Consider the following scenario.Novated leases and claiming car expenses
Susan is a senior executive at XYZ Pty Ltd (XYZ). She is occasionally required to travel to regional areas to perform her duties. Susan received a vehicle under a full novated lease as part of her total remuneration package.
XYZ’s policy is that any FBT liability from the provision of the car fringe benefit is to be borne by the employee. As a result, an employee contributions method is adopted by Susan’s employer such that the taxable value of the benefit is reduced by way of after-tax employee contributions. Under this method, Susan pays for some of her car expenses, such as fuel and servicing, from her after-tax income while the rest of the costs are borne by XYZ from pre-tax income.
Susan’s tax agent is currently completing her tax return. As she is paying some of these costs from her own pocket, she is wondering whether she is entitled to claim a deduction for the costs for some of the car expenses using the cents-per-kilometre method under Division 28 ITAA97.
The total distance Susan travelled for the income year was 4,000 kilometres. If eligible, the total deduction to her would be $2,640 (that is, 66 cents x 4000kms).
Is a deduction allowed to Susan under these circumstances?
No. A deduction of $2,640 for car expenses is not available to Susan in her personal return in respect of the novated lease arrangement. This is due to the operation of s51AF of the ITAA36, which denies a deduction for such expenses. The specific reasoning is as follows.
About novated lease arrangements
A novated lease arrangement is a popular way that employers can reward and incentivise employees. Under the right circumstances, employees can reduce their personal tax liability under a salary sacrifice arrangement involving a novated lease.
Under a novated lease arrangement, the employer takes over all or part of the lessee’s rights and obligations under the lease of the employee’s car. This transfer of rights and obligations is agreed to in a deed of novation between the employer, the finance company and the employee (lessee). The lease obligation typically reverts to the employee upon cessation of their employment.
Under a novated lease, apart from paying for the car lease repayments, the employer would usually pay for the car’s running costs, such a fuel, maintenance, registration and car insurance.
How is FBT involved?
A car fringe benefit arises to the employer under a full novated lease arrangement. The employer is required to determine any FBT liability using the statutory formula method as the default, or alternatively elect to use the log book method.
As FBT is generally borne in the end, via adjustments in a salary package, by the employee, FBT can be reduced by the employee making after-tax contributions towards the running costs. This is referred to as the employee contributions method.
To reduce the FBT payable on the benefit, the running costs will be paid by XYZ from a combination of Susan’s pre-tax and post-tax income under the salary sacrifice arrangement.
Therefore, a question commonly asked by practitioners is whether the running costs incurred by the employee from their after-tax income are deductible to the employee in their personal return. If so, can the employee use one of the two methods prescribed in Division 28 ITAA97 (that is, the cents per kilometre method or the log book method) or otherwise.
Car expense deductions denied under s51AF ITAA36
Broadly, “car expenses” incurred by an employee in respect of a car provided by an employer are specifically denied as a deduction under s51AF ITAA36.
In particular, a deduction for “car expenses” is denied where:
- an employer during a period provides a car for the exclusive use of a person who is, or of persons any of whom is, an employee of the employer or a relative of such an employee, and
- at any time during that period, the employee or a relative of the employee is entitled to use the car for private purposes.
A “car expense” is defined under s28-13 ITAA97 to include any loss or outgoing to do with a car (including costs in operating the car and its tax depreciation).
Note also that under s51AF ITAA36, the deduction is denied for car expenses that are incurred: (i) during the relevant period in which the car was provided, or (ii) is wholly or partly attributed to that period. Also, as noted, a deduction is not allowed if the car is used by a relative such as a spouse, a parent or a child (see s995-1 for full definition).
In this case, the running costs incurred by Susan from her after-tax income in relation to the car fringe benefit would not be deductible to her due to the operation of s51AF. In other words, she cannot claim a deduction for those costs – whether by using one of the methods in Division 28 ITAA97 or as a general deduction under s8-1 ITAA97.
Section 51AF applies because the vehicle, under the novated lease arrangement, was provided to Susan for her exclusive and private use.
Notwithstanding the above, Susan may still benefit from the arrangement. The after-tax contributions towards the car’s running costs reduce the amount of FBT that she would have been required to salary sacrifice as a component of her total remuneration.
Note that section 51AF would also be relevant where a company or fleet car is provided by an employer to an employee (or their relative) for their exclusive and private use. In such instances, running costs incurred by the employee such as fuel would not be deductible.
Novated leases and claiming car expenses Novated leases and claiming car expenses Novated leases and claiming car expenses Novated leases and claiming car expenses