Loan Fringe Benefit
A loan fringe benefit involves an employer (or an associate or third-party under an arrangement) providing an employee (or an associate of the employee or a directed third-party) with a loan (not including a loan of property) carrying a low or no interest rate.
Note that a loan also includes a debt that remains after the due date of repayment of that debt.
A loan benefit will be exempt from FBT in any of the following circumstances:
- The employer is in the business of lending money and the rate of interest charged is equal to or greater than the interest charged on a comparable loan to a third-party.
- The employer provides the money to the employee to cover work-related expenses to be incurred within six months.
- The employer provides the loan to enable to employee to cover a security deposit on accommodation e.g. a rental bond. Further conditions must be satisfied.
- The loan is provided for reasons unconnected with the employment of that employee. For example, where a director of a company makes a cash drawing from the company bank account. It is not necessary the case that the benefit of private access of company funds is connected with the employment of the director.
- The loan is subject to the deemed dividend provisions in Division 7A of the Income Tax Assessment Act 1936. These provisions are relevant where the loan is provided to an employee who is also a shareholder or associate of a shareholder in the employer company.
Taxable value of a loan fringe benefit
The taxable value of a loan fringe benefit is based on the difference between the statutory rate (which is considered an ‘arms-length’ interest charge) and the actual interest rate charged to the employee (or associate). The logic is that a low or no interest loan to any employee is a form of ‘benefit’ that should be captured by the FBT regime. Obviously therefore, if the interest rate charged is at least equal to the statutory rate then the loan provided will not have an FBT consequence (as there is no benefit being afforded to the employee-borrower). The statutory interest rate varies from year to year. The annual rate for the FBT year ended 31 March 2023 was 4.52%.
For a loan with terms that requires interest payments to be made on an infrequent basis (specifically, at intervals greater than every six months), the employer is treated as having provided a separate loan for each block of six months that passes before the next interest payment is required. For example, if interest is required to be paid every 3-years, there would effectively be five separate deemed loans. The first would run for 30 months, the second for 24 months, the third for 18 months, the fourth for 12 months and the fifth for 6 months.
Reduction in taxable value
The taxable value of a loan fringe benefit is reduced by the amount of interest that would have been deductible to the employee had the employee been charged the statutory rate of interest. Therefore, any loan provided to an employee will not be subject to FBT in the instance that the loaned monies are 100% deductible to the employee.
Importantly, note that the deductibility of interest on a loan to an associate of an employee will not be effective in reducing the taxable value of the fringe benefit provided to that employee associate.
The deductibility of interest is determined by analysing the use of the loaned monies. If the borrowed funds are put towards a use that relates to carrying on a business or producing assessable income e.g. the purchase of work tools, payment of office rent etc., the interest will be deductible to the extent there is no private use. There is the possibility that borrowed funds may be utilised for a number of purposes – some income-producing and some private in nature. In this instance, there will need to be a calculation of the deductible portion of the overall loan interest.
The required steps to calculate the taxable value of a loan fringe benefit are as follows:
1. Calculate the basic taxable value of loan fringe benefit (ignoring the otherwise deductible rule).
i.e. amount of loan x statutory interest rate – (amount of loan x actual interest rate charged under the terms of the loan agreement).
2. Calculate taxable value as though the statutory rate of interest was charged
i.e. loan amount x statutory rate.
3. Calculate the amount of interest that would have been deductible if the statutory rate of interest was charged
i.e. step 2 amount x business use %.
4. If the employee is charged interest on the loan, calculate how much of the interest would be an allowable deduction.
i.e. loan amount x actual interest rate x business use %. If no interest was charged, the amount calculated under this step will be nil.
5. Subtract the deductible amount in step 4 from the amount that would have been deductible if the statutory interest rate had of been charged (as calculated in step 3). The amount calculated here is the amount by which the taxable value of the loan fringe benefit (as calculated in step 1) can be reduced.
i.e. step 3 amount – step 4 amount.
6. The ultimate taxable value of the loan fringe benefit after taking advantage of the otherwise deductible rule is the amount calculated at step 1 less the amount calculated at step 5.
i.e. step 1 amount – step 5 amount.
Take the example of ABC Pty Ltd. On 31 August 2022, the company provides a $100,000 loan to Thomas, an employee of the company, charging an annual interest of 3%. The statutory interest rate for the FBT year ended 31 March 2023 is 4.52%. Thomas uses 80% of the loaned monies to purchase dividend-yielding shares (interest being deductible) and 20% of the loaned monies to purchase a holiday overseas (interest is not deductible).
Applying steps 1 – 6 to calculate the ultimate taxable value of the loan fringe benefit:
- The basic taxable value of the loan fringe benefit: $100,000 x 4.52% – ($100,000 x 3%) = $1,520.
- The taxable value of the loan fringe benefit assuming the statutory interest rate was charged: $100,000 x 4.52 = $4,520.
- Hypothetical interest deduction for employee assuming the statutory interest rate was charged: $4,520 x 80% = $3,616.
- How must interest is allowable as an income tax deduction: $100,000 x 3.0% x 80% = $2,400.
- Calculate the amount by which the basic taxable value of the loan fringe benefit can be reduced by subtracting the amount calculated in step 4 from the amount calculated in step 3: $3,616 – $2,400 = $1,216.
- Calculate ultimate taxable value of the loan fringe benefit by subtracting the amount in step 5 from the amount in step 1= $1,520 – $1,216 = $304.
The basic taxable value of the loan fringe benefit to Thomas was $1,520 which is reduced by $1,216 according to the ‘otherwise deductible rule’ to arrive at the ultimate taxable value of $304.
Note that there is a unique set of rules for calculating reductions in the taxable value of car loans.
Evidence of the employee’s use of the borrowed monies must be obtained by the employer. The employee should complete an employee declaration (in an approved form) to substantiate the use of borrowed monies and the extent of deductibility of interest on the borrowing.
Debt Waiver Fringe Benefit
What is a debt waiver fringe benefit?
A debt waiver fringe benefit involves an employer (or an associate or third-party under an arrangement) waiving an employee (or an associate of the employee or certain third-party) debt.
There are a number of circumstances in which a debt waiver will not give rise to a fringe benefit.
This includes where:
- The debt is waived for reasons unconnected with the employment of that employee. For example, the waiver of a debt to a family member who is incidentally an employee of the creditor would not typically constitute a debt waiver fringe benefit.
- The employer writes-off the debt because it considers it unlikely to be recovered or because of another commercial reason. Generally, the employer must demonstrate reasonable efforts to recover the debt and adopt an approach to dealing with the debt that accords with the employer policy.
- The waived debt is subject to the deemed dividend provisions in Division 7A of the Income Tax Assessment Act 1936. These provisions are relevant where the debt is waived in respect of an employee who is also a shareholder or associate of a shareholder of an employer company.
Taxable value of fringe benefit
The taxable value of a debt waiver fringe benefit is equal to the amount of debt waived including any interest.
Fringe benefits tax at 47% will be payable by the employer on the grossed-up taxable value of the debt waiver benefit.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.