GST and leasing a car to a disabled person when the car is also under a partial novation arrangement

Is the entity, a lessor of cars, making a GST-free supply under subsection 38-510(1) of the A New Tax System (Goods and Services Tax) 1999 (GST Act), when it leases a car to a disabled person and the leased car is under a partial novation arrangement between the disabled person and their employer?

Yes, the entity is making a GST-free supply under subsection 38-510(1) of the GST Act when it leases a car to a disabled person and the leased car is under a partial novation arrangement between the disabled person and their employer.

The entity is a lessor of cars. The entity leases a car to a disabled person.

The disabled person enters into a partial novation arrangement with its employer, whereby the disabled person sub-leases the car to its employer. This partial novation arrangement is separate to the lease arrangement between the entity and the disabled person.

Under the sub-lease arrangement, the disabled person foregoes the right to receive payments under the sub-lease in exchange for the employer's agreement to accept the novation of the lease payment obligations contained in the lease agreement between the entity and the disabled person.

The partial novation arrangement does not revoke the lease between the disabled person and the entity.

The disabled person has a current disability certificate issued in accordance with the requirements set out in paragraph 38-510(1)(a) of the GST Act.

The disabled person intends to use the car for their personal transportation to or from gainful employment during all of the Subdivision 38-P period.

The GST inclusive market value of the car does not exceed the car limit.

The entity is registered for goods and services tax (GST).

Subsection 38-510(1) of the GST Act provides that the supply of a car to an individual, who has a current disability certificate issued in accordance with the requirements of paragraph 38-510(1)(a) of the GST Act, will be GST-free where the individual intends to use the car in his or her personal transportation to or from gainful employment during all of the Subdivision 38-P period.

The disabled person has a current disability certificate issued in accordance with the requirements set out in paragraph 38-510(1)(a) of the GST Act. In addition, the disabled person intends to use the car for their personal transportation to or from gainful employment during all of the Subdivision 38-P period.

Subsection 38-510(2) of the GST Act provides that a supply covered by subsection 38-510(1) of the GST Act is not GST-free to the extent that the GST inclusive market value of the car exceeds the car limit. The GST inclusive market value of the car does not exceed the car limit. Therefore, as the supply of the car is not excluded from being GST-free under subsection 38-510(2) of the GST Act and the requirements of subsection 38-510(1) of the GST Act are satisfied, the supply of the car is GST-free.

However, it needs to be determined whether the entity, in leasing the car to the disabled person while the car is under a partial novation arrangement, is making a supply of the car to the disabled person.

The disabled person enters into a separate partial novation arrangement with its employer, whereby, the disabled person sub-leases the car to their employer.

Under the sub-lease arrangement, the disabled person foregoes the right to receive payments under the sub-lease in exchange for the employer's agreement to accept the novation of the lease payment obligations contained in the lease agreement between the entity and the disabled person. This arrangement does not revoke the lease agreement between the entity and the disabled person.

The fact that the employer provides the consideration to the entity (that is, makes the lease payments to the entity), does not mean that the entity is making a supply of the car to the employer. Identifying the provider of the consideration is not the determining factor in establishing the supplier (subsection 9-15(2) of the GST Act).

The lease agreement between the entity and the disabled person is not revoked by the partial novation agreement. The majority of the rights and obligations under the lease agreement between the entity and the disabled person still remain with the disabled person. As such, the entity is making a supply of the car to the disabled person.

Therefore, the entity is making a GST-free supply under subsection 38-510(1) of the GST Act when it leases a car to a disabled person and the leased car is under a partial novation arrangement between the disabled person and their employer. Note: Partial novation can also arise where a tripartite agreement exists between a lessor, an employee and an employer. Under such an arrangement, the tripartite agreement is entered into in conjunction with the original lease, rather than the employer and employee entering into a sub-lease.

The original lease agreement between the lessor and the employee is not revoked and the only obligation transferred to the employer is the obligation to make the lease payments.

Therefore, in these circumstances, where the conditions in section 38-510 of the GST Act are satisfied, an entity makes a GST-free supply of a car to an employee.