Earlier in the year we advised how the ATO provided guidance in relation to what constitutes a bona fide car leasing arrangement.  This was particularly relevant for cars financed by way of a novated lease.  You can read our article on this matter here.

One condition that the ATO said needed to be satisfied for a car leasing arrangement to be bona fide was for the lease residual to be a minimum percentage of the car’s cost.  If the residual percentage was too low then the finance would be deemed to be a non-lease arrangement, which results in a less tax-effective outcome in terms of salary packaging.

The ATO has recently updated its guidelines on lease residuals in a taxation determination called TD 93/142.  Previously, this taxation determination referred to the ‘term of the lease’ when calculating a residual.  As each term was considered in isolation, a lower residual could be achieved when multiple leases were used.

For example, it was possible to lease finance a car for three years by first using a two-year term with a 56.25% residual, and at the end of that period lease finance it for another year with a 65.63% residual.  The final residual of 36.92% of the car’s costs would be lower than the residual of 46.88% that would normally apply if only one lease for a three-year period was used.  The smaller residual amount would make the arrangement more tax-effective and allow the car to ultimately be acquired at a lower price.

Instead of referring to the ‘term of the lease’, TD 93/142 now refers to the ‘total leased period’.  This means that each lease cannot be considered in isolation.  The car in the above example that was leased for a total period of three years now needs to have a minimum residual of 46.88%, regardless of how many leases are used over this period.

Importantly, TD 93/142 states that the minimum residual percentage applies “irrespective of whether the car is leased through the same leasing company or another leasing company”.  This means that if an employee ceases a novated lease with one employer and starts another lease with a new employer then the new agreement must take the length of the previous agreement into account to be considered a bona fide car leasing arrangement.  If this does not occur then the new employer could have an unintended fringe benefits tax liability.