Edited version of your private ruling

Authorisation Number: 1012470359403

Ruling

Subject: Fringe benefits tax: fringe benefit - debt waiver fringe benefit

Question

Did a fringe benefit arise when you accepted the employee's securities in full satisfaction of the outstanding loan amount owing by the employee under the scheme?

Answer

Yes

This ruling applies for the following periods:

The fringe benefits tax year ending 31 March 200X

The scheme commences on:

In the relevant fringe benefits tax year

Relevant facts and circumstances

You established a scheme for some of your employees.

Under the scheme, you granted the participants interest bearing loans that were used to acquire securities in the employer.

The loans are of no fixed term.

As long as the loans remain outstanding, the securities are not able to be transferred or otherwise dealt with by the participants.

An employee participated in the scheme.

They were made redundant.

Under the scheme you had discretion to accept the net proceeds of the sale of the securities in full satisfaction of the loan.

You signed a deed of release confirming that you would accept the employee's securities under the scheme in satisfaction of any outstanding loan amount owing by the employee.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986, section 14

Fringe Benefits Tax Assessment Act 1986, section 16

Fringe Benefits Tax Assessment Act 1986, section 45

Fringe Benefits Tax Assessment Act 1986, subsection 136(1)

Fringe Benefits Tax Assessment Act 1986, section 147

Reasons for decision

Did a fringe benefit arise when you accepted the employee's securities in full satisfaction of the outstanding loan amount owing by the employee under the scheme?

The definition of 'fringe benefit' in defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides that a fringe benefit will arise when a benefit is:

…

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) the employer or an associate of the employer; and

(ii) the arranger or another person; or

(ea) a person other than the employer or an associate of the employer, if the employer or an associate of the employer:

(i) participates in or facilitates the provision or receipt of the benefit; or

(ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employment of the employee, but does not include:

(f) …

(s) ….

In summarising, a fringe benefit arose from the acceptance of the securities in full satisfaction of the outstanding loan and interest if the following conditions were satisfied:

(a) a benefit arose from the acceptance of the securities in full satisfaction of the outstanding loan and interest;

(b) the benefit was provided to an employee (or an associate of an employee);

(c) the benefit was provided by the employer (or an associate of the employer), or comes within paragraphs (e) or (ea) of the fringe benefit definition;

(d) the benefit was provided in respect of the employment of the employee; and

(e) the benefit was not one of the benefits excluded from being a fringe benefit by paragraphs (f) to (s) of the fringe benefit definition.

These conditions are considered below.

(a) Did a benefit arise from the acceptance of the securities in full satisfaction of the outstanding loan and interest?

Divisions 2 to 11 of Part III of the FBTAA define 12 specific types of benefits. A debt waiver benefit is one of these specific types of benefit. In addition to these specific types of benefit, section 45 of the FBTAA provides that a residual benefit will arise when something is provided that is not a specific benefit, but comes within the definition of benefit in subsection 136(1).

Therefore, in considering whether a benefit arose from the acceptance of the securities in full satisfaction of the outstanding loan and interest it is necessary to consider the following questions:

(i) Did a specific type of benefit arise from the acceptance of the securities in full satisfaction of the outstanding loan and interest?

(ii) If a specific benefit type did not arise from the acceptance of the securities in full satisfaction of the outstanding loan and interest, did a residual benefit arise from the acceptance of the securities?

(i) Did a specific type of benefit arise from the acceptance of the securities in full satisfaction of the outstanding loan and interest?

For the purposes of this ruling the relevant section to consider in relation to whether a specific type of benefit was provided is section 14 of the FBTAA. Under section 14 a benefit is taken to arise:

Where, at a particular time, a person (in this section referred to as the provider) waives the obligation of another person (in this section referred to as the recipient) to pay or repay to the provider an amount, the waiver shall be taken to constitute a benefit at that time by the provider to the recipient.

Where these conditions are met, the benefit will be a debt waiver benefit in accordance with the debt waiver benefit definition in subsection 136(1) of the FBTAA. Therefore, a debt waiver benefit arose from the acceptance of the employee's securities in full satisfaction of the outstanding loan and interest if:

· The employee was under an obligation to pay or repay an amount to you; and

· you waived the obligation.

Was the employee under an obligation to pay or repay an amount to you?

In your original ruling application you contended that the employee was not under an obligation to pay or repay an amount to you. In support of this contention you made the following contentions:

· an obligation requires a written demand; and

· you only had a right to be paid an amount equal to the value of the securities.

Did the existence of an obligation require a written demand to be made?

The definition of obligation in subsection 136(1) states:

obligation, in relation to the payment or repayment of an amount, includes an obligation that is not enforceable by legal proceedings.

Section 147 defines an obligation to pay or repay an amount as follows:

Obligation to pay or repay an amount

For the purposes of this Act, a person shall be deemed to be under an obligation to pay or repay an amount notwithstanding that the amount is not due for payment or repayment.

In applying these two definitions, we do not accept your contention that the existence of an obligation required a written demand to be made. As set out in the definition of obligation in subsection 136(1), an obligation can exist even if it is not enforceable by legal proceedings. Further, section 147 provides that an obligation to pay or repay can exist notwithstanding that the amount is not due for payment or repayment. Therefore, an obligation to pay or repay can exist even though a demand for repayment has not been made.

Further to this, we note that you have submitted that a loan benefit arose from the loan. Within Division 4 of the FBTAA section 16 provides the following definition of a loan benefit:

(1) Where a person (in this subsection referred to as the provider) makes a loan to another person (in this subsection referred to as the recipient), the making of the loan shall be taken to constitute a benefit provided by the provider to the recipient and that benefit shall be taken to be provided in respect of each year of tax during the whole or a part of which the recipient is under an obligation to repay the whole or any part of the loan.

In relation to the nature of loan fringe benefits, Lindgren J in Westpac Banking Corporation v. Federal Commissioner of Taxation (1996) 70 FCR 52; (1996) 34 ATR 143; 96 ATC 5021 (Westpac), states at 5028:

It is important to understand the nature of the loan fringe benefits the subject of Division 4. It will be recalled that the expression "loan benefit" is defined in s 136 to mean a benefit referred to in sub-s 16(1). What is the nature of the benefit referred to in that sub-section? In my opinion, it is not simply the making of a loan (as defined in s 136), but the making of a loan as there defined which there is an obligation to repay. This result flows from the concluding words in sub-s 16(1) (quoted in full earlier):

"…and that benefit shall be taken to be provided in respect of each year of tax during the whole or a part of which the recipient is under an obligation to repay the whole or any part of the loan."

Therefore, if there is a loan benefit there will be an obligation.

Was there a right to be paid more than the value of the securities?

In considering this contention it is necessary to refer to the rules that existed at the time the release occurred. On the basis of these rules, we consider that at the time of the release there was an obligation to pay the amount of the loan.

Did you waive the obligation to repay the amount?

'Waive' is defined in subsection 136(1) of the FBTAA:

waive includes release.

The term 'waive' is not otherwise defined in the FBTAA and so the ordinary meaning of the word is relevant.

The Macquarie Dictionary [Multimedia], version 5.0.0,01/10/01, defines 'waive' to mean:

verb (t) (waived, waiving)

1. to forbear to insist on; relinquish; forgo: to waive one's rank; to waive honours.

2. Law to relinquish (a known right, etc.) intentionally.

3. to put aside for the time; defer.

4. to put aside or dismiss from consideration or discussion: waiving my attempts to explain.

The meaning of the term 'waiver' was considered in Banning v. Wright (1972) 2 ALL ER 97 where at 998 Lord Hailsham LC said:

In my view, the primary meaning of the word 'waiver' in legal parlance is the abandonment of a right in such a way that the other party is entitled to plead the abandonment by way of confession and avoidance if the right is thereafter asserted. This appears to accord with the dictionary meaning of the term and with the two discussions of the subject, each to the same, or similar, effect in Halsbury's Laws of England. In the former of these it is said:

'Waiver is the abandonment of a right…A person who is entitled to the benefit of a stipulation in a contract or of a statutory provision may waive it, and allow the contract or transaction to proceed as through the stipulation or provision did not exist.'

An obligation to pay or repay an amount must exist at the time of the waiver (Cohen v FC of T 2000 ATC 4424). At the time the decision was made to make the employee redundant he had an obligation to repay the loan amount to you.

Under the deed of release you cancelled the loan in exchange for the securities.

Guidance for considering whether this clause constitutes a waiver is provided by ATO Interpretative Decision ATO ID 2003/317 Fringe Benefits Tax Debt waiver benefits: benefits upon discharge of limited recourse loan. ATO ID 2003/317 states:

Where, under the terms of a loan agreement, a lender accepts a transfer of shares in full satisfaction of the loan balance, there is no release or waiver of any obligation to pay or repay an amount.

In applying ATO ID 2003/317, it is accepted that the deed of release entered into with the employee did not constitute a waiver. Therefore, it is agreed that a debt waiver benefit did not arise from the acceptance of the employee's securities as consideration for the cancellation of the loan.

However, this conclusion does not mean a benefit was not provided. It is still necessary to consider whether a residual benefit arose from the acceptance of the securities.

(ii) Did a residual benefit arise from the acceptance of the securities?

Section 45 of the FBTAA provides the circumstances in which a residual benefit will arise. Section 45 states:

A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive).

As discussed above, a benefit will not arise by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive). Therefore, if a benefit arose from the deed of release it will be a residual benefit.

Subsection 136(1) of the FBTAA provides a broad definition of a 'benefit' as follows:

benefit includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work or a professional nature), whether with or without the provision of property;

(ii) the provision of, or the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money.

The cancellation of the loan and accumulated interest comes within the definition of a benefit as the employee no longer had an obligation to pay you an amount of money. Support for this conclusion is provided by ATO Interpretative Decision ATO ID 2003/316 Fringe Benefits Tax, Fringe benefit: benefit arising upon discharge of a limited recourse loan which states:

When an employee transfers shares to the lender to discharge the loan, and the value of those shares is less than the balance of the outstanding loan, a benefit is considered to arise to the employee.

You have contended that a residual benefit will not arise on the basis of ATO Interpretative Decision ID 2003/315 Fringe Benefits Tax Loan fringe benefits: loans with limited recourse loan facility (ATO ID 20003/315) which states:

When the employee is provided with a limited recourse loan the non-recourse feature of the loan protects the employee from loss, should the value of the shares be below the loan balance when the loan is discharged. This protection is commonly referred to as downside risk protection (DRP).

…

The right to DRP may give rise to a property benefit or alternatively a residual benefit provided it is not also a benefit pursuant to Division 4 of Part III of the FBTAA (Division 4).

…

Whilst all benefits that relate to a loan may not necessarily fall within Division 4, where a loan is provided on a commercial basis, the DRP benefits that specifically arise under the terms of the loan are considered to be within the subject matter of Division 4.

As such the DRP benefits that arise under the terms of a limited recourse loan cannot also give rise to either property benefits or residual benefits.

In seeking to apply ATO ID 2003/315 it should be noted that it was concerned with whether the downside risk protection benefits that arise under a limited recourse loan will give rise to a separate benefit. The decision reached was based on the decision of the Full Federal Court in Westpac Banking Corporation v. Federal Commissioner of Taxation (1996) 70 FCR 52; (1996) 34 ATR 143; 96 ATC 5021 (Westpac).

In Westpac, the bank provided loans to its employees at a concessional interest rate and the usual loan establishment fees charged to the public were generally waived. In considering whether the services provided by the bank to their employees in assessing the loan application, considering the documentation and communicating its acceptance of the loan application formed part of the loan benefit, or were a separate benefit, Lindgren J said at ATC 5029:

…In my view Division 4 catches in respect of any year of tax only the making of a loan as defined where the recipient is under an obligation to repay the whole or a part of the loan during the whole or a part of that year. The Bank's investigation, assessment and determination of an application, writing of the letter of approval and receipt of the signed acknowledgment do not of course, themselves, generate an obligation to repay. …

The learned trial judge held that although it is clear that a benefit cannot be a residual fringe benefit if it is included within the category of loan fringe benefit, it does not follow that the provision of Division 4 are an exclusive code for all benefit that in any way related to loans. I agree. On the assumption that there is a benefit, as defined in s 136, provided by the Bank to its employees in respect of their employment in relation to the lending of money but antecedent to the "actual" advance, provision of credit or other financial accommodation, or payment, I can find no legislative intent that such a benefit must be treated as part of the subject matter of Division 4. On the contrary, such a benefit, on the assumption that it is provided, seems to me to be the very kind of benefit intended to be caught as a residual fringe benefit by the "catch-all" provisions of Division 12.

Lindgren J then at ATC 5029-5030 concluded that the services provided gave rise to a residual fringe benefit:

This conclusion leaves for consideration the question whether there was in the present case a residual fringe benefit at all. Contrary to the Bank's submission, the learned trial Judge held that there was. I agree with his Honour's conclusion on this also.

….

[At 5030]

In my view, the steps taken by the Bank to which I have referred involve the provision of a benefit or service by it to the applicant, whether the applicant is an ordinary customer or an employee.

…

Although the evidence did not include the form of letter written to outsiders, the writing of the letter of offer or commitment, whether to them or to employees, at least once the signed acknowledgment is returned, gives rise to a legal or moral obligation on the part of the Bank to make the financial accommodation available. I have no difficulty in regarding this as a benefit or service provided by the Bank.

…

I have no difficulty in accepting that the benefit to which I have referred is provided by the Bank to the employee "in respect of the employment of the employee".

Under the terms of the loan the employee was indebted to you and his loan was repayable. The employee had no contractual right or any expectation arising from the contractual terms that the value of his securities would be accepted by you in exchange for you cancelling his loan. Applying the reasoning of Westpac, the decision by you to accept his securities and cancel his loan was a separate transaction outside the provision of the loan.

This can be contrasted with the downside risk protection that is considered in ATO ID 2003/315 as the downside risk protection is something that is reflected in the interest rate charged on the loan. As such it is something that comes within Division 4 of the FBTAA.

Support for this conclusion is provided by ATO 2003/316. As set out above, ATO ID 2003/316 states:

When an employee transfers shares to the lender to discharge the loan, and the value of those shares is less than the balance of the outstanding loan, a benefit is considered to arise to the employee.

ATO ID 2003/316 considers whether this benefit is a fringe benefit. If a separate benefit did not arise from the discharge of the loan, it would not have been necessary to consider whether the benefit was a fringe benefit. Rather, ATO ID 2003/315 would have considered the discharge of the loan with the provision of the downside risk protection.

Therefore, we consider a separate benefit does arise from the discharge of the loan. This benefit will be a residual benefit under section 45 of the FBTAA as it is not a specific type of benefit.

(b) Was the benefit provided to an employee?

Employee is defined in subsection 136(1) of the FBTAA to mean:

(a) a current employee;

(b) a future employee; or

(c) a former employee.

'Current employee' and 'former employee' are also defined in subsection 136(1):

current employee means a person who receives, or is entitled to receive, salary or wages.

...

former employee means a person who has been a current employee.

Although at the time the benefit was provided the employee was a former employee, they had been a current employee. Therefore, they were an employee for the purposes of the FBTAA.

(c) Was the benefit provided by one of the providers listed in the fringe benefit definition?

As the benefit was provided by the employer it was provided by one of the listed providers.

(d) Was the benefit provided in respect of the employment of the employee?

The expression 'in respect of' is defined in subsection 136(1) of the FBTAA as follows:

in respect of, in relation to the employment of an employee, includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.

Subsection 148(1) provides further legislative guidance in determining when a benefit will be provided in respect of employment. Subsection 148(1) is explained in Miscellaneous Taxation Ruling MT 2016 Fringe benefits tax: benefits not taxable unless provided in respect of employment (MT 2016) which discusses the affect of subsection 148(1) on the classification of benefits as follows:

2. An essential element of the definition of "fringe benefit" is that the benefit must be one provided "in respect of" the employment of an employee. Unless a benefit is provided in the context of an employer-employee relationship the tax has no application.

3. Section 148 qualifies the meaning that is to be given to references in the Act to benefits provided "in respect of" the employment of an employee.

4. Sub-section 148(1) seeks to anticipate arguments that might otherwise be put so as to narrow the defined meaning of "fringe benefit". The sub-section is based in part on experiences of difficulties with the practical application of paragraph 26(e) of the Income Tax Assessment Act 1936.

5. Sub-section 148(1) does not remove in any circumstances the fundamental requirement that, before there can be a tax liability, the benefit under consideration has to be provided in respect of the employment of the employee. Where that requirement is satisfied, sub-section 148(1) ensures that the benefit will not be regarded as other than a fringe benefit subject to tax by reason that:

· the benefit may also be provided in respect of some other matter or thing;

· the benefit is in respect of previous employment or prospective employment;

· the benefit is more than adequate to the needs or wants of the recipient; the benefit is also provided to another person;

· the benefit is to an extent offset by some inconvenience or disadvantage;

· the benefit has a use in connection with the employment; the benefit is or is not in the nature of income;

· the benefit is or is not a reward for services

…

As discussed above, you provided the employee with a benefit when you accepted the value of their securities in exchange for you cancelling his loan. Applying the definitions and explanations provided in subsections 136(1) and 148(1) of the FBTAA the benefit appears in the first instance, to have been applied 'in respect of' the employee's employment.

However, various court cases and ATO Interpretative Decisions have discussed the meaning of this phrase in different contexts which provide further guidance on its meaning.

The similarity of the phrase 'in respect of' in the FBTAA with the former section 26(e) of the Income Tax Assessment Act 1936 (ITAA 1936) was noted by Lindgren J in the Federal Court decision of Starrim Pty Ltd v. Federal Commissioner of Taxation [2000] FCA 952; 44 ATR 487; 2000 ATC 4460 (Starrim). Lindgren J in discussing the meaning if 'in respect of' stated at ATC 4469:

…The concluding words of that definition ("for or in relation directly or indirectly to, that employment") are more general. But the same words occurred in the expression "in respect of, or in relation directly or indirectly to any employment" in s 26(e) of the ITAA36 that was considered by the High Court in Smith v FC of T. I think that they should be understood conformably with the expressions "by reason of" and "by virtue of" in the definition in subs 136 (1) of the Act.

The High Court decision of Smith v. FCT (1987) 164 CLR 513; 19 ATR 274 (Smith) referred to by Lindgren J, considered whether payments made by the employer under a scheme encouraging their employees to study were made 'in respect of' the employees employment in the context of the former section 26(e) of the ITAA 1936. Brennan J discussed the decision in FCT v Dixon (1952) 86 CLR 540 (Dixon) where it was held that payments an employer gave to employees who enlisted for service during the Second World War to make up the difference between their service pay and the pay they had received as an employee prior to enlistment was made in relation to the payee's service as a soldier but not made in respect of or in relation to the payee's employment by his peacetime employer. Brennan J at 4889 stated in discussing Dixon:

To adopt the words of McTiernan J. (at p. 559), although the scheme "grew out of" the employment relationship, the scheme was "ultra that relationship".

…

Fullagar J. explained the reason for the payment in this way (at p. 564):

… The fact of the respondent's employment explains the selection of him as a recipient, but it in no degree characterizes the payment."

Brennan J then went on to distinguish the facts in Smith from Dixon stating at 4890:

But if the employment (or some aspect of the employment) is the reason or one of the reasons why the allowance is paid, the allowance falls within sec. 26(e). A reason which is an insubstantial cause of the payment is immaterial, as the judgments in Dixon illustrate. But if an employee's employment or some aspect of that employment is a substantial reason why the allowance is paid, it cannot be said that the allowance is merely personal or that the payment is made for reasons extraneous to - or ultra - the employment. As the requisite relationship may be indirect as well as direct, it is immaterial that there is another reason why the allowance is paid or even that the other reason is the dominant one.

In this case, an allowance was payable only to those in the bank's employment, and the scheme provided for payment of the allowance to any employee who qualified by completing a prescribed course. Although no course of study was mandatory for any employee, the approved courses were calculated to improve the skills of the bank's employees. The scheme was an aspect of their employment. The allowance was not paid as a mere mark of an employer's personal esteem for particular employees. I am quite unable to say that the allowance was paid for considerations extraneous to the employment. On the contrary, the allowance was paid because it was an incentive to improve his skills to his own advantage and to the anticipated advantage of the bank. The relationship between the employment if the appellant and the payment of the allowance was substantial. In my opinion, the employment was a direct cause of the payment. It follows that the allowance was paid "in consequence of" the employment, and thus was said "in respect of…or in relation…to" the employment. The relationship prescribed by sec. 26(e) was established.

The decision of Smith has been referred to in a number of other cases including:

· J & G Knowles & Associates Pty Ltd v. FCT 2000 ATC 4151; 44 ATR 22 (Knowles) in the context of the meaning of 'in respect of' in subsection 136(1);

· McArdle v. Federal Commissioner of Taxation 88 ATC 4222; (1988) 19 ATR 985; (1989) 19 ALR 637 (McArdle) in the context of the former section 26(e) of the ITAA 1936.

The Full Federal Court in Knowles found it instructive to consider Smith before stating at ATC 4158:

…what must be established is whether there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment.

…

Here the question whether there is a sufficient or material connection or relationship between a benefit and employment is assisted by having regard to the purpose or object of imposing FBT on employers. That purpose was stated by the then Treasurer, Mr Keating, in the Second Reading Speech (2 May 1986, Hansard, House of Representatives) at 3020 to be to "ensure that all forms of remuneration paid to employees bear a fair measure of tax…"

While the width of the definition of "fringe benefit" was designed to capture benefits that, in truth, were other than remuneration, the stated purpose suggests that asking whether the benefit is a product or incident of the employment will be helpful. If it is not then the benefit is likely to be extraneous to the employment and will not bear FBT, notwithstanding that the employment might have been a causal factor in the provision of the benefit.

…

To put the matter another way, although the process of characterising the benefit provided in a particular case can involve questions of fact and degree, it is not sufficient for the purposes of the FBTAA merely to enquire whether there is some causal connection between the benefit and the employment:…

In McArdle the taxpayer was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump-sum payment. The Court held that what had occurred under the surrender agreement was not the granting of a valuable benefit but the exploitation of rights received from the employer in previous years.

Fisher J in McArdle discussed the decision in Smith before stating at ATC 4236:

In my opinion the passages cited indicate clearly that it is necessary to go beyond the historical or temporal connection which had existed or presently existed between an employer and an employee. It is necessary to consider whether the taxpayer received the payment in any capacity other than that of employer, whether there was any consideration other than services rendered or to be rendered, and whether it could be said that the payment was in consequence only of the employee's service or of some other consideration.

Fisher J then referred to the decision in Constable v. F.C. of T. (1952) 86 C.L.R. 402 and F.C. of T. v. Dixon (1952) 86 CLR 540 before stating at ATC 4237:

In my opinion the test of assessability of benefits under sec. 26(e) as stated by the majority of the High Court in Smith's case is that the benefit must be the consequence of the employment relationship. In the present matter the crucial fact was that by the month of November 1981 the taxpayer had significant rights in contract as an option holder to acquire shares. These rights to call for shares were capable of being exercised subsequent to the termination of his employment or after his death. It was these contractual rights, and his entitlement as an option holder, which enabled him to deal with Delhi International in relation to the surrender arrangements. The mere existence of an employer-employee relationship in November 1981 was nothing to the point if he had not been the holder of options.

ATO ID 2003/316 states:

… for a benefit to be a 'fringe benefit' it must be provided 'in respect of' the employment. Whilst the expression 'in respect of' has no fixed meaning, it has been considered by the courts in various statutory contexts on numerous occasions.

Whilst an employee's employment may explain their selection to receive a benefit, in order to find that a benefit is provided 'in respect of' employment, there needs to be a sufficient or material, rather than a causal connection or relationship to employment. Refer J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 444 ATR 22.

ATO ID 2003/316 goes further to discuss the application of this definition in relation to the discharge of a limited recourse loan, to conclude that a benefit that arises to an employee upon the discharge of a limited recourse loan will not be a fringe benefit as it is not provided in respect of the employees employment. ATO ID 2003/316 states:

The benefit that arises upon the discharge of the loan is considered to be provided as a result of the employee exercising rights (previously obtained) as a debtor under the loan agreement.

The situation is considered to be analogous to that in FC of T v. McArdle 89 ATC 4051; (1988) 19 ATR 1901. McArdle was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump-sum payment. The Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years.

In this case, when the employee enters into the loan agreement they obtain the right to transfer the shares to the lender in full satisfaction of the debt. If these rights are subsequently exercised and the shares surrendered, any benefit would be in respect of the exercise of these rights, and not in respect of employment. At the time the shares are surrendered, the rights given up are considered to have a value equal to the loan balance.

Thus, the benefit that arises to the employee upon the surrender of the shares, does not give rise to a fringe benefit as no benefit has been provided to the employee 'in respect of' the employment relationship.

You have proposed that a key principle contained in ATO ID 2003/316 is that where the discharge of a loan occurs under the terms of the relevant loan agreement, any benefit that arises should not be considered to be provided 'in respect of' the employment relationship. You suggest that the circumstances surrounding the employee redundancy are analogous with the facts in ATO ID 2003/316. There is however, a crucial difference between the facts of ATO ID 2003/316 and the present case.

Considering the cases discussed above, the difference between the cases compared with the employee's circumstances is that the employee did not receive the benefit by exercising a pre-existing right. At the date of their redundancy the employee's loan was repayable and they held no pre-existing contractual right to have or expect to have the sale value of the securities accepted by you in full satisfaction of their loan regardless of a shortfall arising from the sale.

Although the option for you to accept the net proceeds of the sale of the scheme in full satisfaction of the loan is considered by the rules, the acceptance of the sale of the securities in full satisfaction was a right that you held to exercise at your discretion. The option was available to you in certain circumstances only however, it was not a direction to you in these circumstances (and thus a pre-existing right to the employee in those circumstances). The option was reliant on you making a further discretionary decision external to the rules and therefore external to any contractual right of the employee.

For these reasons, the reasoning used in ATO ID 2003/316 concluding that the benefit in that case was not made in respect of employment does not apply.

It is therefore considered that when you executed the deed of release and accepted the value of the securities in exchange for cancelling their loan, the acceptance occurred external to any contractual right of the employee. It is considered that the sufficient and material connection required by Knowles between the benefit provided and the employee' employment existed and that the benefit was therefore provided in respect of their employment.

(e) Was the benefit is a benefit excluded from being a fringe benefit by paragraphs (f) to (s) of the fringe benefit definition?

The benefit provided is not one of benefits listed in paragraphs (f) to (s) of the fringe benefit definition.

Summary

As you provided a benefit to the employee, in respect of their employment, that was not an excluded benefit, you have provided a fringe benefit to the employee.

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