Edited version of your written advice

Authorisation Number: 1012799547178

Ruling

Subject: Fringe Benefits Tax: Loan fringe benefits

Question 1

Will the acquisition of land and buildings, by an associate of an employee of the employer, on a three year fixed term loan provided by the employee's employer, be subject to a loan fringe benefit, if the interest rate charged is lower than the 2015 and subsequent years FBT benchmark interest rates?

Answer

Yes.

This ruling applies for the following periods:

1 April 2015 to 31 March 2019

This scheme will commence when the sale and purchase agreement is signed by the employer and the associate of the employee of the company, for the acquisition of land and buildings, which is subject to this ruling.

Relevant facts and circumstances

1. The employer is in the building and construction industry.

2. The employer has acquired a block of land on which they propose to build two townhouses. The employer has obtained approval to develop the land.

3. The employer is willing to sell the land and the two buildings to the associate of the employee of the employer, in an arm's length transaction.

4. The associate will pay a deposit to the employer based on the price of the land and two buildings.

5. The employer will then provide the associate with a three-year fixed loan for the balance outstanding (95 percent of the cost).

6. The employer does not provide loans to members of the public or to their clients

7. The purchase price will be based on the actual cost of the land and buildings plus a percentage mark-up, which will be the final cost to the purchaser.

8. The interest rate charged in the three-year fixed loan will be what is offered in the commercial lending market but is lower than the fringe benefits tax (FBT) statutory interest rate (benchmark interest rate) published by the tax office for the 2015 FBT year.

9. The associate has to agree to the scheme allowing the employer to commence building the two buildings, which will be completed by the end of 2015 year.

10. The 'benchmark interest rate' for the FBT year commencing 1 April 2015 is 5.65 per cent per annum.

11. The 'otherwise deductible rule' as outlined in section 19 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) will not apply to an associate of an employee.

Relevant legislative provisions

Fringe Benefits Assessment Act 1986 Section 16

Fringe Benefits Assessment Act 1986 Section 18

Fringe Benefits Assessment Act 1986 Section 19

Fringe Benefits Assessment Act 1986 Subsection 136(1)

Fringe Benefits Assessment Act 1986 Subsection 149(2)

Fringe Benefits Assessment Act 1986 Subsection 148(4)

Reasons for decision

Summary

The proposed three year fixed term loan to be provided to an associate of an employee will be a fringe benefit. The loan fringe benefit arises 'in respect of the employment' of the employee. The interest rate to be charged will be below the fringe benefits tax 'benchmark interest rate' for the 2015 fringe benefits tax year and for as long as the loan exists, resulting in loan fringe benefits tax liability for the employer.

Detailed reasoning

Benefit, loan benefit and fringe benefits tax

An employer will only be liable to fringe benefits tax if a 'benefit' is provided to an employee, or his or her associate (as defined) and that benefit is a 'fringe benefit'.

A "benefit'' includes any right, privilege, service or facility, including a right relating to real or personal property, provided under an arrangement relating to:

(a) (i) the performance of work

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

(iii) the conferring of rights, benefits or privileges for which remuneration is payable.

(b) a contract of insurance; or

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

A 'loan benefit' is outlined in section 16 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) states:

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 to the recipient and the benefit shall be taken to constitute a benefit provided by the provider to the recipient and that benefit will 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.

The loan will be a benefit because it is a facility, which is an arrangement for or in relation to the lending of money.

'Loan' is defined in subsection 136(1) of the FTAA which includes an advance of money.

The benefit fits in the definition of 'loan benefit' therefore it is a loan benefit.

The definition of a 'fringe benefit' in subsection 136(1) of the FBTAA provides that a fringe benefit arises when:

• a benefit

• is provided to an employee, or an associate of an employee

• by the employer, an associate of the employer, or a third party under an arrangement involving either the employer, or an associate of the employer

• in respect of the employment of the employee

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

The benefit is clearly provided by an employer to an associate (spouse) of an employee and it is not one of the benefits listed in paragraphs 136(1)(f) - (s) of the FBTAA.

Therefore, the only limb in the definition of a 'fringe benefit' that needs addressing in this private ruling is whether the proposed three year fixed term loan to be provided by the employer to an associate (spouse) of an employee of the employer, is 'in respect of' employment of the employee.

The definition of "in respect of" in subsection 136(1) of the FBTAA states:

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.

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

In relation to a person, means the holding of any office or appointment, the performance of any functions or duties, the engaging in of any work, or doing of any acts or things that results, will result or has resulted on the person being treated as an employee.

There will be an arm's length contract of sale and purchase agreement once both parties agree to the terms of the sale and purchase contract for the land and two buildings.

Furthermore, the three-year fixed loan to be provided by the employer will be a normal commercial contractual arrangement between both parties. The actual rate of interest charged will be lower than the FBT benchmark rate resulting in a taxable loan fringe benefits liability.

The deal, once signed would be legally binding on both parties and would continue in the event that the employee ceases employment with the employer. If the proposed loan is considered a loan fringe benefit, it will continue to exist when the employee ceases employment because a 'former employee' is included in the definition of 'employee' in subsection 136(1) of the FBTAA after the employee leaves employment with this employer or the associate (spouse) separates from the employee.

However, the employer has stated that in, J & G Knowles & Associates v FC of T 2000 ATC 4151, (Knowles case) the phrase ''in respect of'' was held to require a ''nexus, some discernible and rational link, between the benefit and employment''.

It could not be said that any causal relationship between the benefit and the employment was a sufficient link resulting in a taxable transaction.

The employer believes there is only a causal link between the employment of the employee and the proposed provision of a loan (advance of money) to the associate. Therefore the loan will be a loan benefit but not a loan fringe benefit, hence this amount will not be subject to fringe benefits tax.

From the decision in Knowles case it is clear what must be established was whether there was a sufficient or material, rather than a causal connection or relationship between the benefit and the employment.

Therefore it is necessary to consider the reason(s) the benefit will be provided to the associate of the employee.

This loan is out of the ordinary day-to-day business operations of the employer as they are not involved in lending money to the public or to their clients. The arrangement and agreement between the related parties could have only occurred because of the employee/employer relationship.

That is the reason why the spouse will be given a three-year fixed term loan is due to the employment of the employee of the company.

Therefore, there is a material and sufficiently close relationship (connection) between the provision of the loan to the associate and the employment of the employee. This relationship occurs even though the agreements between both parties are similar to those in normal commercial dealings.

The loan provided will be in respect of the employee's employment; consequently the loan benefit is a loan fringe benefit and subject to fringe benefit tax.

Note 1: the taxable value of the loan fringe benefits is calculated in accordance with section 18 of the FBTAA.

Note 2: The otherwise deductible rule (ODR) in section 19 of the FBTAA does not apply where the recipient of the loan fringe benefit is an associate of the employee. The ODR only has application where the loan fringe benefit is provided to the employee of the employer.

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