Edited version of private ruling

Authorisation Number: 1011501327185

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Ruling

Subject: Tax consequences of remuneration arrangement.

Question 1

Will the loan from the employee to the taxpayer be characterised as a non-share equity interest for the purpose of Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the interest paid by the taxpayer on the loan from the employee be deemed a dividend under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 3

If the loan is not fully repaid at the end of the term, is there a commercial debt forgiveness under Division 245 of the ITAA 1936?

Answer

Yes

Question 4

Are the Unit Plan and the Loan Plan related schemes within the meaning given by section 974-155 of the ITAA 1997?

Answer

No

Question 5

Are payments to the employee under the Unit Plan deductible to the taxpayer under section 8-1 of the ITAA 1997?

Answer

Yes

Question 6

Are the payments to the employee under the Unit Plan subject to the Pay As You Go withholding tax rules in accordance with section 12-35 in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

Yes

Question 7

Will implementation and operation of the Unit Plan create a benefit as defined under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) in respect of which FBT is payable, and (if so) how is it calculated?

Answer

No

Question 8

Will implementation and operation of the Loan Plan create a benefit as defined under subsection 136(1) of the FBTAA in respect of which FBT is payable, and (if so) how is it calculated?

Answer

Yes. The benefit will be calculated under section 43 of the FBTAA as an external property fringe benefit.

Question 9

Are the units property for CGT purposes under Part 3-1 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The taxpayer is a subsidiary company and conducts its business as a company in its own right and not as a trustee of any trust.

The taxpayer is not part of a consolidated group of companies for tax purposes.

The taxpayer has several key employees each with responsibility for a particular part of the business.

A number of key employees may have a remuneration package which will include one or both of the following remuneration components:

· Unit Plan

· Loan Plan

Unit Plan

The arrangements in respect of the Unit Plan will be put in place via a document setting out the Plan Rules.

The Unit Plan will amend the key employee's employment terms and generate for the employee a conditional right to certain cash payments or bonuses over time.

The Unit Plan is not issued for any consideration payable by the employee. It is given to the employee.

The units do not provide the employee with an interest in the assets of the company, an interest in its share capital or any interest in the company's profits however such profits are calculated, or any property right independent of the employment contract.

Each unit carries a right to receive a cash payment under an employment contract, calculated under the terms of the Plan Rules.

Each unit carries a right to annual cash bonus payments.

There is no discretion to alter or withhold these cash bonus payments.

Loan Plan

The arrangements in respect of the Loan Plan will be contained in an agreement under which the employee lends funds to the employer.

The employee may source the funds which are lent to the employer from personal savings, a third party financier and/or from the employer.

A loan unit is a hypothetical unit for the purpose of expressing a proportion of the business value from time to time to enable the calculation of the reduced principal outstanding.

The arrangement is a voluntary arrangement where the employee is the lender and the employer, the taxpayer, is the borrower.

The taxpayer must on expiry of the loan period repay to the employee in full satisfaction of the principal outstanding relating to the loan units the subject of the repayment, the lesser of:

i. where the loan unit value is equal to or greater than the issue price of the loan units, the principal outstanding; and

ii. where the loan unit value is less than the issue price of the loan units, the principal outstanding reduced by the amount specified in the following formula:

Note: loan units x (issue price - loan unit value)

The loan amount is subject to the interest amount. The interest amount is defined as an interest amount payable to the lender equal to the interest rate on the principal outstanding.

The interest rate is the Reserve Bank of Australia's interbank cash overnight rate plus 2%, or such other rate as agreed between the lender and borrower.

Interest is calculated and paid on a monthly basis, unless otherwise agreed.

The principal outstanding means advances outstanding at that time, together with any adjustments.

Adjustments mean all accrued interest (if any) and all other debts and monetary liabilities of the borrower to the lender under or in relation to the agreement.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 245

Income Tax Assessment Act 1936 Subsection 23L(1)

Income Tax Assessment Act 1936 Section 44

Income Tax Assessment Act 1936 Section 245-10 of Schedule 2C

Income Tax Assessment Act 1936 Section 245-25 of Schedule 2C

Income Tax Assessment Act 1936 Subsection 245-15(1) of Schedule 2C

Income Tax Assessment Act 1936 Subsection 245-35(1) of Schedule 2C

Taxation Administration Act 1953 Section 12-35 in Schedule 1

Fringe Benefits Tax Assessment Act 1986 Section 40

Fringe Benefits Tax Assessment Act 1986 Section 43

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Paragraphs 136(1)(f) to (s)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Division 974

Income Tax Assessment Act 1997 Subsection 974-5(4)

Income Tax Assessment Act 1997 Subdivision 974-B of the ITAA 1997

Income Tax Assessment Act 1997 Section 974-15

Income Tax Assessment Act 1997 Subsection 974-15(1)

Income Tax Assessment Act 1997 Subsection 974-15(2)

Income Tax Assessment Act 1997 Subsection 974-20(1)

Income Tax Assessment Act 1997 Paragraph 974-20(1)(a)

Income Tax Assessment Act 1997 Paragraph 974-20(1)(b)

Income Tax Assessment Act 1997 Paragraph 974-20(1)(c)

Income Tax Assessment Act 1997 Paragraph 974-20(1)(d)

Income Tax Assessment Act 1997 Paragraph 974-20(1)(e)

Income Tax Assessment Act 1997 Subsection 974-20(2)

Income Tax Assessment Act 1997 Subsection 974-20(3)

Income Tax Assessment Act 1997 Subsection 974-20(4)

Income Tax Assessment Act 1997 Section 974-25

Income Tax Assessment Act 1997 Section 974-35

Income Tax Assessment Act 1997 Subsection 974-35(2)

Income Tax Assessment Act 1997 Subsection 974-35(3)

Income Tax Assessment Act 1997 Subsection 974-35(5)

Income Tax Assessment Act 1997 Paragraph 974-35(5)(d)

Income Tax Assessment Act 1997 Section 974-70

Income Tax Assessment Act 1997 Subsection 974-70(1)

Income Tax Assessment Act 1997 Paragraph 974-70(1)(a)

Income Tax Assessment Act 1997 Paragraph 974-70(1)(b)

Income Tax Assessment Act 1997 Section 974-75

Income Tax Assessment Act 1997 Subsection 974-75(1)

Income Tax Assessment Act 1997 Subsection 974-130(1)

Income Tax Assessment Act 1997 Paragraph 974-130(1)(a)

Income Tax Assessment Act 1997 Section 974-135

Income Tax Assessment Act 1997 Subsection 974-135(3)

Income Tax Assessment Act 1997 Section 974-155

Income Tax Assessment Act 1997 Subsection 974-155(3)

Income Tax Assessment Act 1997 Section 974-160

Reasons for decision

Question 1

Whether a scheme gives rise to an equity interest or debt interest will depend on the application of sections 974-70 of the Income Tax Assessment Act 1997 (ITAA 1997) and 974-15 of the ITAA 1997, respectively. Paragraph 974-70(1)(b) of the ITAA 1997 prevents an interest from being characterised as an equity interest if the interest itself is characterised as debt interest, or forms part of a larger interest that is characterised as, a debt interest in the company, or a connected entity of the company.

Section 974-15 of the ITAA 1997 sets out the meaning of 'debt interest'. Subsection 974-15(1) of the ITAA 1997 provides that a scheme gives rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in subsection 974-20(1) of the ITAA 1997 in relation to the entity.

Note: The Loan Plan will be analysed separately. It is considered that the Loan Plan, the Unit Plan and the Employee Loan schemes are not related schemes. Refer to the discussion in Question 4.

Debt test

A scheme satisfies the debt test if the criteria in subsection 974-20(1) of the ITAA 1997 are satisfied.

Financing arrangement

Paragraph 974-20(1)(a) of the ITAA 1997 requires that the scheme is a financing arrangement. Subsection 974-130(1) of the ITAA 1997 defines financing arrangement:

A *scheme is a financing arrangement for an entity if it is entered into or undertaken:

a) to raise finance for the entity (or a *connected entity of the entity); or

b) to fund another scheme, or a part of another scheme, that is a *financing arrangement under paragraph (a); or

c) to fund a return, or a part of a return, payable under or provided by or under another scheme, or a part of another scheme, that is a financing arrangement under paragraph (a).

A scheme will be a financing arrangement if it is undertaken to raise finance for the company (paragraph 974-130(1)(a) of the ITAA 1997). The scheme involves the advancement of the loan amount from the employee (the lender) to the taxpayer (the borrower) for the term of the loan, which constitutes the raising of finance.

Financial benefits received

Paragraph 974-20(1)(b) of the ITAA 1997 requires that the entity, or a connected entity of the entity, receives, or will receive, a financial benefit or benefits under the scheme. The term 'financial benefit' is defined in section 974-160 of the ITAA 1997. The taxpayer will receive an amount, which is the loan amount. The loan amount is calculated as the aggregate of the issue price of the loan units. This is a financial benefit within the meaning of section 974-160 of the ITAA 1997.

For the purposes of paragraph 974-20(1)(b) of the ITAA 1997, subsection 974-20(4) of the ITAA 1997 provides that a financial benefit to be received under the scheme by the entity or a connected entity is taken into account only if it is one that another entity has an effectively non-contingent obligation to provide. This requirement is satisfied here - the employee's obligation to provide to the taxpayer the loan amount is non-contingent within the meaning of section 974-135 of the ITAA 1997.

Effectively non-contingent obligation to provide financial benefits

Paragraph 974-20(1)(c) of the ITAA 1997 requires that the entity, or the entity and a connected entity each has, an effectively non-contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when the first or the financial benefits referred to in paragraph 974-20(1)(b) of the ITAA 1997 is received.

Section 974-135 of the ITAA 1997 sets out where there is an effectively non-contingent obligation to take action under a scheme. Regard must be had to the pricing, terms and conditions of the scheme when determining whether there is in substance or effect a non-contingent obligation to take that action. An obligation is non-contingent if it is not contingent on any event, condition or situation (including economic performance of the entity having the obligation or a connected entity of that entity), other than the ability or willingness of that entity or connected entity to meet that obligation (subsection 974-135(3) of the ITAA 1997).

The taxpayer has a number of obligations to provide financial benefits - namely, the monthly interest payments to the employee and the obligation to pay the employee an amount (to be ascertained at the end of the scheme) in full satisfaction of the principal outstanding.

The obligations to pay the interest amounts are non-contingent obligations in both form and substance and effect. The interest amount is calculated using the Reserve Bank of Australia's interbank cash overnight rate plus 2 per cent and the loan amount. The obligation is not subject to any discretion on the part of the company nor any other conditions. They are effectively non-contingent obligations to provide financial benefits.

At the end of the loan, the taxpayer has the obligation to pay an amount which is the lesser of the following amounts:

(i) where the loan unit value is equal to or greater than the issue price of the loan units, the principal outstanding; and

(ii) where the loan unit is less than the issue price of the loan units, the principal outstanding reduced by the amount specified in the following formula:

Note: loan units x (issue price - loan unit value)

The relevant amount is paid in full satisfaction of the principal outstanding. That is, the obligation is to pay the employee an amount, the amount is to be ascertained at the end of the term, in full satisfaction of the principal outstanding. Although the amount of the financial benefit that must be provided cannot be determined from the outset, the obligation to provide the relevant amount is non-contingent. That obligation must be fulfilled, and does not depend upon any conditions being met, any situation or any discretion on the part of the company. Even if the amount payable is calculated to be nil, the obligation still stands. If the amount payable to the employee is nil, the parties have agreed that the provision of a nil amount will be in full satisfaction of the principal outstanding.

It is substantially more likely than not that the value provided will at least be equal to the value received

Paragraph 974-20(1)(d) of the ITAA 1997 requires that it is substantially more likely than not that the value provided will be at least equal to the value received.

Subsections 974-20(2) and (3) of the ITAA 1997 set out what the value provided and received are, respectively.

The value provided will consist of the sum of the values of all the financial benefits provided or to be provided under the scheme by the entity or a connected entity (subsection 974-20(2) of the ITAA 1997). The value received will consist of the value of the financial benefit received (subsection 974-20(3) of the ITAA 1997).

For the purposes of subsection 974-20(2) of the ITAA 1997, subsection 974-20(4) of the ITAA 1997 provides that a financial benefit to be received under the scheme by the entity or a connected entity is taken into account only if it is one that another entity has an effectively non-contingent obligation to provide. As discussed previously, this requirement is satisfied - the employee's obligation to provide to the taxpayer the loan amount is non-contingent within the meaning of section 974-135 of the ITAA 1997.

Section 974-35 of the ITAA 1997 sets out the general rules for the valuation of financial benefits. The value of a financial benefit received or provided under the scheme is calculated assuming that the interest arising from the scheme will continue to be held for the rest of its life (subsection 974-35(2) of the ITAA 1997). Although the loan period may end prior to this, it is assumed that it runs for the rest of its life. Since the performance period (subsection 974-35(3) of the ITAA 1997) has a defined end date after the interest arising from the scheme is issued, the value of the financial benefits received or provided under the scheme will be measured in nominal terms.

The value of the financial benefit received by the taxpayer is fixed and known from the outset - that is the loan amount.

The value of the financial benefit to be provided is comprised of the value of the monthly interest payments paid to the employee throughout the life of the scheme and the value of the amount to be provided at the end of the term (in full satisfaction of the principal outstanding). It can be seen that the value of the financial benefits to be provided by the taxpayer are dependent on variable factors. The amount of the interest payments are dependent on the Reserve Bank of Australia's interbank cash overnight rate plus 2 per cent and the amount to be provided at the end of the term of the scheme is dependent on the value of the loan unit.

Subsection 974-35(5) of the ITAA 1997 provides that where the criteria are satisfied, the value of the financial benefit (which depends on a factor that may vary over time) is calculated assuming that the factor's value will retain the starting value for the whole of the life of the scheme.

The relevant criteria in subsection 974-35(5) of the ITAA 1997 are:

a) a *financial benefit received or provided in respect of an interest depends on a factor that may vary over time (such as a variable interest rate); and

b) that factor is one commonly used in commercial arrangements; and

c) it would be unreasonable to expect any of the parties to the *scheme to know, or to anticipate accurately, the future value of that factor; and

d) that factor has a particular value (the starting value) when the scheme is entered into.

These criteria are satisfied in relation to both the obligation to provide the interest payments and the amount in full satisfaction of the principal outstanding (at the end of the term). The loan unit value reflects a proportion of the business value:

Where business value means the value of the specified business as determined by the Board based on management accounts used to prepare statutory accounts calculated by reference to:

a) simple average of the net earnings before interest and tax of the business for the 3 previous financial years prior to the date on which loan units are being valued and

a) multiplied by a factor of 3.5.

These factors are commonly used in commercial arrangements. In particular, it is common for employee incentive schemes to have reference to the value and earnings of a business.

It would be unreasonable to expect any of the parties to the scheme to know, or to anticipate accurately, the future value of these factors and these factors have a particular value when the scheme is entered into (the starting value).

The starting value is the particular value of the variable factor when the scheme is entered into (paragraph 974-35(5)(d) of the ITAA 1997). Therefore, the relevant starting values will be the Reserve Bank of Australia's interbank cash overnight rate plus 2 per cent and the value of the loan unit at the time when the schemes are entered into. That is, when the agreement is entered into.

Under the terms of the agreement, if the loan unit value is equal to or greater than the issue price of the loan unit, the amount to be paid (in full satisfaction of the principal outstanding) is the principal outstanding. Assuming that there are no adjustments to the principal outstanding, and that the requirement to pay interest monthly is complied with (that is, interest is not accrued), the principal outstanding will be the loan amount.

Given that the amount to be repaid by the taxpayer will be a fixed amount and interest is calculated on the loan amount using the Reserve Bank of Australia's interbank cash overnight rate plus 2 per cent, the total value of the financial benefits to be provided will be at least the loan amount.

Therefore, paragraph 974-20(1)(d) of the ITAA 1997 is satisfied.

The value provided and the value received are not both nil

Paragraph 974-20(1)(e) of the ITAA 1997 requires that the value provided and the value received are not both nil.

Subsections 974-20(2) and (3) of the ITAA 1997 set out what the value provided and received are, respectively. As discussed previously, neither the value of the financial benefits provided or received are nil.

Conclusion

The requirements under subsection 974-20(1) of the ITAA 1997 are all satisfied so the debt test is satisfied. The exceptions to the debt test set out in section 974-25 of the ITAA 1997 are not applicable to the scheme being considered.

As the debt test is satisfied at the time it comes into existence (and there are no applicable exceptions), the scheme gives rise to a debt interest (subsection 974-15(1) of the ITAA 1997).

Equity test

Section 974-70 of the ITAA 1997 sets out the circumstances where a scheme gives rise to an equity interest in a company. Subsection 974-70(1) of the ITAA 1997 states:

A scheme gives rise to an equity interest in a company if, when the scheme comes into existence:

a) the scheme satisfies the equity test in subsection 974-75(1) of the ITAA 1997 in relation to the company because of the existence of an interest; and

a) the interest is not characterised as, and does not form part of a larger interest that is characterised as, a debt interest in the company, or a connected entity of the company, under Subdivision 974-B of the ITAA 1997.

Paragraph 974-70(1)(a) of the ITAA 1997 is satisfied, as the equity test set out in section 974-75 of the ITAA 1997 is satisfied. The interest carries a right to a variable return where the amount of the return is in substance or effect contingent on the economic performance of part of the company (item 2 of the table in subsection 974-75(1) of the ITAA 1997). The scheme is a financing arrangement.

Despite paragraph 974-70(1)(a) of the ITAA 1997 being satisfied, the scheme cannot give rise to an equity interest as it is characterised as a debt interest (paragraph 974-70(1)(b) of the ITAA 1997 and see also subsection 974-5(4) of the ITAA 1997).

Question 2

The interest paid by the taxpayer on the loan from the employee will not be deemed to be a dividend under section 44 of the ITAA 1936, as the interest arising from the scheme is characterised as debt, rather than equity.

Question 3

Section 245-10 of Schedule 2C to the Income Tax assessment Act (ITAA 1936) provides that Division 245 of the ITAA 1936 applies to the forgiveness of a commercial debt if the forgiveness occurs after 27 June 1996.

Under subsection 245-15(1) of Schedule 2C to the ITAA 1936 debt is defined as 'an enforceable obligation imposed by law on a person to pay an amount to another person'.

The taxpayer has entered into an agreement to loan money from the employee which is required by law to be repaid.

Further section 245-25 of Schedule 2C to the ITAA 1936 provides that a 'commercial debt' includes a debt on which interest paid is an allowable deduction.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, provided the losses or outgoings are not capital, private or domestic in nature.

Expenditure will generally be deductible under that section if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income, provided that the expenditure is not of a capital, private or domestic nature.

The payment of interest on the loan by the taxpayer to the employee is an expense that is necessarily incurred by the taxpayer in the carrying on of their business for the purpose of gaining or producing assessable income. None of the exceptions apply. Therefore the taxpayer would be allowed a deduction under section 8-1 of the ITAA 1997 for payments of interest to the employee.

Accordingly the loan will be a commercial debt to which the commercial debt forgiveness rules can apply.

What constitutes 'forgiveness' of a debt is specified in subsection 245-35(1) of Schedule 2C to the ITAA 1936 which provides that a debt is forgiven if the debtor's obligation to pay the debt is released or waived, or is otherwise extinguished.

The terms 'released' and 'waived' are not defined for the purposes of Schedule 2C. The Macquarie Dictionary of Law defines 'release' as 'the relinquishment of a legal right or claim against' another, and 'waiver' as 'the intentional renunciation of some legal right or immunity'. In the context of Schedule 2C both terms are considered to encompass circumstances where the debtor has been afforded relief from repaying the debt.

At the end of the loan, the taxpayer has the obligation to pay an amount which is the lesser of the following amounts:

i. where the loan unit value is equal to or greater than the issue price of the loan units, the principal outstanding; and

i. where the loan unit is less than the issue price of the loan units, the principal outstanding reduced by the amount specified in the following formula:

Note: loan units x (issue price - loan unit value)

The relevant amount is paid in full satisfaction of the principal outstanding.

In the context of Schedule 2C to the ITAA 1936 where the amount repaid is less than the amount provided as a result of a decline in the business' value does extinguish the debt as there has been the relinquishment of the legal right to claim repayment of the total amount provided.

Accordingly where the loan is not fully repaid at the end of the term due to a decline in the business' value there has been a commercial debt forgiveness within Division 245 of the ITAA 1936.

Question 4

It is necessary to consider whether two or more of the schemes are related schemes. Two or more related schemes together give rise to a debt interest in an entity if subsection 974-15(2) of the ITAA 1997 is satisfied.

The term 'related scheme' has the meaning given by section 974-155 of the ITAA 1997.

It is considered that the unit plan and the loan are not 'related schemes' within the meaning set out by section 974-155 of the ITAA 1997. On the facts, both schemes can be entered independently of each other. Participation in one scheme does not require participation in the other and the schemes do not have any reference to the other.

Although the schemes may have a common party, they are not to be taken as being related to each other merely for this reason (subsection 974-155(3) of the ITAA 1997).

It is also noted that an employee may source the funds to loan to the employer from the employer via a loan (Employee Loan Agreement). It is considered that the loan plan and the Employee Loan Agreement are not related schemes within the meaning of section 974-155 of the ITAA 1997. The Employee Loan Agreement merely specifies that the employee (the borrower) use the borrowed funds for income producing purposes. The Employee Loan Agreement covers all loans from the employer to the employee. The employee is free to source funds to loan the employer from any source - there is no requirement to borrow funds from the employer. Furthermore, there is no requirement that the employee use funds borrowed under the Employee Loan Agreement for the purposes of lending to the employer under the Unit Loan Plan. The only requirement in terms of the use of funds is that the employee uses the borrowed funds for income-producing purposes.

Therefore, the Unit Plan and the Unit Loan Plan will be considered separately.

Questions 5, 6, 7, 8 and 9 will be analysed in accordance with this view.

Question 5

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, provided the losses or outgoings are not capital, private or domestic in nature.

Expenditure will generally be deductible under that section if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income, provided that the expenditure is not of a capital, private or domestic nature. The essential character of an expense is a question of fact to be determined by reference to all the circumstances.

Payments made to an employee under the Unit Plan are considered to be extra payments given to the employee in the context of an employment relationship as a reward for their contribution to the growth or profits of the taxpayer's business (see discussion at Question 6). Such expenditure arises in the ordinary course of the taxpayer's business.

Accordingly payments to the employee under the Unit Plan are deductible to the taxpayer under section 8-1 of the ITAA 1997.

Question 6

Section 12-35 in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) provides that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

Under the Unit Plan an offer is made to the employee who amends their employment terms and generates a conditional right to certain cash payments for the employee. The unit is used to calculate business value and determine the value of all fractional interests in this value. The unit is not issued for any consideration payable by the employee, it is given to the employee.

It is considered that the cash payments received under the Unit Plan are cash bonuses received in the context of an employment relationship as they are an extra payment given to the employee as a reward for their contribution to the growth or profits of the taxpayer's business and they are only offered and issued to employees.

Accordingly amounts must be withheld from the payments to the employee under the Unit Plan in accordance with section 12-35 in Schedule 1 to the TAA 1953.

Question 7

Under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) a fringe benefit does not include a payment of salary or wages.

Further subsection 136(1) of the FBTAA defines salary or wages as meaning a payment from which an amount must be withheld under section 12-35 in Schedule 1 to the TAA 1953.

Amounts must be withheld from the payments to the employee under the Unit Plan in accordance with section 12-35 in schedule 1 to the TAA 1953 (see discussion at Question 6).

Accordingly the cash payments are salary or wages for the purposes of subsection 136(1) of the FBTAA and a fringe benefit does not arise in respect of such payments.

Question 8

Subsection 136(1) of the FBTAA defines a fringe benefit to mean a benefit provided to an employee by the employer, in respect of the employment of the employee, and the benefit is not listed under paragraphs 136(1)(f) to (s) of the FBTAA.

Further subsection 136(1) of the FBTAA defines benefit as including any right (including a right to, and an interest in, real or personal property), privilege, service or facility under an arrangement in relation to the performance of work.

Section 40 of the FBTAA specifically provides that the provision of property will be a benefit.

The principle that money can constitute property for the purposes of the FBTAA has the support of the Federal Court decision of Caelli Constructions (VIC) Pty Ltd v. Commissioner of Taxation (2005) 147 FCR 449; 2005 ATC 4938; 60 ATR 542. Kenny J, at FCR 465; ATC 4952; ATR 557, accepted the Commissioners submission that money constitutes property whilst formally rejecting the applicants argument that the FBTAA does not contemplate that the payment of money can constitute a property fringe benefit.

 Therefore the payment of money can be a property benefit under subsection 136(1) of the FBTAA.

Under the Loan Plan Agreement the employee will enter into an arrangement with the taxpayer to lend funds to the taxpayer. The employee is then entitled to receive monthly interest payments and to an amount (to be ascertained at the end of the scheme) in full satisfaction of the principal outstanding from the taxpayer.

Therefore the provision of money by the taxpayer to the employee will constitute a property benefit for the purposes of subsection 136(1) of the FBTAA.

However, for such a benefit to be considered a 'fringe benefit' for the purposes of the FBTAA, the primary criterion is that it must be provided 'in respect of employment' of an employee.

The expression 'in respect of' is defined in subsection 136(1) of the FBTAA as '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'. The term 'in respect of employment' has been considered by the courts on numerous occasions. In J & G Knowles & Associates Pty Limited v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22; it was noted that the term 'in respect of employment' includes benefits where:

...there is a sufficient or material, rather than a causal connection or relationship between the benefit and the employment...

In this case the employee enters into the loan agreement with the taxpayer in their capacity as an employee and there is no other relationship contemplated in the loan agreement. Therefore it can be concluded that there is a sufficient and material connection or relationship between the employment of the employee and the provision of a benefit for the benefit to be considered to be provided 'in respect of employment' within the meaning of the FBTAA.

None of the exclusions listed in subsection 136(1) of the FBTAA apply.

Accordingly the payment of money by the taxpayer to the employee under the Loan Plan Agreement will constitute a property fringe benefit for the purposes of subsection 136(1) of the FBTAA.

The taxable value of the property fringe benefit will be determined under section 43 of the FBTAA as an external property fringe benefit.

(Note: there will be no element of double taxation as subsection 23L(1) of the ITAA 1936 provides that income derived by a taxpayer by way of the provision of a fringe benefit is not assessable income and is not exempt income of the taxpayer.)

Question 9

Payments made to an employee under the Unit Plan are considered to be cash bonuses received in the context of an employment relationship and subject to the provisions of section 12-35 in Schedule 1 to the TAA 1953 (refer to the discussion at Question 6) and therefore would be assessable to the employee as ordinary income under section 6-5 of the ITAA 1997.

Accordingly the provisions of the ITAA 1997 pertaining to Capital Gains Tax (CGT) are not applicable and the units are not property for CGT purposes under Part 3-1 of the ITAA 1997.