Circular 96-12 advised of policy approval to implement a system of novated leases for 100% private use executive vehicles. In addition, Circular 96-15 stated that all lease, running and FBT costs were to be met out of the officer's remuneration package.

The purpose of this Circular is to provide more detailed guidance about novated motor vehicle leases so that CES, SES and Senior Officers (for the purposes of this Circular all are hereinafter referred to as "the officer") can make an informed decision on the suitability of the scheme for individual salary packaging. A standard Deed of Novation of Motor Vehicle Lease is also provided and this Deed must be used in any novation arrangements.

The following documents are attached to this Circular:

1. The Deed of Novation of Motor Vehicle Lease;
2. Novated Motor Vehicle Leases: Background Material;
3. Novated Motor Vehicle Leases - Detailed Information For Interested Officers;
4. Novated Motor Vehicle Leases - SES Administrator's Checklist

The Australian Taxation Office (ATO) has considered these documents in development and has provided an indicative opinion that the Deed of Novation is a "split-full novation" (1). It therefore complies with the current ATO guidelines for a full novation car leasing arrangement as detailed in the Draft Ruling on Novated Leases (TD 98/D6). This means that the employee takes out a car finance lease with a financier. This finance lease is contractually extinguished and the novation splits the rights and obligations between the employer and employee with the agreement of the financier.

Taxation advice received is that the Deed of Novation has the following effects:

1. there is no amount of assessable income in the hands of the officer;
2. provision of the car to the officer will give rise to a car fringe benefit;
3. any car expenses incurred in relation to the car fringe benefit will be exempt from FBT; and
4. in the event that the officer subsequently acquires the car from the lessor, there would be no taxable value if the officer paid the residual value amount.

The Office of State Revenue has advised that no additional stamp duty is payable on execution of the Deed.

The Auditor-General has considered the accounting implications of the Deed of Novation and in this regard has stated, inter alia:

Under the proposed novated lease arrangement, the employer has an obligation to meet the monthly lease payments for as long as the employee remains with the employer. The lease payments are made by the employer to the finance company. Effectively, the employee releases the employer from the ultimate obligation for payment by accepting a salary sacrifice equal to the amount of the monthly lease payments.

In other words, this right of set-off allows the employer to off-set the amount paid to the finance company against the amount of the employee's salary sacrifice.

Information relating to the right of set-off is required to be disclosed as a note to the financial statements in the agency's financial report.

The employer is party to a leasing arrangement, with certain obligations of the lessee novated to it. However, based upon the guidance set forth in AAS17, it would appear that it is inappropriate for this arrangement to be classified as a finance lease in the employer's financial statements.

Any enquiries should be directed to Stephen Auburn (02) 9228 5627 or Paul Stewart (02) 9228 5512. Electronic copies of the standard documents listed above are available from them on request (email: [email protected] or [email protected] ).

 C. Gellatly
Director-General

(1) A full novation occurs where a deed of agreement is entered into by the finance company, the employer and the employee that results in the original finance lease being rescinded and replaced by the new deed with the employer assuming all rights and obligations. At the end of the agreement, the finance lease is reinstated. A 'split full novation' differs only in that the rights and obligations are split between the employer and the employee. In our case, the employer agrees to assume the right to use the car and make the lease payments to the finance company. The employee agrees to accept all obligations relating to lease residuals
__________________________________________________________

Deed of novation replaced in C2000-70

Updated by M2006-05