Edited version of private ruling

Authorisation Number: 1011667237266

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Ruling

Subject: Exempt Fringe Benefits

Reasons for decision

Issue 1; Loans to Employees being exempt benefits

Question 1

Are the loans provided by the employer to its employees under its Environment Policy, Exempt Benefits under Section 58P of the Fringe Benefits Tax Assessment Act 1986? (FBTAA)

Answer;

Yes.

This ruling applies for the following periods;

1^st April 2011 to 31 March 2012

1^st April 2012 to 31 March 2013

1^st April 2013 to 31 March 2014

The scheme commenced on

1^st April 2011

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 employer has implemented a number of initiatives to support sustainable practices and promote environmental awareness among stakeholders including customers and employees. This fits within the employer's strategic objective of being seen and recognised as a socially responsible corporate citizen as detailed in the Environment Policy and Sustainability Report 2009 and 2010.

As part of this objective, the employer is considering implementing an employee loan arrangement to enable employees to acquire environmentally friendly products and services using an interest-free loan from the employer.

The key features of the arrangement are as follows

Employees will be entitled to obtain an advance of funds up to the level of expenditure they have incurred on approved environmentally friendly products/services a maximum of 2 times per year. The total amount advanced in any year will be capped at an amount such that the notional amount of interest that would otherwise apply to the loan based on the prevailing FBT benchmark interest rate would be less than $300 per annum ("Annual Cap"). In the current FBT year the Annual Cap would be approximately $4,000.

As part of the sustainability loans arrangement, the employee will enter into an agreement with the employer to repay the employer the amount they are advanced, The repayment terms will require equal fortnightly instalments to be repaid from after-tax dollars (expected to be up to 26 instalments) until the balance of the loan is nil. Should the employee be terminated prior to the end of the loan term, the loan will be repayable in full by the employee at termination.

The loans will only be provided in respect of products/services that have been approved by the employer sustainability team. Examples of proposed products that would be considered for the program include;

§ Grey water recycling

§ Rainwater tanks

§ Insulation

§ Solar panels

§ 5 star whitegoods

§ Bicycles

§ Car sharing memberships

§ Course fees for programs that promote sustainability

§ Other environmentally friendly products and services, subject to approval (approval would be considered in the context of the Environment Policy).

Employees will not be entitled to receive more than 2 loans under the policy in any year (with the aggregate value of the loans not exceeding the Annual Cap).

The aggregate notional value of the interest that would otherwise accrue on the loans (including any other loans granted under any other policy) will not exceed $300 per employee in any year.

The sustainability loans application process will be subject to verification to ensure that the amounts are only advanced in respect of approved environmentally friendly products or services.

No part of the arrangement will be under a salary sacrifice arrangement.

There will be no individual performance based conditions that need to be satisfied in order to enable employees to obtain the loans (for example employees will not need to meet certain individual targets to qualify for the loans). It is intended the policy will apply to all permanent employees.

Section 136(1) of the FBTAA defines a loan as being:

(a) On 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 express or implied) to repay the amount; and

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

Under the arrangement, it is intended that the employer will, upon evidence of expenditure on approved products/services, provide the employees with an advance of money equal to the amount incurred by the employee on the approved products/services.

As part of the arrangement, the employee will be under an obligation to repay the amount over an agreed number of instalments from their after-tax pay.

The obligation to repay the loan constitutes a loan under the FBTAA.

Is the provision of the benefit a fringe benefit?

Subsection 136(1) of the FBTAA, paragraph (g) of the definition of a fringe benefit confirms that a fringe benefit will not arise in respect of an exempt benefit in relation to the year of tax.

A benefit that satisfies the conditions outlined in section 58P of the FBTAA is an exempt benefit. We have provided further details on these conditions below.

Section 58P

The Commissioner has outlined his views on the application of the minor benefits exemption in Taxation Ruling 2007/12. The specific application to a loan arrangement in respect of annual rail tickets is also included in ATO ID 2002/926.

We have included the relevant guidance issued by the Commissioner, and our analysis of the provisions of section 58P below.

We address the four criteria required to establish a benefit is a minor benefit and hence exempt from FBT as follows:

i) The frequency with which the benefit, or similar or identical benefits, are provided to employees

The employees will be entitled to a maximum of 2 interest-free loans in any year. The timing of the loans and frequency with which an employee obtains the loans will differ between each employee. In practice, some employees will receive no loans under the arrangement in a particular year, whilst others may receive 1 or 2. It is reasonable to expect that in different years, different employees will access the benefits under the policy.

Given there are a maximum of two loan benefits provided to any employee during the year, and the make-up of employees receiving the loans is likely to change each year, we consider the benefits should be classified as infrequent and irregular based on the Commissioner's views in TR 2007/12.

ii) The sum of the notional taxable value of the benefit as well as any associated benefits

Employees will be entitled to apply for interest-free loans in respect of environmentally friendly products and services, up to a maximum aggregate loan value such that at no time will the notional value of the interest that would accrue under the loan (or any other loan) exceed $300 in any year. In fact, it is likely to be significantly less than $300 in any year.

The loan will be repaid in equal instalments over the year and must be repaid in full should the employee be terminated prior to the end of the loan term.

Where the advance of money is considered to constitute an expense payment fringe benefit, the notional value of the benefit would be nil as the employee makes after-tax contributions equal to the amount of the advance.

In the event an employee has any other loans with the bank (for example a home loan or investment loan) such loans would be;

§ as a general rule provided on commercial terms and exempt under section 17 of the FBTAA;

§ in the case of loans provided for investment purposes- have a taxable value of 'nil' under the otherwise deductible rule provided for under section 19 of the FBTAA; or

§ for a relatively small number of employees, may constitute another, separate loan benefit under section 17 of the FBTAA for which the employer would account for and pay the applicable FBT and for which the employee would receive a reportable fringe benefit amount.

iii) The practical difficulty for the employer in determining the notional taxable value of the benefits provided in a year of tax

The proposed arrangement will be administered through a combination of the sustainability team and payroll team. For example, the sustainability team will approve the advances where they fit within the guidelines of the policy and the payroll team will commence the fortnightly repayments directly from an employee's net pay.

As outlined in TR 2007/12, the Commissioner considers the difficulty for the employer in keeping the necessary records for this criterion. Given that employees will receive different loan amounts, it would be a significant administrative exercise, and require significant work on internal systems, to enable the tracking of the notional interest arising under the policy.

This is further complicated by the fact that payroll team deducts amounts from the employee's after tax pay on a fortnightly basis and the payroll system is separate to other systems within the organisation in particular the product systems.

Whilst these systems may, ostensibly, be capable of tracking loan balances they do not currently have the capability of distinguishing between employee and non-employee loans, Given that employee loans would constitute a small minority of accounts, the huge cost involved in modifying such systems simply to enable the necessary employee information to be maintained and allow integration with the payroll system is not commercially feasible.

iv) The circumstances under which the benefits were provided (e.g. not wholly, or principally, or as a reward for services rendered, or to be rendered)

The introduction of the sustainability loans policy is linked to the Environment Policy that is publicly available on the employer's internet site. The sustainability loans policy is for the purpose of encouraging environmental awareness and behaviour change amongst employees to empower them to reduce their own environmental impact. This will contribute to the employer's overall objective of being, and being seen to be, a sustainable and environmentally friendly organisation.

The sustainability loans policy will be added to the employer's Human Resources intranet site.

The sustainability loan initiative will not be advertised to employees as an incentive that is aligned with their remuneration package. There will be no individual based performance hurdles to be satisfied and it is intended the policy will be available for all salaried employees. The sustainability loans will not be provided to employees as a substitute for salary, wages, or bonuses and as such, based on TR 200 7/12 we believe this criterion is met,

All repayments will be made from after tax dollars and will not be part of a salary sacrifice arrangement. The circumstances under which the benefit will be provided will not be wholly, or principally as a reward for services rendered.

Additional ATO guidance on the application of the minor benefits exemption to loan fringe benefits

In ATO ID 2002/926, it was concluded that an interest-free loan provided to an employee to purchase an annual rail ticket should be classified as a minor benefit. In making its determination the ATO outlined that under section 58P of the FBTAA, the notional value of the benefit must be less than $300 per year and, having regard to the listed criteria, it would be unreasonable to treat the benefit as a fringe benefit during the year of tax.

The ATO noted that under the arrangement there was only one benefit provided at any one time, and a maximum of two loan benefits during the year. It also considered the provision of the rail ticket would be an associated benefit but would have a nil taxable value as the employee repays the employer during the year.

Our analysis of the requirements under section 58P of the FBTAA, coupled with guidance issued by the Commissioner in TR 2007/12, concludes that section 58P should apply to the sustainability loan arrangement.

Detailed reasoning

Paragraph (c) of subsection 136(1) of the FBTAA defines a loan as including 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.

Given that…

(a) an arrangement is entered into between the employer and the employee prior to the provision of the loan; that

(b) there is an obligation on the part of the employee to repay the cost of the loan in instalments.

It is considered that this meets the requirements of Para (c) of the definition of 'loan' under subsection 136(1) of the FBTAA.

Under the provisions of subsection 16(1) of the FBTAA, the making of the loan gives rise to a loan fringe benefit.

The taxable value of a loan fringe benefit, pursuant to section 18 of the FBTAA, is the difference between:

§ the interest that would have accrued during the tax year if the benchmark interest rate had applied to the daily balance of the loan; and

§ the interest (if any) which actually accrued.

As no interest is payable on the loan, subsection 16(5) of the FBTAA states that the rate of interest is taken to be nil.

The aggregate notional value of the interest that would otherwise accrue on the loans will not exceed $300 per employee in any year

As each expected notional loan value is less than $300 they may be classified as minor benefits (and hence exempt) provided they meet the other requirements of section 58P of the FBTAA.

As the loan fringe benefit is provided in a year of tax and in respect of the employment of the employee by the employer with a taxable value of less than $300, paragraphs (a) to (e) of subsection 58P(1) of the FBTAA are satisfied.

Paragraph (f) of subsection 58P(1) of the FBTAA requires that some further conditions must be satisfied for the exemption to apply.

In summary these are:

§ the infrequency and irregularity with which similar or identical benefits (or benefits given in connection with the minor benefit) are provided

§ the value of the minor benefit and similar or identical benefits;

§ the value of the minor benefit and other associated benefits;

§ the practical difficulty for the employer in determining the value of the minor benefit and associated benefits; and

§ the circumstances in which the minor benefit and associated benefits are provided.

Each one of these conditions needs to be examined.

The infrequency and irregularity with which similar or identical benefits (or benefits given in connection with the minor benefit) are provided

In Case2/96, 96 ATC 131, the AAT concluded that the provision of taxi travel to an employee would be an exempt minor benefit if the number of trips in an FBT year was less than 48 or, on a monthly averaging basis, less than four a month.

Whilst some reservation could be expressed about the frequency limit stated in that case, a loan benefit only arises at the time the loan is made (subsection 16(1) of the FBTAA).

As the loans in this case will only be made on no more than two occasions each FBT year to each relevant employee, it is considered that the benefits provided are within the meaning of 'infrequent and irregular' as stated in paragraph 58P(1)(f) of the FBTAA.

The value of the minor benefit and similar or identical benefits and the value of the minor benefit and other associated benefits

The benefit received meets the value test of the section in that it is less than $300. Further, the employer has stated that the recipients of this type of benefit would be not be in receipt of other benefits of this nature from the employer.

Accordingly, this condition has been satisfied for these employees.

The practical difficulty for the employer in determining the value of the minor benefit and associated benefits

It is likely that the calculation of the fringe benefit on a diminishing value method would cause practical difficulty for the employer in determining the value of the minor benefit and associated benefits for a number of employees.

The circumstances in which the minor benefit and associated benefits are provided

In considering this issue, regard must be had to matters including:

§ whether the benefit was provided as a result of an unexpected event; and

§ whether the benefit provided should be considered to be principally in the nature of remuneration for services rendered.

No specific guidelines are available as to how the Commissioner should apply this factor and each case must be decided on its own facts.

Clearly, the loans are not provided as a result of an unexpected event as the arrangement is to be entered into prior to the loan being made.

However, given that the loan is being repaid, it cannot be said that the benefit is being provided principally in the nature of remuneration for services rendered.

It is considered that, overall;

…the circumstances of the arrangement are such as not to deny the loan benefits being considered as minor benefits under this condition.

The FBT Subcommittee of the National Tax Liaison Group (NTGL) have discussed a similar issue, and item 10 of their minutes of 10 December 1998 reports the following

Overview

This paper discusses whether loan fringe benefits provided in the form of salary sacrificed annual met travel tickets, qualifies for an exemption from fringe benefits tax (FBT) on the basis of the minor, infrequent and irregular rule.

The interest charged on most loans is less than $100 annually for each employee and the benefit provided (the loan) infrequent and irregular.

Facts

Many employers offer employees a loan to purchase annual Metropolitan Rail tickets on the following terms:

…the employer will purchase the ticket on behalf of employees;

…the cost of the ticket and the fringe benefits tax are deducted from the net salary in equal instalments;

…where the employee leaves the employer during the period the loan is outstanding, the balance of any loan is repaid in full;

…the maximum estimated FBT cost for a Metropolitan Rail tickets ticket (in Victoria) covering zones 1 to 3 is $38.00; and

…employers do not generally provide any other loans to employees.

After some discussion, the following conclusion was reached.

Using this analysis, it is clear that the provision of a loan fringe benefit for the purchase of annual Metropolitan Rail tickets for employees, will constitute infrequent and irregular benefits as the loan is a one-off loan benefit, an isolated or rare which is not generally extended to employees on any other occasion.

It is equally clear from section 58P of the FBTAA that the loan to an employee is minor, as interest accrued in respect of the loan as calculated by Section 16(1) of the FBTAA it falls below the $300 threshold required.

Therefore, the provision of the loan to employees to purchase Metropolitan Rail tickets is in accordance with section 58P of the FBTAA and should be exempt from FBT.

ATO Response

On the basis of the facts provided, the ATO agreed, having regard for the tests in section 58P, that the benefit is a 'minor benefit".

Residual Benefits

Section 45 of the FBTAA 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 the benefit is a loan fringe benefit pursuant to section 16 which is a provision of Subdivision A of Division 4 of the FBTAA, it cannot be a residual fringe benefit as defined.

Conclusion

The facts of this case are very similar to those presented in the NTLG minute where it was accepted that the conditions of section 58P of the FBTAA were met.

In view of all the above, provided the benefit meets all of the requirements of section 58P of the FBTAA, it is considered that such a benefit will be a minor benefit and exempt from FBT.