Fringe benefit tax - Value of motor vehicle previously owned by the employer or by an associated person of the employer

This item applies to FBT periods beginning on or after the first day of the 2008/2009 income year and replaces the Question we've been asked, "FBT cost price of secondhand motor vehicle obtained from associated person", published in Tax Information Bulletin, Vol 7, No 2 (August 1995) at page 31 from the same date.

All legislative references are to the Income Tax Act 2007 unless otherwise stated.

Question

1. For fringe benefit tax (FBT) purposes, in what situations will the value of a motor vehicle owned by an employer be affected by the vehicle having previously been owned by the employer or an associated person of the employer?

Answer

2. The value for FBT purposes of a motor vehicle owned by an employer is determined on the basis of either the cost price or the tax value of the vehicle to the employer. Generally, the starting point for both of these bases is the actual cost price of the vehicle to the employer - the cost price is the actual cost price to the employer, and the tax value is the actual cost price to the employer less the total accumulated depreciation of the vehicle.
3. The appropriate starting point to value the vehicle for FBT purposes will not necessarily be the actual cost price of the vehicle to the employer if, in the two years before the employer most recently acquired the vehicle, the vehicle was owned by:
   • the employer; or
   • a person associated with the employer at the time the person owned the vehicle.
4. If the cost price method is to be used, the starting point will be the highest cost paid for the vehicle by the employer or the associated person on any acquisition.
5. If the tax value method is used, the appropriate starting point is determined by clause 4 of Schedule 5 of the Income Tax Act 2007. More information on the application of clause 4 is in Tax Information Bulletin, Vol 19, No 3 (April 2007), page 81.

Explanation

Purpose of this item

6. This item explains the application of clauses 3(c) and 8(b) of Schedule 5 of the Income Tax Act 2007 (‘the provisions').
7. Clause 1 of schedule 5 states that the value of the benefit that an employee receives from having a vehicle provided or available for their private use can be determined on the basis of either the cost price or the tax value of the vehicle.
8. Clause 3(c) applies to employers using the tax value basis and states:
   • 3  In this schedule, a motor vehicle's tax value in a quarter, tax year, or income year is-
     ...
     (c) determined under clause 4 if, in the period of 2 years before the vehicle's acquisition by the person (person A) providing it to the employee, the vehicle is owned by person A or by a person (person B) associated with them.
   
   Clause 4 determines which clause is used to calculate the tax value of the vehicle depending on the basis most recently used to value the vehicle and the owner of the vehicle when that basis was used.
9. Clause 8(b) applies to employers using the cost price basis and states:
   • 8  To determine the value of a benefit under clause 1-
     ...
     (b) if, in the period of 2 years before the vehicle's acquisition by the person providing it to the employee, the vehicle is owned by the person or by someone associated with them, the cost price is treated as being the highest one of the cost prices paid for the vehicle by the person or an associate since its manufacture:
10. The provisions are anti-avoidance provisions aimed at ensuring FBT liability is not reduced by an employer selling and repurchasing a vehicle at market value so as to take advantage of a lower cost price of the vehicle.
11. A Question We've Been Asked, "FBT cost price of secondhand motor vehicle obtained from associated person", was published in Tax Information Bulletin, Vol 7, No 2 (August 1995) at page 31. This Question We've Been Asked stated that the predecessor to clauses 3(c) and 8(b) applied:
    • when the vehicle is purchased from an associated person within 24 months of the date on which that associated person purchased the vehicle.
12. The Commissioner considers that the statement quoted above is incorrect and wishes to clarify the situation.
13. It is timely to do this now, because clause 3(c) was recently amended by section 580 of the Taxation (International Taxation, Life Insurance and Remedial Matters) Act 2009.

How the provisions apply

14. This section explains how the provisions are interpreted by answering specific questions that have arisen when the provisions have been applied. Three questions are answered below:
    • What is the relevant period set out by the provisions?
    • When do the parties need to be associated for the provisions to apply?
    • Does it matter how the employer acquired the vehicle?

What is the relevant period set out by the provisions?

15. The provisions focus on "the period of 2 years before the vehicle's acquisition by the person providing it to the employee". This is the two years immediately before the employer most recently acquired the vehicle. This point is illustrated in example 1.
16. Previously, clause 3(c) stated the period as "2 years before a person … acquired the vehicle and provided it to the employee". This could have suggested that the relevant period was the two years before the vehicle was provided to the employee. Clause 3(c) was amended by section 580 of the Taxation (International Taxation, Life Insurance and Remedial Matters) Act 2009 to clarify that this interpretation is incorrect.

Example 1

17. Company A and Company B have been associated since 2001. Company A bought a motor vehicle on 1 July 2006 and sold it to an unrelated party (Company Z) on 1 October 2006. On 1 April 2008, Company B bought the motor vehicle from Company Z. Company B did not begin to provide the vehicle to one of its employees until 1 January 2009. 
18. The transactions in this example are illustrated in the following timeline.

     

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19. The relevant period in the situation described above is 1 April 2006 to 31 March 2008. The vehicle was owned by an associated person of Company B during this period, so Company B will need to determine the value of the motor vehicle provided to the employee using:
    • clause 3(c), if using the tax value basis; or
    • clause 8(b), if using the cost price basis.
20. The following are not important in determining the relevant period:
    • when Company A acquired the vehicle; and
    • when Company B began to provide the vehicle to one of its employees.

When do the parties need to be associated for the provisions to apply?

21. The provisions address the situation of a vehicle that has been previously "owned by" the employer or an associated person of the employer. Therefore, for the provisions to apply, the parties must have been associated at a time that was both:
    • during the relevant two year period; and
    • during the time that the associated person owned the vehicle.
22. The parties do not need to be associated when either one acquires the vehicle or when the employer provides the vehicle to an employee. This point is illustrated in example 2.

Example 2

23. Company A purchased a motor vehicle on 1 April 2006. On 1 April 2007, Company A and Company B became associated persons. On 30 September 2007, Company A sold the vehicle to an unrelated party (Company Z). On 31 March 2008, Company A and Company B ceased to be associated persons. On 1 October 2008, Company B purchased the vehicle from Company Z.
24. For the provisions to apply to this situation, there must have been a time that was:
    • during the period the parties were associated; and
    • during the two year period immediately before Company B acquired the vehicle; and
    • during the period Company A owned the vehicle.
25. The transactions in this example are illustrated in the following timeline.

     

     

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26. If the period in which Company A and Company B were associated and the relevant period (the two years before Company B acquired the vehicle) are added to the timeline above, then the timeline looks as follows:

     

     

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27. It can be seen that from 1 April 2007 to 30 September 2007 the parties were associated and Company A owned the vehicle. These dates also fall within the relevant period. Therefore, the provisions apply to this situation. Company B will need to determine the value of the motor vehicle provided to the employee using:
    • clause 3(c), if using the tax value basis; or
    • clause 8(b), if using the cost price basis.

Does it matter how the employer acquired the vehicle?

28. The provisions do not refer to how the employer acquires the vehicle, only to the time of acquisition. The provisions do not require that the employer acquire the vehicle directly from the associated person.
29. The provisions also cover situations where one or more unrelated parties own the vehicle in between the associated parties owning the vehicle.
30. The two examples above are both situations where a non-associated person has owned the vehicle between the associated parties. The provisions apply to both of these situations.