Explanatory Memorandum(Circulated by the authority of the Treasurer the Hon Ralph Willis, M.P.)
Chapter 1 Fringe Benefits tax - Benchmark interest rate
1.1 The Bill will amend the definition of "benchmark interest rate" in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) so that the rate is determined not by reference to a rate offered by the Commonwealth Bank for a housing loan, but by reference to the standard variable rate for owner-occupied housing loans of the major banks, as determined by the Reserve Bank of Australia.
1.2 Paragraph (a) of the definition of "benchmark interest rate" contained in subsection 136(1) of the FBTAA will be amended so that the value of a loan fringe benefit will be a more accurate reflection of the value of the benefit to the employee. In particular, "capped" interest rates will no longer be able to be used to determine the "benchmark interest rate" [Clause 4].
1.3 The amendment applies from 1 April 1994 [Clause 6].
1.4 Subsection 16(1) of the FBTAA provides that a loan benefit arises when an employer makes a loan to an employee or an associate of an employee. Loans that are made by an employer to a third party at the request of the employee or by a third party to an employee at the request of the employer may also constitute a loan benefit. Fringe benefits tax does not apply to exempt loan fringe benefits, such as loans to employees to meet certain work-related expenses.
1.5 The taxable value of a loan fringe benefit in relation to a year of tax is the difference between a notional amount determined by reference to the benchmark interest rate and the actual interest paid or deemed to be paid on the loan.
1.6 The taxable value is calculated by multiplying the daily balances of the loan by the difference between the notional amount of interest and interest actually paid. The daily amounts are added to obtain the taxable value of the benefit.
1.7 The "notional amount of interest" is the interest determined by applying a statutory rate of interest. The "statutory interest rate" for a loan taken out after 2 April 1986 is determined using a "benchmark interest rate". The terms "notional amount of interest", "statutory interest rate" and "benchmark interest rate" are all defined in subsection 136(1) of the FBTAA. The "benchmark interest rate" for a fringe benefits tax (FBT) year is the rate of interest offered by the Commonwealth Bank on its housing loans immediately before the commencement of the FBT year.
1.8 Where more than one benchmark interest rate applies, the lowest rate is used. If there is no benchmark interest rate, the statutory rate of interest may be prescribed by regulation.
1.9 Consequently, the benchmark interest rate in any FBT year is based at present on the lowest rate of interest offered by the Commonwealth Bank on a housing loan on the 31 March immediately preceding the FBT year.
1.10 A different "notional amount of interest" applies to fixed interest loans taken out before 1 July 1986 and also to housing loans made before 3 April 1986.
1.11 The definition of "benchmark interest rate" in subsection 136(1) of the FBTAA will be amended to delete the reference to the rate of interest on Commonwealth Bank housing loans. The amendment will replace that rate with the standard variable rate offered by the major banks for owner-occupied housing loans. The definition of "statutory interest rate" in subsection 136(1) of the FBTAA will be amended consequentially. [Clause 5]
1.12 The standard variable rate offered by the major banks for owner-occupied housing loans is determined by the Reserve Bank of Australia. It is known as the large bank housing lenders variable interest rate on loans for housing for owner occupation. The rate to be used will be the rate last published by the Reserve Bank of Australia before the start of the relevant FBT year. Each FBT year begins on 1 April.