a short-term hire arrangement. As such, the exclusion provided in subsection 7(7) is not applicable. If this treatment is applied to the subscription model, which will be able to be novated to the Company in their capacity as an employer, and where the subscription is for a minimum of three months, then such a car in these circumstances would satisfy the reasonable expectation of not being intermittently being hired as occasion requires, thus satisfying the 'held' requirement in subsection 7(1) of the FBTAA. With reference to the subscription agreement, it is noted that employees can detail the minimum period in which a subscription plan can be entered into, but for the purposes of entering into a novation with the Company in their capacity as an employer, employees are required to do so for a minimum period, as per Clauses 46 and 47 of the Subscription Agreementbefore termination can occur. This minimum period aligns with the Commissioner's view that the hiring is not intermittent as occasion requires. Further, an employee will only be entitled to a potential vehicle swap outside of the Company's Swap Credits system after a three month period, as provided for the Subscription Agreement. The amortisation of the upfront fee incorporated into the weekly subscription fee for the first six months reflects the intention that the minimum period in which an employee will subscribe to a car will be for a period of at least six months, considering the calculated risk the Company adopts by incorporating this element into the subscription fee (that is, an expectation that to minimise cash-flow impacts, subscribers will adopt the arrangement for at least six months). While the Company - as an employer and as a subscription model provider - is ultimately one and the same in these circumstances, it is important to distinguish the Company's capacity under these two avenues to identify who is the benefit 'provider'. In this regard, embedded within subsection 7(7) of the FBTAA is recognition of the fact that the provider in a short-term hire situation is not the hiring company, but rather the hirer - 'a car is let on hire to the provider'. As such, the Company - in its employer capacity - holds the car under subsection 7(7) and is the benefit provider. Therefore, pursuant to subsection 162(1) of the FBTAA, the car will be held by the provider, who is the Company (in its capacity as the employer). Is the motor vehicle a 'car'? Yes, you have advised that a motor vehicle provided by the Company to an employee under the novated lease 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 Company will provide a car to an employee under an effective salary sacrifice arrangement (SSA). As such, it is clear that the provision by the Company 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 Company (the employer) that is salary-sacrificed by an employee of the Company (under a 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. | Detailed Reasoning - Conclusion: As each of the applicable conditions in section 7 of the FBTAA are satisfied, the novation of a subscription agreement between an employee and the subscription facilitator and the employer gives rise to a car fringe benefit. | Summary: a. Under the Statutory Formula method, the base value of the car is the 'leased car value' of the car at the earliest holding time pursuant to subparagraph 9(2)(a)(ii) of the FBTAA. b. Under the Operating Cost method, the operating cost of the car includes the total weekly subscription rate charged, the upfront fee and the additional kilometres charges pursuant to the operating cost components in paragraph 10(3)(a) of the FBTAA. | Detailed Reasoning - Relevant law: Section 9 of the FBTAA specifies the taxable value of a car fringe benefit under the Statutory Formula method is to be calculated as follows: 0.2 × Base value of the car × Number of days during that year of tax on which the car fringe benefits were provided by the provider ÷ Number of days in that year of tax ­ Amount (if any) of the recipient's payment With respect to the 'base value of the car', paragraph 9(2)(i) of the FBTAA outlines that where a car is owned or leased by the provider, the base value is to consist of: (i) where, at the earliest holding time, the car was owned by the provider or an associate of the provider, the amount calculated in accordance with the formula AB, where: A is the cost price of the car to the provider or associate, as the case may be; and B is: (A) in a case where the commencement of the year of tax is later than the fourth anniversary of the earliest holding time - 2/3; or (B) in any other case - 1; and (ii) in a case to which subparagraph (i) does not apply - the amount calculated in accordance with the formula AB, where: A is the leased car value of the car at the earliest holding time; and B is: (A) in a case where the commencement of the year of tax is later than the fourth anniversary of the earliest holding time - 2/3; or (B) in any other case - 1; ... The term "cost price" is defined under subsection 136(1) to mean: (a) in relation to a car owned by a person, means: (i) where the car was manufactured by the person - the amount for which the car could reasonably have been expected to have been sold by the person by wholesale under an arm ' s length transaction at or about the time when the car was applied to the person ' s own use; or (ii) where neither subparagraph (i) nor (iii) applies, an amount equal to the sum of: (A) 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; and > (B) the amount of any additional expenditure incurred by the person for or in relation to the fitting of non-business accessories to the car at or about the time when the car was acquired by the person, reduced by the amount of any reimbursement of the whole or a part of that expenditure paid, at or about the time when the expenditure was incurred, by a recipient of a car benefit in relation to the car; or (iii) where subparagraph (i) does not apply and the person was entitled to privileges or exemptions in relation to customs duty in respect of a transaction by which the person acquired the car or by which the person arranged for the fitting of non-business accessories to the car at or about the time when the car was acquired by the person, the amount that could reasonably have been expected to have been applicable under subparagraph (ii) if the person had not been entitled to those privileges to exemptions; ... The term "leased car value" is also defined under subsection 136(1): in relation to a car held but not owned by a person at a particular time, means: (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 meaning of the 'cost price' of a car is further explained in Taxation Ruling TR 2011/3 Fringe Benefits Tax: meaning of 'cost price' of car, for the purposes of calculating the taxable value of car fringe benefits (TR 2011/3): | Detailed Reasoning - Fleet discounts, sales incentives and manufacturers' rebates: 11. Fleet discounts, or any other incentives or discounts that are applied by a car dealer to reduce the purchase price of a car, reduce the expenditure incurred by the purchaser in acquiring the car. 12. In addition, manufacturer rebates paid to purchasers, or applied at their direction, or on their behalf, to reduce the amount of the purchase price that has been borne by the purchaser, will reduce the expenditure incurred by the purchaser in acquiring the car. ... | Detailed Reasoning - Example 4 - fleet discount provided to the purchaser: 27. Steve's employer intends to enter into car novated lease arrangements with its employees. Employees will also be permitted to enter into effective salary sacrifice arrangements in relation to the novated leases. A consequence of having a novated lease in place is that the employer will be able to provide Steve with the private use of a new car . 28. Steve and the employer organise for a novated lease to be put in place with a Fleet Management Company (FMC ). The FMC, as lessor, will be the purchaser of the car. The FMC is entitled to a fleet discount in respect of the car that Steve and the employer have agreed upon . 29. The list price of the car is $40,000. The FMC is entitled to a fleet discount of $5,000. This fleet discount is recognised by the car dealer at the time the car is acquired by the FMC, resulting in a lower purchase price of $35,000 to the FMC . 30. For FBT purposes, the expenditure incurred by the FMC will be $35,000. Steve's employer will be required to take into account the $35,000 when determining the ' cost price' of the car . With respect to the Operating Cost method, section 10 of the FBTAA stipulates that: > 10(1) [Election by employer] An employer may, in relation to a particular car, elect that this section apply in relation to all the car fringe benefits in relation to the employer in relation to a year of tax that relate to that car. 10(2) [Taxable value] Subject to this Part, where an election is made under subsection (1), the taxable value, or the aggregate of the taxable values, as the case requires, of the car fringe benefits in relation to the employer in relation to the year of tax that relate to the car while it was held by a particular person (in this section referred to as the provider ) during a particular period (in this section referred to as the holding period ) in the year of tax is the amount calculated in accordance with the formula: (C × (100% - BP)) - R where: C is the operating cost of the car during the holding period; BP is: (a) if, under section 10A or 10B, the employer is not entitled to a reduction in the operating cost of the car on account of business journeys undertaken in the car during the holding period - nil; or (b) (Omitted by No 145 of 1995) (c) in any other case - the business use percentage applicable to the car for the holding period; and R is the amount (if any) of the recipient' s payment. Application of this formula to determine the taxable value of a car fringe benefit requires any operating costs of the car during the holding period to be captured. Pursuant to section 10 of the FBTAA, such costs would include: 10(3) [Definition of components in formula] For the purposes of subsection (2): (a) the operating cost of the car during the holding period is the sum of: (i) any car expenses (other than insured repair expenses or expenses in respect of registration and insurance) relating to the car incurred during the holding period (whether the expenses are incurred by the provider or by any other person), not including, in a case where the car is leased to the provider, any car expenses incurred by the lessor pursuant to the lease agreement; and (ii) so much of any expense paid or payable in respect of the registration of, or insurance in respect of, the car as is attributable to the holding period (whether the expenses are incurred by the provider or by any other person), not including: (A) in a case where the car is owned by the provider - any expense incurred before the provider became the owner of the car; or (B) in a case where the car is leased to the provider - any expense incurred by the lessor pursuant to the lease agreement; and (iii) in a case where the car is owned by the provider: (A) the amount of depreciation that is deemed to have been incurred by the provider in respect of the car in respect of the holding period; and (B) the amount of interest that is deemed to have been incurred by the provider in respect of the car in respect of the holding period; and (iv) in a case where the car is owned by the provider and a non-business accessory was fitted to the car during the period when the car was owned by the provider and remained fitted to the car at a time during the holding period: (A) the amount of depreciation that would be deemed to have been incurred by the provider in respect of the accessory in respect of the holding period if the accessory were a car; and (B) the amount of interest that would be deemed to have been incurred by the provider in respect of the accessory in respect of the holding period if the accessory were a car; and (v) in a case where the car is leased to the provider: (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; or (B) where the lessor was entitled to privileges or exemptions in relation to customs duty in respect of a transaction by which the lessor purchased the car - the amount that could reasonably be expected to have been applicable under sub-subparagraph (A) if the lessor had not been entitled to those privileges or exemptions; and (vi) in a case where the car is neither owned by, nor leased to, the provider - the amount of depreciation and interest that would be deemed to have been incurred by the provider in respect of the car in respect of the holding period if the car had been purchased by the provider at the time when the provider commenced to hold the car for a consideration equal to the leased car value of the car at that time; and ... (c) the amount of the recipient ' s payment is the sum of: (i) in a case where expenses were incurred to 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; and (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. | Detailed Reasoning - Application of the law to the Company's circumstances: Statutory Formula method Where the Company, in an employer capacity, opts to use this valuation method to determine the taxable value of any car fringe benefits provided to employees, the Company would need to sufficiently capture the following information: · the base value of the car · the number of days during the FBT year in which the car fringe benefit was provided to the employee, and · the appropriate amount, if any, of employee post-tax contributions were made. However, pursuant to paragraph 9(2)(a) of the FBTAA, the base value that would be applicable would be dependent on whether the car provided was owned or leased by the provider in the circumstances. As discussed in the response to Question One, under the novation arrangement the Company (in their employer capacity) will be the provider of the car. Based on this understanding, the application of the Statutory Formula method is reflected below. Where a tripartite arrangement is entered into, which subsequently facilitates a lease to the Company in an employer capacity for the purposes of the novation agreement, irrespective of whether ownership exists with the Company (in a non-employment capacity) or a third party, such a novation agreement results in a lease of the vehicle being transferred from the employee to the employer. This arrangement would result in the base value to equate to the 'leased car value' of the car at the earliest holding time, as detailed in paragraph 9(2)(ii) of the FBTAA. In such an instance, the Company, in their employer capacity, would be required to consider the purchase date of the car by the lessor in order to determine the 'leased car value'. As per the definition of 'leased car value' in subsection 136(1) of the FBTAA, the 'leased car value' will generally be the cost price of the car where the lessor had purchased the car at or about that time in which the 'lease' is entered into. In accordance with the definition of 'cost price' in subsection 136(1) of the FBTAA, cars available for subscription would have a cost price comprising of the expenditure incurred in acquiring and delivering the car to the Company (in a non-employer capacity) or a third party (provided both the Company and the third party do not manufacture any cars, nor are entitled to any privileges or exemptions in relation to customs duties applicable to transactions where cars are purchased). The Company, in its capacity as a car subscription service, is able to obtain cars at a cost below the generally advertised public value due to the discounts available upon bulk car purchases. As these discounts would not be associated with any exemption or reduction of custom duties that generally apply to car purchases, the cost price applicable to a car owned by the Company and subscribed to by an employee under a tripartite agreement would be the reduced cost of the car through discounts available on bulk purchase, supported by subparagraph (ii) of the 'cost price' definition (in that no increasing adjustment would be necessary to reflect the bulk discount). This is supported by the approach in Example 4 of TR 2011/3, where the discount is recognised upon sale of the vehicle. Where the facts of the lease and the subsequent subscription do not fall within such circumstances (that is, the car was not purchased by the lessor at or about that time in which the lease was entered into), the base value of the car will consist of the amount that the Company (in an employer capacity) could be reasonably expected to pay to purchase the car from the third party at that time under an arm's length transaction, which would require the market value of the car to be determined and utilised in order to satisfy this definition. In either of the aforementioned situations, the Company would be required to apportion the base value of the car by two-thirds where the commencement of the FBT year would be later than the fourth anniversary from which the car was first held. Operating Cost method Where an election is instead made to utilise the Operating Cost method to value the car fringe benefit, the Company would need to apply the formula as provided in subsection 10(2) of the FBTAA. This formula would require the Company to establish: · C - the operating cost of the car during the holding period · BP - the business use percentage applicable to the car, and · R - any recipients' payments (that is, employee post-tax contributions). Irrespective of whether the vehicle was owned by the Company (in a non-employer capacity) or a third party, the vehicle under a novation agreement is considered to be leased by the provider, being the Company in its capacity as an employer. As such, paragraphs 10(3)(i) and (ii) of the FBTAA would require the employer to firstly capture any car expenses incurred in respect of fuel, registration, insurance and repairs attributable to the car per the holding period, along with any other lease charges incurred under the subscription arrangement under subparagraph 10(3)(v)(A) of the FBTAA. These expenses would be applied on the assumption that no customs duties or exemptions are relevant in these circumstances. Therefore, pursuant to subsection 10(3) of the FBTAA, the operating costs of the car would include: · lease charges · repairs (other than costs which have resulted from a crash repair) · maintenance · fuel, and · registration and insurance. Application of subsection 10(3) of the FBTAA would thereby include the total weekly subscription rate charged, plus the upfront fee, and the additional kilometre charges. This is because these costs cover lease costs, repairs, maintenance, fuel, registration and insurance on a conglomerate basis. Specifically, the subscription service includes an embedded lease charge but incorporates all relevant operating cost components as required per subsection 10(3) of the FBTAA. Subject to some business use being incurred by the employee during the period in which the car is made available to them, this will then reduce the overall taxable value calculated under this method whereby the employee maintains a log book in accordance with section 10A of the FBTAA ('No reduction of operating cost in a log book year of tax unless log book records and odometer records are maintained'). Employee post-tax contributions Whilst both the Statutory Formula and Operating Cost valuation methods differ somewhat in their traditional application given the uniqueness of the subscription service, each method similarly considers the application of employee pre-tax and post-tax contributions to reduce the taxable value of a car fringe benefit. In relation to the portion split as post-tax contributions, as considered in Clause 4 of the Novation Agreement, these amounts are considered to constitute an employee's 'recipient's contribution' (or 'employee contribution') and may be applied to reduce the taxable value of the car fringe benefit pursuant to paragraphs 9(2)(e) and 10(3)(c) of the FBTAA. | Summary: A 'fringe benefit' does not arise in circumstances where an employee decides to purchase a car (as facilitated by the Subscription Agreement) that was provided to the employee under a Novation Agreement. | Detailed Reasoning - Detailed reasoning: As per the Facts, the Customer may notify the Company of their desire to purchase a vehicle used under the Subscription Agreement. Subject to the Company willing to sell the vehicle, the Company will respond to the Customer with an offer price, based on the current state and condition of the vehicle (Clause 67). The offer price provided will be at fair market value, determined using recommendations from independent third party pricing guides. In determining whether circumstances where an employee decides to purchase a car (as facilitated by the Subscription Agreement) that was provided to the employee under a Novation Agreement gives rise to a 'fringe benefit', Taxation Determination TD 95/63 Fringe benefits tax: where a car is acquired at the end of a lease, is the acquisition at the residual value an 'arm's length transaction' for the purposes of section 43 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? relevantly provides at paragraph 6 that: 6. Under certain other types of leasing arrangements, including subleases and novations, the lessee of the car may be the employee or an associate of the employee (Such arrangements are set out in more detail in Taxation Ruling IT 2509.) Consistent with the above views, the taxable value of a property fringe benefit arising (under one of these arrangements) from the purchase by the employee at the residual value, will depend on whether or not the lease is a bona fide lease. The Commissioner accepts that, in respect of the novated lease arrangements, where the lease agreement is bona fide, the parties are dealing at arm's length. Therefore, a fringe benefit will not arise at the termination date or in the event that the vehicle is sold by the Company to the employee in conjunction with the final novation of the lease. However, where the agreement is not a bona fide lease, but is in effect a contract for the sale of goods, then the taxable value for the purposes of section 43 of the FBTAA will be the notional (or market) value at the time of acquisition of the car by the employee, less any employee contribution. Therefore, if an employee purchases a car at the residual value, there may be a property fringe benefit payable if the lease is not a bona fide lease. | Detailed Reasoning - Is the lease a bona fide lease?: Paragraph 4 of TD 95/63 states: Where the residual value under a lease agreement is equal to or exceeds the minimum residual value calculated in accordance with the percentages of the original cost as set out in the table in Taxation Ruling IT 28 Leasing arrangements of plant and machinery , and where there is no express or implied agreement under which ownership would pass to the lessee at the end of the lease, we will generally accept the agreement as a bona fide lease. The Commissioner has determined that the effective life for cars is 8 years, with effect from 1 July 2002, as per ATO ID 2002/1004 Income Tax: Car Lease Residual Values . Therefore, for the lease of a car to be accepted as bona fide, the residual value under the lease must be equal to or exceed the percentage of the original cost as set out in ATO ID 2002/1004 and not those set out in IT 28 (we no longer use the percentages outlined in IT 28 due to amendments made to the percentage rates by the Commissioner). The subscription agreement (from what we can determine) shows that there is no express or implied agreement under which ownership would pass to the lessee at the end of the lease. | Detailed Reasoning - Conclusion: As long as the residual value under the lease is equal to or exceeds the minimum residual value calculated in accordance with the percentages of the original cost as set out in the table in ATO ID 2002/1004, and there is no express or implied agreement under which ownership would pass to the lessee at the end of the lease, the lease would be considered a bona fide lease. Therefore, the acquisition of the vehicle by the employee at the end of the lease will not incur a fringe benefits tax liability.

Would a car fringe benefit arise under section 7 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where a Subscription Agreement is entered into by an employee and the Company (as the subscription facilitator, in a non-employment capacity) and a Novation Agreement is subsequently entered into, transferring the obligations existing under the Subscription Agreement to the Company (in an employer capacity)? | If the answer to Question One is 'Yes', when calculating the taxable value of a car fringe benefit in those circumstances: would the base value of the car under the Statutory Formula method equate to the 'leased car value' of the car at the earliest holding time pursuant to subparagraph 9(2)(a)(ii) of the FBTAA? | would the operating cost of the car under the Operating Cost method include the total weekly subscription rate charged, the upfront fee and the additional kilometres charges pursuant to the operating cost components in paragraph 10(3)(a) of the FBTAA? | would the post-tax portion of an employee's payment of costs under the subscription (under a salary-sacrifice model) constitute a 'recipient's payment' pursuant to paragraphs 9(2)(e) and 10(3)(c) of the FBTAA? | The post-tax portion of an employee's payment of costs under the subscription (under a salary-sacrifice model) constitutes a 'recipient's payment' pursuant to paragraphs 9(2)(e) and 10(3)(c) of the FBTAA.