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Subject: loan fringe benefits and the minor exemption

Question 1

Does a loan fringe benefit as described in section 16 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) arise if model 3 is adopted in respect of the change from a weekly to fortnightly pay cycle?.

Answer

Yes

Question 2

If the answer to question 1 is yes, does section 58P of the FBTAA apply to exempt the loan benefits provided in respect of model 3?

Answer

No.

This ruling applies for the following periods:

Year ended 31 March 2012

Year ended 31 March 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The employer is moving from a weekly pay cycle to a fortnightly pay cycle and is considering making a once off payment to assist with any potential disadvantages which may occur for employees and are considering the following three models in respect of that payment:

· Model 1: One week's normal pay is advanced repaid by the employee in equal instalments over 13 pay periods.

· Model 2: One week's normal pay Is advanced repaid by the employee in equal instalments over 26 pay periods.

· Model 3: One week's normal pay is advanced repaid by the employee by deduction from their termination payment when leaving their employment with the employer.

This ruling is being provided in respect of model 3.

In addition, the submission provided by the employer states that for a small number of employees (if a loan benefit does arise), the notional value of the benefit is expected to exceed $300. This ruling will only apply to employees who receive benefits with a notional value under $300.

No interest will be charged on this advance.

Relevant legislative provisions

FBTAA section 16

FBTAA section 18

FBTAA section 58P

FBTAA subsection 136(1)

Reasons for decision

Question 1

Summary

The payment made as a result of the change in the pay cycle from weekly to fortnightly under model 3, will create in a loan fringe benefit as defined under section 16 of the FBTAA 1986.

Detailed reasoning

Subsection 16(1) of the 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 by the provider to the recipient and that benefit shall 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.

A loan is defined in subsection 136(1) of the FBTAA as:

Includes:

(a) an 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 expressed or implied) to repay the amount; and

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

In respect of model 3 (and models 1 and 2) the employer will be making a payment to each employee equal to one week's salary. In addition there is a condition attached to the payment that the employee repays that money to the employer (Model one is over 13 pays or approximately 6 months, Model 2 over 26 pays or approximately 12 months, or Model 3 on termination of employment).

As there is an obligation to repay the payment to the employer the definition of a loan in paragraph 136(1)(c) of the FBTAA is satisfied.

Under the definition of a loan benefit contained in subsection 16(1) of the FBTAA a loan benefit will arise in each year (or part of) where the obligation repay the payment (or any part of the advance) back to the employer exists.

Under Model 3 a loan benefit will arise until the employee repays the payment out of their termination payment.

Question 2

Summary

Section 58P of the FBTAA does not apply to this benefit because of the open-ended nature of the loan.

Detailed reasoning

Section 18 of the FBTAA explains how the taxable value of a loan fringe benefit is calculated and states:

Subject to this Part, the taxable value, in relation to a year of tax, of a loan fringe benefit provided in respect of the year of tax is the amount (if any) by which the notional amount of interest in relation to the loan in respect of the year of tax exceeds the amount of interest that has accrued on the loan in respect of the year of tax.

In this case no interest is being charged so the taxable value is calculated on the difference between the notional amount of interest and the interest actually charged. As no interest is being charged the taxable value in this case will be the notional amount of interest.

The notional amount of interest is defined in subsection 136(1) of the FBTAA. As the loan was not made before 3 April 1986, the notional amount of interest is the amount of interest that would have accrued on the loan in respect of the year of tax if the interest had been charged on the daily balance of the loan at the statutory rate of interest. The statutory rate of interest is also referred to as the 'benchmark interest rate' and is set at the beginning of each fringe benefits tax (FBT) year of tax.

The taxable value calculated under section 18 of the FBTAA is the notional value used when looking at the application of section 58P of the FBTAA. In respect of the application of section 58P the Commissioner issued Taxation Ruling TR 2007/12 Fringe benefits tax: minor benefits. Paragraph 8 states:

A minor benefit is an exempt benefit under section 58P where:

· the notional taxable value of the minor benefit is less than $300; and

· it would be concluded that it would be unreasonable, having regard to the specified criteria in paragraph 58P(1)(f), to treat the minor benefit as a fringe benefit.

In this case the notional value of the loan benefit will be below $300. It is the second dot point that needs to be examined to determine if section 58P applies. In respect of this second dot point, the steps to take in meeting this criteria are listed in the electronic version of our publication Fringe benefits tax - a guide for employers in chapter 20.8, which states in part:

The following five criteria need to be considered when deciding if it would be unreasonable to treat the minor benefit as a fringe benefit.

1. The infrequency and irregularity with which associated benefits, being benefits that are identical or similar to the minor benefit and benefits given in connection with the minor benefit, are provided. The more frequently and regularly associated benefits are provided, the less likely that the minor benefit will qualify as an exempt benefit.

2. The total of the notional taxable values of the minor benefit and identical or similar benefits to the minor benefit. The greater the total value of the minor benefit and identical or similar benefits, the less likely it is the minor benefit will qualify as an exempt benefit.

3. The likely total of the notional taxable values of other associated benefits - that is, those provided in connection with the minor benefit. For example, where a meal, which is a minor benefit, is provided in connection with a night's accommodation and taxi travel, which themselves may or may not be a minor benefit, the total of their taxable values must be considered. The greater the total value of other associated benefits, in this case being the accommodation and the taxi travel, the less likely it is that the minor benefit will qualify as an exempt benefit.

4. The practical difficulty in determining what would be the notional taxable value of the minor benefit and any associated benefits. This would include consideration of the difficulty for you in keeping the necessary records in relation to the benefits.

5. The circumstances in which the minor benefit and any associated benefits were provided. This would include consideration as to whether the benefit was provided as a result of an unexpected event, and whether or not it could be considered principally as being in the nature of remuneration.

Criterion 1 - frequency and irregularity

In respect of Model 3 there is a single loan being provided to each employee. However under subsection 16(1) of the FBTAA, when an employer makes a loan of money to an employee, a loan benefit arises in respect of each year in which an employee is under an obligation to repay the whole or any part of the advance.

This means that although only one loan is made multiple loan benefits will arise from the making of the loan. The total number of loan benefits provided to a particular can only be determined when the employee's employment terminates.

This could be contrasted with models 1 which and 2 which have a fixed repayment schedule which would result in the loan being repaid in less than two FBT years.

Criterion 2 - total of the notional taxable values of the minor benefit and identical or similar benefits to the minor benefit

Once gain as model 3 is open ended the total notional value of all the loan benefits provided in respect of the loan cannot be determined until the employee's employment terminates.

However excluding the first and last FBT year the notional value will be the notional amount of interest calculated at the benchmark interest rate.

This could be contrasted with models 1 which and 2 which have a fixed repayment schedule which means that the total of the notional taxable values can be determined in advance for Model 1 and estimated for Model 2 (can only be estimated as the benchmark interest rate for 2013 will not be issued until April 2012).

Criterion 3 - likely total of the notional taxable values of other associated benefits - that is, those provided in connection with the minor benefit.

This criterion has no application as there are no other benefits provided in conjunction with the loan.

Criterion 4 - practical difficulty in determining what would be the notional taxable value of the minor benefit and any associated benefits

As the employer will know the amount of the advance and that the taxable value is calculated by applying the benchmark interest rate to the outstanding balance there would be no difficulty in determining the taxable value of the loan benefit.

Criterion 5 - The circumstances in which the minor benefit and any associated benefits were provided.

The loan benefit is being made to assist employees in dealing with problems they might encounter a result of employer's decision to move from a weekly to a fortnightly pay cycle.

The reason behind providing the loan (being the move to a fortnightly pay cycle) is not unexpected this is something the employer has planned to do. Nor could it be said that the loan was made to meet unexpected expenses of an employee as the loan is being made to all employees regardless of their personal circumstances.

However as the loan is being offered to all employees it could not be considered to be provided in the nature of remuneration. Also if it was remuneration there would be no requirement to repay the amount and it would be treated as salary and wages.

Conclusion

In respect of Model 3 the fact that the loan does not have to be repaid until the employee's employment is terminated means that the loan exists for the remained of the employee's employment with the employer. This provides for a recurring benefit each FBT year until the employee ceases that employment.

In a single year it would be easy to determine the notional value of the benefit and that the notional value would be less that $300. However the longer the employee remains employed the total of these individual notional values increases.

As Model 3 has the effect of allowing the employee to receive a loan benefit indefinitely we are unable to conclude that section 58P of the FBTAA will apply.