A debt waiver fringe benefit arises where a debt to an employee or an employee's associate is released. For a debt to be released, there must not be any legal requirement for the lender to repay the amount.
Raising a provision for bad debts does not constitute a debt waiver fringe benefit as there is still a legal requirement for the debt to be repaid.
Australian Government entities rarely waive debts. However, there are occasions on which a debt such as a salary overpayment owed by a former employee will be written off following unsuccessful recovery action.
A debt waiver fringe benefit will not arise when a debt owed by an employee (or former employee), is written off for reasons that are entirely unrelated to the employee's employment. For example, writing off a debt owed by an employee as a genuine bad debt will not be a debt waiver fringe benefit. The fact that a debt is waived because it is bad rather than because of the employment relationship can be established by, for example, showing that reasonable efforts were made to recover the debt in accordance with internal guidelines such as chief executive instructions (CEIs) and that the waiver was in line with a policy in relation to the waiver of debts owing by non-employees.
Calculating the taxable value of a debt waiver fringe benefit
The taxable value of a debt waiver fringe benefit is the amount of the debt that is waived. Where the loan has accrued interest, the debt waiver is the total of the principal plus interest owed.
Sources of information
Employee debts will form part of the accounts receivable of entities. Information in relation to waived debts should be available from the accounts receivable work area.
There are strict documentation requirements in relation to most Australian Government waived debts. Such documentation will generally be retained by the financial reporting work area. This documentation can be used to identify debt waiver fringe benefits.