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Ruling carries benefits for fleet managers

News Release lease – 1
June 7, 2001

Ruling carries benefits for fleet managers

Tax treatment uncertainty about a vehicle leasing plan pioneered by a New Zealand company has been cleared up following a recent Inland Revenue Department ruling.

Debate over the tax treatment of annual renewable vehicle leases — often referred to as 1+1+1 leases — has been raging in the vehicle leasing industry for several years.

However, in a binding ruling, the IRD has determined the flexible leases of one vehicle leasing company are acceptable. The ruling is the result of an application by Esanda Fleet Partners, the company that developed the scheme some nine years ago.

In 1992, Esanda Fleet Partners — formerly Avis Lease — developed what it calls the Esanda MultiLease programme whereby, generally speaking, a lessor will enter into a one-year lease contract with a lessee.

So-called ‘normal’ vehicle leasing contracts are generally for a period of three years.

At the end of the one-year lease period and at the request of the lessee, a new lease of the same vehicle can be entered into for another year. And so on up to a total period of three years.

Esanda says the leases are commercially attractive as they provide flexibility as to the length of commitment made to vehicle leasing.

And Brent Knight, the company’s general manager, says there is a very beneficial by-product of the lease scheme.

“Using a 1+1+1 MultiLease, businesses can gain a reduction in fringe benefit tax payable — and GST on fringe benefits,” he says.

The IRD did not challenge the treatment until about three years ago when it rejected a tax argument of an Esanda client.

Mr Knight said the IRD had challenged the FBT treatment of the Esanda MultiLease arrangement with one of Esanda’s clients.

“The IRD said the initial market value should be used for all subsequent lease contracts and assessed our client for the higher FBT and GST costs over a four-year period.

“However, after a concerted effort by Esanda and our client, Inland Revenue conceded its position.”

The crucial facts that lead to the IRD’s ruling seem to have been that Esanda’s client could point to instances where it had elected not to enter new vehicle leases for subsequent one-year terms.

“In addition, under our MultiLease contracts, each subsequent contract has a different reduced lease rate and is not regarded as merely continuing an established arrangement,” Mr Knight said.

Subsequently, Esanda successfully applied to the IRD for a binding ruling.

It has been an important ruling for his business, Mr Knight says.

Esanda MultiLease contracts can save businesses up to 20 per cent in Fringe Benefit Tax (FBT), he says.

“It has cleared up an area that some, even in our own industry, had perceived as grey.

“In New Zealand, the introduction of FBT has seen the decline of the ‘perk’ car — more and more businesses are moving away from the provision of a car as a substitute for salary.

“None-the-less, leasing as an alternative method of funding company fleets has experienced steady growth in the last five to 10 years.

“While lease vehicles represent only about 25 per cent of the total fleet vehicles in New Zealand, in Europe the figure is closer to 50 per cent. In that context, this is a crucial ruling and one we believe may be a catalyst for further growth.”

Esanda developed its MultiLease product in 1992 in conjunction with the company’s then tax advisers, Arthur Anderson.

Following the IRD’s challenge to the scheme, KPMG took up the cause and pursued the case to a binding ruling from the tax body.

ends

Issued for Esanda Fleet Partners by Pead PR

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