Edited version of private ruling

Authorisation Number: 1011827215151

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Ruling

Subject: Fringe Benefits Tax - benefit arising upon discharge of a limited recourse loan

Question 1

Will a fringe benefit as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) arise upon the discharge of the balance of the loans given to the employees?

Answer

Yes

Relevant facts and circumstances

In or around 2008, you provided loans to four of your employees to acquire ordinary shares in your company.

The loans were made as part of your Executive Share Purchase Plan.

The object of the Share Purchase Plan is to assist in the reward, retention and motivation of executives and employees of Group Companies by providing for the purchase of shares by or on behalf of eligible persons.

Under clause 4.4 of the Plan an eligible person on receipt of a written notice of acceptance of an offer under the plan and the execution of documents is entitled to acquire shares on-market in consultation with you.

Under clause 4.6 the participant is not able to sell, assign or transfer a plan share until the loan is repaid in full. To ensure this occurs, the shares are subject to a holding lock until the loan is repaid in full.

Clause 5.1 provides that the loan is on terms that you prescribe from time to time and specified in any offer under the Plan including the terms on which the loan is repayable following the cessation of the employee's employment.

Clause 5.2 requires the entire amount of the loan to be applied towards paying in full for the shares.

Under clause 5.3 a loan granted under the plan to a participant will be at a rate of interest equivalent to the cash dividend payable in respect of the shares acquired under the plan.

Under clause 5.4 the participant may pay their loan in full at any time during the term of that loan or make partial payments in amounts not less than those specified by the Board from time to time.

Clause 5.5 provides that if a loan is repaid in part, the Company will release to the participant the shares financed by the amount of the repayment.

Under clause 5.6 each cash dividend payable in respect of each share purchased under the Plan acquired in whole or in part by the loan is to be applied in repayment of the interest payable under the loan.

You advised in your Private Ruling application that it was a loan terms at the time of the sale of the shares that if the employee elected to:

(a) sell all their shares (as infact occurred); and

(b) apply the sale proceeds to monies owing to you under their respective loan terms (as occurred),

then you would discharge the employee from their remaining obligations under the loan terms and waive the balance of monies owing there under, if any.

Upon the employees applying the sale proceeds to the balance of the loans you discharged the employees from their remaining obligations under the loan terms and waived the shortfall.

You provided copies of a Deed of Termination of Employment for one of the employees and an Executive Share Purchase Plan Loan Repayment Agreement for another two employees.

These above agreements, which were signed after or upon the termination of the employees' employment with you, contained clauses detailing the terms for the employees' remaining obligations under the loan terms.

Your Chairman has made the following statements to further clarify details of the loans:

It was at all times, including at the time that the loans were granted, the understanding of Vision and the relevant employees that the loans were to be limited in recourse to the shares acquired. It is your Chairman's view that the employees would not have accepted the loans from you if this was not a condition of the loan.

That the employees were entitled to, and did in fact, apply the proceeds from the sale of their shares to the balance of the loans in full and final satisfaction of monies owed and without further recourse by you is consistent with the understanding of the parties at the time the loans were entered into. This was not specifically confirmed in writing at the time the loans were granted due to an oversight, but was re-clarified in writing at the time a sale of shares was being contemplated.

Reasons for decision

Will a fringe benefit as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) arise upon the discharge of the balance of the loans given to the employees?

Broadly, 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.

Has a benefit been provided?

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

· an arrangement for or in relation to:

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

· the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

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

· a contract of insurance; or

· an arrangement for or in relation to the lending of money.

This definition is expanded by section 14 of the FBTAA which states:

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 provided at that time by the provider to the recipient.

In your situation, the employees repaid the loans, provided by you to purchase the shares, with the proceeds of the sale of those shares. The proceeds of the sales of the shares were less than the amount of the loan to be repaid, the balance of the loans for all four employees was forgiven.

As the balance of the monies owing was not required to be repaid a benefit has been provided in accordance with section 14.

Was a benefit provided to an employee or an associate of an employee?

As stated above the benefits were provided to your employees.

Was the benefit provided by the employer, an associate of the employer, or a third party under an arrangement?

The benefits were provided by the employer.

Were the benefits provided in respect of the employment of the employees?

The phrase 'in respect of' in relation to the employment of an employee is defined in subsection 136(1) of the FBTAA to include 'by reason of, by virtue of, for or in relation directly or indirectly to, that employment'.

The meaning of this phrase was considered by the Federal Court in J & G Knowles v. Federal Commissioner of Taxation [2002] 96 FCR 402; 2000 ATC 4151; 44 ATR 22 (Knowles) and Starrim Pty Ltd v. Federal Commissioner of Taxation [2000] FCA 952; 2000 ATC 4460; 44 ATR 487 (Starrim).

In Knowles the Full Federal Court considered the judgements in Smith v. FCT (1987) 164 CLR 513; 19 ATR 274; 87 ATC 4883 and Federal Commissioner of Taxation v. Rowe (1995) 60 FCR 99; 31 ATR 392; 95 ATC 4691 before concluding that it is not sufficient for the purposes of the FBTAA to conclude that there is a causal connection between the benefit and the employment.

At paragraph 26 the Court said:

Whatever question is to be asked, it must be remembered that 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

At paragraphs 28 and 29, the Court said:

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. In particular, the fact that a benefit is provided to a director because it was authorised by that director will not, of itself, be sufficient to characterise the benefit as one which is "in respect of" the employment. Without more, it is not a product of incident of that office.

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: see FCT v Rowe (1995) 60 FCR 99 at 114 and 123; 31 ATR 392 at 404 and 412; 95 ATC 4691 at 4703 and 4710. Although Brennan, Deane and Gaudron JJ observed in Technical Products (at 47), that the requisite connection will not exist unless there is "some discernible and rational link" between the 2 subject matters which the statute requires to be linked, as was pointed out by Dawson J (at 51), the connection must be "material".

In Starrim Lindgren J. further considered the phrase 'in respect of' in relation to a private company which provided benefits to a husband and wife who were its only shareholders and directors. In considering whether the benefits were provided in respect of their employment as directors, Lindgren J said at paragraph 52:

Fourthly, the decision of the full court in Knowles establishes that the required relationship between the provision of a benefit and the employment is not established merely by the existence of some or a causal relationship, and, in particular, that it is not established by nothing more that the fact that the employee has been able to cause the benefit to be provided to him by reason of his or her office as a director of the employer. There must be a "sufficient" or "material" relationship between the employment and the provision of the benefit.

In coming to our decision, we have taken into consideration ATO Interpretative Decision ATO ID 2003/316 Fringe Benefit: benefit arising upon discharge of a limited recourse loan which states:

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) 44 ATR 22.

In arriving at the conclusion that a fringe benefit did not arise on the discharge of a limited recourse loan the ATO ID 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 terms of the loan provided that the employee may elect to transfer to the lender in full and final satisfaction of the loan balance. The benefit was in respect of exercising of the right not in respect of the employee's employment.

In contrast, the terms of loans to your employees do not provide an election or right to transfer the shares to the lender in full and final satisfaction of the loan balance.

Clause 4.6, of the Terms of the Loan, prevents the sale, assignment, transfer or encumbrance of a plan share until the loan is repaid in full, while clause 5.4 provides that a participant may either repay the loan in full or make partial payments in amounts not less than those specified by the Board.

Further, the conditions stated in the Deed of Termination of Employment for one employee states that the loan must be repaid in full by a specified date. Further clause 3.5 provides that the balance of the loan will be forgiven.

The Loan Repayment Agreements for another two employees, who both had resigned or were resigning, state that the loan must be repaid in full by a specified date or at a later date as agreed between the parties. Both Agreements provide that the balance of the loans will be forgiven.

Therefore we consider that the benefit was not the result of the employees exercising a right as none of the above documents contain a right or election.

Was the benefit provided 'in respect of employment'?

In considering whether the benefit was provided 'in respect of employment' the loans were provided to the employees who were selected by your board, as a reward, method for retention or as motivation.

Employee is defined under subsection 136(1) of the FBTAA as:

o a current employee;

o a future employee; or

o a former employee.

While 'former employee' is also defined in subsection 136(1) to mean 'a person who has been a current employee'.

The Deed of Termination of Employment and the Loan Repayment Agreements apply have been signed either on the last day of the employment of an employee or after the employees have ceased employment with you.

Therefore, although the employees are no longer employed by you, the benefit provided can still be in respect of the employment of the employee.

The Deed of Termination of Employment and the Loan Repayment Agreements require that the former employees consult with you in the selling or procuring the sale of the Plan Shares and that they comply with all reasonable requests by you in relation to the sale.

The above documents also provide that the net sale proceeds of the Plan Shares will be applied to the balance of the loans and any balance of the loan will be forgiven.

In above factors indicate that the benefits were provided in respect of the employment of the employees.