Edited version of your private ruling

Authorisation Number: 1012563369240

Ruling

Subject: Loan and debt waiver fringe benefits

Question 1

If employees are provided an interest free loan to cover course fees does a loan fringe benefit arise under section 16 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes.

Question 2

If the answer to question 1 is yes, would section 19 of the FBTAA apply to reduce the taxable value of the loan fringe benefit to nil?

Answer

Yes.

Question 3

If an employee enters into a salary sacrifice agreement (SSA) in respect of the loan will a debt waiver fringe benefit arise under section 14 of the FBTAA?

Answer

Yes.

This ruling applies for the following periods:

Year ended 31 March 2014

The scheme commences on:

1 April 2013

Relevant facts and circumstances

The employer has employees employed under a multi- level classification system and to increase their classification level employees are required to undertake certain training courses. If they do not complete these courses they cannot advance to the next classification level.

The employer encourages employees to undertake these courses and has agreed to lend employees money to cover their course fees. The loan will be interest free and employees will be required to pay to loan back over a two year period.

The employer is also contemplating allowing the employees to salary sacrifice the loan repayments.

Relevant legislative provisions

FBTAA section 14

FBTAA section 15

FBTAA section 16

FBTAA section 19

FBTAA subsection 136(1)

Reasons for decision

Question 1

If employees are provided an interest free loan to cover course fees does a loan fringe benefit arise under section 16 of the FBTAA?

Summary

A loan fringe benefit will arise under section 16 of the FBTAA.

Detailed reasoning

A loan is defined in subsection 136(1) of the FBTAA and includes:

(a) an advance of money;

(b) the provision of credit or any other form of financial accommodation;

(c) the payment of an amount for, on account of, on behalf of or at the request of a person where there is an obligation (whether expressed or implied) to repay the amount; and

(d) a transaction (whatever its terms or form) which in substance effects a loan of money.

A loan fringe benefit will arise under section 16 of the FBTAA where an employer makes a loan to an employee and the employee has an obligation to repay whole or part of that loan.

In this case the employer will advance employees an amount to pay their course fees, and the employees are required to repay that advance in two years.

This is a loan as defined in subsection 136(1) of the FBTAA and will constitute a loan fringe benefit under section 16 of the FBTAA.

Question 2

If the answer to question 1 is yes, would section 19 of the FBTAA apply to reduce the taxable value of the loan fringe benefit to nil?

Summary

Section 19 of the FBTAA applies to reduce to taxable value of the loan fringe benefit to nil.

Detailed reasoning

The taxable vale of the loan fringe benefit is calculated under section 18 of the FBTAA and is the difference between:

· the interest that would have accrued during the fringe benefits tax (FBT) year if the statutory interest rate had been charged; and

· the interest that actually accrued

In this case no interest is being charged on the loan.

With an interest free loan the taxable value will be the interest that would have accrued during the FBT year if the statutory interest rate had been charged.

Section 19 of the FBTAA reduces this taxable value by the extent that the interest that would have accrued would have been deductible to the employee if the employee had incurred the interest expense themselves. This is known as the otherwise deductible rule.

Paragraph 23 of Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business states:

Subject to the general tests under section 8-1 being met, the following types of expenses related to self-education are allowable:

(a) course or tuition fees of attending an educational institution, work-related conference or seminar, including student union fees;

(b) the cost of professional and trade journals, textbooks1 and stationery;

(c) airfares incurred on overseas study tours or sabbatical, on work-related conferences or seminars, or attending an educational institution. They are part of the necessary cost of participating in the tour, etc.;

(d) subject to paragraph 24(c) of this Ruling, where a taxpayer is away from home overnight, accommodation and meals expenses incurred on overseas study tours, on work-related conferences or seminars, or attending an educational institution; and

(e) interest incurred on borrowed monies where the funds are used to pay for self-education expenses associated with a course of education, that enables a taxpayer to maintain or improve his or her skill or knowledge or is likely to lead to an increase in income from the taxpayer's current income-earning activities. Regard must be had to the connection between the interest expense and the income-earning activity in each income year interest is claimed because a change in circumstances, for example, a change of employment, may mean that the necessary connection no longer exists.

Depending on the course being studied, interest is deductible where the study enables a taxpayer to maintain or improve his or her skill or knowledge or is likely to lead to an increase in income from the taxpayer's current income-earning activities.

In this case the loans are to pay for course fees which when complete will allow the employees to advance in the classification level of their current employment.

Therefore the otherwise deductible rule would apply in respect of the interest incurred by the employee on money borrowed to complete these courses as per paragraph 23 of TR 98/9.

It should also be noted that for the application of the otherwise deductible rule, section 82A of ITAA 1936 which excludes the first $250 of self-education expenses is ignored.

As a result section 19 of the FBTAA reduces the taxable value of the loan fringe benefit to nil.

Question 3

If an employee enters into a SSA in respect of the loan will a debt waiver fringe benefit arise under section 14 of the FBTAA?

Summary

A debt waiver fringe benefit will arise under section 14 of the FBTAA if the employee salary sacrifices their loan repayments.

Detailed reasoning

A debt waiver benefit arises under section 14 of the FBTAA where a provider (in this case the employer) waives an obligation of a recipient (in this case the employee) to pay or repay an amount that the recipient may owe the provider.

Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements looks at how the Commissioner deals with SSAs. Paragraph 21 describes an effective SSA as 'an effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages'.

In respect of loan and an effective SSA the employee will agree to receive part of his or her total amount of remuneration as a release from the obligation to repay part (or all) of the loan before that employee has earned the entitlement to receive that amount as salary or wages.

In other words under an effective SSA the employee will never receive the salary or wages and the reduction in the amount owning on the loan cannot be considered to be a payment from the employee. The reduction in the amount owing is in effect a waiving of part of obligation to repay the loan in lieu of the salary being forgone by the employee.

The reduction in the amount owing on a loan under an effective SSA will constitute a debt waiver benefit under section 14 of the FBTAA.

Therefore if the teachers enter in an effective SSA in respect of their loan repayments a debt waiver benefit will arise.

The taxable value of the debt waiver fringe benefit is determined under section 15 of the FBTAA and is the amount waived.

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