FBT Q&A ‘ vehicle sold to employee for residual value

Question

We are wondering if there are any FBT implications on the sale of a previously leased Council vehicle to an employee. Our lease over the vehicle expired last month and the vehicle has since been sold to the employee for the residual value paid by Council to acquire the vehicle from the financier?

We are concerned that FBT will apply as the market value of the vehicle is greater than the residual amount we paid to acquire it.

Answer

The provision of property by an employer to an employee for nil consideration or at a discount to its market value in respect of that person’s employment is a property fringe benefit under s. 40 of the FBTAA. In this regard ‘property’ means all tangible and intangible property. The provision of the Council vehicle would therefore appear to be a property fringe benefit.

Under the external property fringe benefits valuation rules, where the property has been acquired under an arm’s length transaction by the employer, the FBT taxable value of the benefit is the cost price of the property reduced by the amount (if any) paid by the employee. This rule applies where the property is provided to the employee around the time when it was acquired by the employer.

In cases where a material time has elapsed since the property was first purchased by the employer such that the value of the property may have altered appreciably, the taxable value of the fringe benefit is the notional value (i.e. the amount that the employee could reasonably be expected to have paid) less any amount actually paid by the employee. In this case, the time period is insignificant and so the relevant starting point is the residual value paid by Council to acquire the vehicle.

The relevant question to ask is whether the acquisition of the vehicle by Council for its residual value is an arms length transaction?

In Taxation Determination TD 95/63, the Commissioner confirms that if the lease is a bona fide lease, the acquisition of the vehicle at the residual value is an arms length transaction and the taxable value of the property fringe benefit will be the amount of the residual payment less any employee contribution.

In your case, as the price paid by the employee for the vehicle was equal to the amount Council paid to acquire it under an arms length transaction, no fringe benefit tax arises as no discount has been provided to the employee.

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