As part of a salary sacrifice arrangement an employee will often enter into a novated lease arrangement with their employee for the provision of a car.
Under the terms of the novation the lease obligations are transferred to the employer for either the term of the lease, or the period for which the employee is employed.
If the employee ceases their employment before the end of the lease the obligations under the lease will revert back to the employee.
In some cases, an employer may wish to make 12 months of prepayments on the lease to cover their yearly obligation.
FBT liability on the prepayment
In a situation where this occurs, and under the terms of the employment agreement the employee is not required to pay back any prepaid lease payments should their employment terminate during the prepayment period, does a FBT liability arise to the employer for the lease prepayments?
All obligations under the novated lease revert to the employee on termination of their employment and they are not required to reimburse the employer for the amount of any lease prepayment outstanding at this time.
Therefore, where the lease has been prepaid the employee will not be required to make payments for a period of the lease for which they have an obligation.
For example, if the employer prepays the lease obligations for the period from 1 April to 30 September and the employee terminates their employment on 30 June the employee will not be required to pay the lease obligations that relate to the period from 1 July to 30 September as the payments for this period will already have been paid by the employer.
On termination of employment, there will be an amount of prepayment outstanding which the employee is not required to reimburse to their employer. The employer has therefore met their obligation to the financier to make lease payments for the amount of the prepayment outstanding at the time of termination.
In terms of section 20 of the FBTAA, the outstanding prepayment is a discharge of the employee’s obligation to a third person, being the financier. This constitutes the provision of an expense payment fringe benefit by the employer as the provider to the employee as the recipient.
Lease payments relating to the period prior to termination do not result in a fringe benefit arising as these are exempt car expense benefits that relate to the provision of the car fringe benefit to the employee.
Could it be argued that no expense benefit arises in the situation outlined above?
An employment termination payment (ETP) is essentially a payment received by a person in consequence of the termination of their employment. Subsection 136(1) of the FBTAA defines the term ‘fringe benefit’. Paragraph (k) of that definition specifically excludes payments that are ETPs.
It would seem arguable that, as the employer and employee in the above scenario have agreed that the employee will not be required to repay any lease payments that relate to the period post termination, the amount of those payments is an ETP.
However, ETPs are made in consequence of the termination of the employment of an employee. In this situation, the payment has been made prior to any termination so perhaps the nexus to the termination is too remote to be considered an ETP?
This can be contrasted with the situation where an employer and employee negotiate the transfer of an employer held vehicle to the employee as part of their termination package. The ATO’s general view in such circumstances is that the transfer of the vehicle is an ETP assessable to the employee and deductible to the employer (and is subject to PAYGW).
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