Edited version of private ruling

Authorisation Number: 1011853421423

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Ruling

Subject: Loan fringe benefits

Question 1

Does the 'otherwise deductible rule' contained in section 19 of the FBTAA apply to reduce the taxable value of the loan fringe benefit to nil?

Answer

Yes

Question 2

If a dividend paid to an employee is applied towards the repayment of the loan, will the repayment constitute a fringe benefit as defined in subsection 136(1) of the FBTAA?

Answer

No

Question 3

If any amount, which has already had the applicable amount withheld in accordance with Division 12 of Schedule 1 to the Taxation Administration Act 1953 (TAA), is applied towards the repayment of the loan, will the repayment constitute a fringe benefit as defined in subsection 136(1) of the FBTAA?

Answer

No

This ruling applies for the following periods:

Year ended 31 March 2011

Year ended 31 March 2012

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Company A is proposing to establish an employee share ownership plan (ESOP) pursuant to the draft Plan Deed provided with the ruling application.

Under the terms ESOP, the draft Offer Letter and Plan Booklet provided, Company A intends to offer an employee of Company B ordinary shares in Company A. The share purchase will be funded by a loan also outlined in the documents provided.

Company B is 100% owned by Company A.

The loan will be interest free for a period of five years. Repayments will be made in set instalments from the employee's after tax salary. In addition the after tax amount of any bonuses received must be applied to the outstanding balance of the loan. In addition the after tax amount of any dividends paid in respect of the shares issued under the must be applied to the outstanding balance of the loan.

Relevant legislative provisions

FBTAA Section 16

FBTAA Section 18

FBTAA Section 19

FBTAA Subsection 136(1)

TAA Division 12 of Schedule 1.

Reasons for decision

Question 1

Does the 'otherwise deductible rule' contained in section 19 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) apply to reduce the taxable value of the loan fringe benefit to nil?

Summary

The otherwise deductible rule will apply to reduce the taxable value of the loan benefit to nil.

Detailed reasoning

In brief, a loan fringe benefit will arise will arise where a loan is made to an employee and the amount of interest charged (if any interest is charged), on that loan is less than the statutory (or benchmark) interest rate.

In this case under the ESOP a loan is being made at a nil rate of interest so a loan fringe benefit arises with the taxable value of the benefit being the amount of interest that would have been charged at the benchmark interest rate.

However under section 19 of the FBTAA, this taxable value is reduced by the amount that the employee would have been able to claim as an income tax deduction had they actually incurred interest on the loan. This is referred to as the otherwise deductible rule.

As explained in paragraph 9 of Taxation Ruling IT 2606 Income Tax: Deductions For Interest on Borrowings to Fund Share Acquisitions as a general rule, interest on money borrowed to acquire shares will be deductible where it is expected that dividends or other assessable income will be derived from the investment. Although the employee is able to sell the shares at any time the intent of the ESOP is to allow employees to share in and enjoy the benefits of ownership of Company A. This includes the payment of dividends to shareholders.

Therefore (providing the substantiation requirement are met), the otherwise deductible rule in section 19 of the FBTAA will apply. Generally, to substantiate a claim the employee has to make a declaration to the extent that the interest would have been otherwise deductible. However this declaration is not required if the loan is an employee share loan benefit.

An employee share loan benefit is defined in subsection 136(1) of the FBTAA as:

in relation to a year of tax, means a loan fringe benefit in relation to an employee in relation to an employer in relation to the year of tax where:

(a) the sole purpose of the making of the loan is to enable the employee to acquire shares, or rights to acquire shares, in a company, being:

(i) the employer; or

(ii) an associate of the employer; and

(b) the shares or rights were beneficially owned by the employee at all times during the period during the year of tax when the employee was under an obligation to repay the whole or any part of the loan.

In this case the sole purpose of the loan is to allow an employee of Company B to acquire shares in Company A.

In looking at whether these entities are associates we need to look at the definition of an associate in subsection 136(1) of the FBTAA which states that an associate has the same meaning as that given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

In looking at the definition of an associate as it applies to a company in subsection 318(2) of the ITAA 1936 a wholly owned subsidiary of a company would satisfy this definition. Therefore as Company B is 100% owned by Company A both entities are associates of each other.

The information provided also show that the employee will be the beneficial owner of the share while under an obligation to repay the loan.

Therefore the loan is an employee share loan benefit and there is no need for the employee to provide a declaration for section 19 of the FBTAA will apply.

As there is no other substantiation requirements section 19 of the FBTAA will apply to reduce the taxable value of the loan fringe benefit to nil.

Question 2

If a dividend paid to an employee is applied towards the repayment of the loan, will the repayment constitute a fringe benefit as defined in subsection 136(1) of the FBTAA?

Summary

The repayment of the loan is not a fringe benefit as defined in subsection 136(1) of the FBTAA

Detailed reasoning

For a fringe benefit to arise under subsection 136(1) of the FBTAA the employee has to be provided with a benefit in respect of their employment.

A benefit is defined under subsection 136(1) of the FBTAA and has a broad meaning and includes rights, privileges or services. Under the ESOP the employee receives a benefit in the form of a loan to which a loan fringe benefit. This benefit exists while the employee has an obligation to repay the amount advanced.

A payment made by the employee to reduce the amount owing on the loan does not create a separate benefit, it is a payment being made in respect of an existing fringe benefit (being the loan).

The only other fringe benefit that could possibly arise in respect of a loan provided to an employee would be a debt waiver fringe benefit if the employee's obligation to repay the loan was waived (either in part or in full).

Although the ESOP the employee is obliged to apply any dividend they receive towards the outstanding balance of the loan their obligation to repay the loan has not been waived. This is money that has to be paid by the employee to the provider of the loan which (if not for the terms of the ESOP), the employee would have been free to use elsewhere.

In addition, in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22, the full Federal Court in examining its meaning in relation to fringe benefits tax noted that for a fringe benefit there needs to be a sufficient or material, rather than a causal connection or relationship between the benefit and the employment.

Although there is a causal connection between the dividend and employment (in that the shares were originally issued as a result of the employee's employment) the payment of the dividend is paid as a consequence of the employee's shareholding.

Question 3

If any amount, which has already had the applicable amount withheld in accordance with Division 12 of Schedule 1 to the TAA is applied towards the repayment of the loan, will the repayment constitute a fringe benefit as defined in subsection 136(1) of the FBTAA?

Summary

The repayment of the loan from salary and wages is not fringe benefit as defined in subsection 136(1) of the FBTAA.

Detailed reasoning

As explained above the repayment of a loan does not give rise to a separate fringe benefit. All it does is reduce the amount owing

In addition, the payment of salary and wages (which is a benefit provided in respect of employment), is specifically excluded as a fringe benefit in paragraph (f) of the definition of the term fringe benefit in subsection 136(1) of the FBTAA.