Deductibility of car expenses for
car provided under salary sacrifice arrangement
Q. Using a salary sacrifice arrangement, my client is
provided with a fully maintained car under a fully novated lease.
The car is not a luxury car (as defined for the purposes of
Division 42A Schedule 2E ITAA 1936). The taxable value of the car
fringe benefit is calculated using the statutory formula method in
section 9 of the Fringe Benefits Tax Assessment Act. My client
wants to know if he can claim an income tax deduction for
work-related travel using the cents-per-kilometre method in
Subdivision 28–C of ITAA 1997.
A. A novated lease refers to an arrangement whereby all
or part of the lessee’s rights or obligations under the vehicle
lease are taken over by the lessee’s employer. The lessee is
usually the employee, although it may be an associate of the
employee.
A full novation (as in this case) involves a lease agreement
between the finance company and the employee, and a deed of
novation (tripartite agreement) between the finance company, the
employee and the employer under which the original lease is
revoked. The employer has responsibility for making the lease
payments and guaranteeing the residual value of the goods at the
end of the lease. There are no income tax consequences for the
employee: see Ruling TR 1999/15 at paras 6 and 26.
A variation of a full novation is a ‘split full‘ novation,
where the employer assumes all obligations under the lease
agreement with the exception of guaranteeing the residual value of
the vehicle. The employee retains this obligation.
There is also a ‘partial’ novation, which usually involves
two distinct lease agreements, one between the finance company and
the employee and the other between the employee and the employer
whereby the employee separately sub-leases the vehicle to the
employer. The head lease is not revoked. Partial novations are
much less common following the release of Ruling TR 1999/15 (in
the case of a partial novation, where the car is not a luxury car,
the Tax Office will assess the employee on the benefit received as
sub-lessor at the time the lease payment obligations are
transferred: para. 16 of TR 1999/15).
The issue in this case is whether the employee can claim a
deduction (on a cents-per-kilometre basis) for work-related car
expenses. This depends on whether the employee has incurred any
expenses. If the car is fully maintained by the employer who pays
all costs of running and maintaining the car (including for
repairs, petrol, oil and insurance), the employee will not have
incurred any expenses and will therefore not be entitled to a
deduction under section 8–1 of ITAA 1997. In AAT Case [2005]
AATA 691, Re Jones and FCT 60 ATR 1096, the Administrative
Appeals Tribunal reached a similar conclusion on similar facts.
The AAT also referred to section 51AF of ITAA 1936, which denies
an employee a deduction for expenses incurred by the employee in
respect of a car provided by the employer for the exclusive use of
the employee (or a relative of the employee). This section may be
relevant in this case.
What is the effect of the salary sacrifice arrangement (SSA)?
In Re Jones, the AAT rejected an argument that the election
to salary sacrifice in respect of a motor vehicle had the effect
that the employee nonetheless ‘derived’ the relevant income,
at least in such terms that he was entitled to deductions against
it.
Ruling TR 2001/10 states that benefits provided to or on behalf
of an employee under an effective SSA may be derived as ordinary
or statutory income by the employee (an effective SSA involves the
employee agreeing to receive part of her or his total amount of
remuneration as benefits before the employee has earned the
entitlement to receive that amount as salary or wages). Any such
benefits that are convertible to money are derived by the employee
as ordinary or statutory income. However, these benefits are not
assessable income of the employee under section 6–5 or section 6–10
of ITAA 1997 because they are exempt income under section 23L of
ITAA 1936. Any expenses incurred in gaining or producing exempt
income are not deductible under section 8-1. Accordingly, even if
one could say that car expenses were incurred by the employee, it
is arguable that they would be incurred in gaining or producing
exempt income.
This Q and A article appeared in Thomson’s InTax,
Australia’s best independent monthly tax magazine. It provides
concise reports of the latest tax news, plus the practical
implications of tax developments in an easy-to-read magazine
format. To find out more, phone Thomson Customer Service on
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