Edited version of private advice

Authorisation Number: 1052325886699

Date of advice: 19 December 2024

Ruling

Subject: Exempt loan benefits

Question 1

Will loans provided by the employer to employees be an exempt loan benefit under section 17(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer 1

Yes.

This ruling applies for the following periods:

Fringe Benefits Tax (FBT) Year ended 31 March 20XX

FBT Year ended 31 March 20XX

FBT Year ended 31 March 20XX

FBT Year ended 31 March 20XX

The scheme commenced on:

1 April 20XX

Relevant facts and circumstances

The employer carries on a business which includes a range of lending activities provided to members of the public.

The employer will set a 'best rate on offer' (BROO) by reference to market conditions. This is the lowest interest rate that the employer can offer to a specific class of customers.

The employer's standard credit assessment criteria will always be applied to determine borrowing capacity and eligibility.

The employer is proposing to offer all employees that take out a new variable home loan, or request a rate refresh, an interest rate equal to the BROO.

All home loans offered to employees will be subject to the same standard terms and conditions that apply to a standard customer. The class of customers eligible for the BROO comprise a wide and substantial section of the community.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 16

Fringe Benefits Tax Assessment Act 1986 section 17

Fringe Benefits Tax Assessment Act 1986 section 136

Reasons for decision

Section 16 of the FBTAA states that a loan benefit will arise when an employer makes a loan to an employee. However, a loan will be an exempt loan benefit where section 17 of the FBTAA applies.

Subsection 17(2) of the FBTAA provides that:

Where:

(a)           a loan is made by a person who carries on a business that consists of or includes making loans to members of the public; and

(b)           the rate of interest from time to time payable in respect of the loan in respect of a year of tax is not less than the rate of interest applicable at the time concerned in respect of a similar arm's length loan made by the person, at or about the time the loan referred to in paragraph (a) is made, to a member of the public in the ordinary course of carrying on that business;

the making of the loan is an exempt benefit in relation to that year of tax.

The specific requirement of paragraphs 17(2)(a) and 17(2)(b) of the FBTAA must be considered in relation to the circumstances to determine whether variable interest rate home loans made by to employees will be exempt from FBT under subsection 17(2) of the FBTAA.

Loan is made by a person who carries on a business that consists of or includes making loans to members of the public

A 'person', as defined in subsection 136(1) of the FBTAA, includes a body corporate. The employer is a corporation, and therefore, meets the definition of a 'person'.

The employer is a person who carries on a business that consists of or includes making loans to members of the public, therefore the requirements of paragraph 17(2)(a) are met.

Loan interest rate not less than a similar arm's length loan made to a member of the public in the ordinary course of the lender's business

To satisfy paragraph 17(2)(b) of the FBTAA, the loans must be made at an interest rate that is not less than a similar arm's length loan made to a member of the public in the ordinary course of business.

The term 'member of the public' is not defined in the FBTAA. The Commissioner's view is set out in Taxation Ruling TR 2000/10 Income tax: public libraries, public museums and public art galleries. It states at paragraph 18:

To be a public library, museum or art gallery it must be open to the public. This does not necessarily mean the whole community. It may mean a section of the community, provided it is a wide and substantial section of the community. A library made available to a body of students at a public educational institution has, therefore, been accepted as a library open to the public. A public educational institution is generally a school, college or university operated on a non-profit basis. It is not relevant that the institution is generally known or described as 'public' or 'private'. The fact that an institution charges fees does not necessarily affect its status as a public educational institution. However, a profit motive in the founders of an institution almost certainly excludes it from being a public educational institution: Trustees of the Cardinal Vaughan Memorial School v. H.E Ryall (Surveyor of Taxes) (1920) 7 TC 611. An organisation operated merely for the joint benefit of its members, for example, a professional association, is not a public educational institution.

In this case, the BROO offered by the employer to employees is available to a wide and substantial section of the community, such that it is accepted that this class of customers are 'members of the public' for the purpose of section 17(2) of the FBTAA.

The employer has advised that the terms and conditions of variable home loans which are offered at the BROO will be the same as the terms and conditions which will be offered to employees.

All variable home loans offered to employees will be subject to the employer's standard terms and conditions.

The relevant interest rate (BROO) offered by the employer to employees will not be lower than the interest rate being offered to members of the public. Therefore the requirements of paragraph 17(2)(b) will be met.

Conclusion

Variable interest home loans made by an employer to their employees will be an exempt loan benefit under subsection 17(2) of the FBTAA.