Tax ruling worth millions to vehicle leasing firms

By KARYN SCHERER

An Inland Revenue ruling on the tax treatment of vehicle leases is expected to save companies millions of dollars a year in fringe benefit tax.

The department has capitulated after a long-running battle with Esanda Fleet Partners (formerly Avis Lease) over its annual renewable leases.

Fringe benefit tax on leased vehicles is calculated on the original purchase price of the vehicle for the entire time it is leased.

Many leasing companies, therefore, tried to divide their three-year leases into three lots of one-year leases, to enable customers to reduce their tax liability.

Leasing is not as popular in New Zealand as it is overseas, partly because of the tax treatment.

About a quarter of all fleet vehicles in New Zealand are leased, compared with around half in Europe.

The ruling is expected to give the industry a big boost. Esanda has calculated the savings could be around $50 million a year in fringe benefit tax and GST on fringe benefits.

Three years ago, IRD challenged an Esanda client over what is known as the "one plus one plus one" arrangement.

It has now ruled the company can continue to use the scheme, although it has not yet ruled on other schemes.

The general manager of adjudication and rulings for Inland Revenue, Martin Smith, said he was unable to discuss the ruling until it was published.

However, he confirmed that the department was planning to do a wider ruling on the issue later in the year.

The introduction of fringe benefit tax has seen a steady decline in the number of employees receiving company vehicles.

The latest annual salary survey by Cubiks New Zealand showed just over 45 per cent of top executives included in the survey did not have cars included in their package, up from 41 per cent the previous year.