Fringe Benefits Tax

Loan Fringe Benefits – Prevailing FBT Treatment

A loan benefit occurs when the provider makes a loan to an employee or associate of an employee. It is taken to be provided in respect of each year in which the recipient is under an obligation to repay any part of the loan.

It also applies if an amount is owed to the provider and payment is not enforced.

If repayments are required less frequently than every six months, the provider is treated as having made a separate loan of the accrued interest amount.

The taxable value of a loan fringe benefit is the difference between the interest that actually accrued and the 'notional amount of interest'. The notional amount of interest is the interest that would have accrued on the unpaid loan at the statutory rate of interest (for the period ended 31 March 2017 – 5.65%) calculated as simple interest.

A loan benefit is exempt if an employee owes you money as an ordinary customer on the same terms and conditions as an ordinary customer.

A loan benefit is also exempt if it is an advance made to a current employee for the sole purpose of enabling the employee to meet expenses incurred by the employee in the course of performing employment duties, within six months of the loan. The amount must not exceed the reasonable expectation of the value of those expenses and the employee must be required to vouch for the expenses.

In addition, a loan benefit will also be exempt if:

  • It is an advance to an employee.
  • It is for a rental bond, or utilities a security deposit.
  • It is to be repaid within 12 months.
  • The employee is in receipt of any of the following benefits:
    • expense payment benefit in respect of accommodation
    • a housing benefit
    • residual benefit in respect of accommodation.
  • The benefit above is an exempt (or reduced to nil) accommodation benefit.

There is also a reduction in taxable value of loan fringe benefits under the 'otherwise deductible' rule. This rule is specified in several fringe benefits. For loan fringe benefits it applies where:

  • The recipient is an employee (that is, not an associate).
  • The recipient could have claimed a ‘once-only’ deduction for interest in the year benefit arises.
  • The interest rate applied is less than the statutory rate.

A 'once-only' deduction means that the amount of the interest, or some proportion of the interest, is deductible in this year. If the deduction is allowable over more than one year, it would not be a ‘once-only’ deduction.
The rule is applied by the following steps.

Step 1
Ignore any interest charged on the loan and calculate the taxable value of the loan fringe benefit as if the loan was interest-free (that is, statutory interest rate x outstanding amount).
Step 2
Assume that the employee had paid interest equal to the amount of the taxable value as calculated in step 1. How much of this hypothetical interest payment would have been income tax deductible to the employee?
Step 3
Now look at the real loan situation. If the employee is being charged interest on the loan, how much of this interest is allowable as an income tax deduction to the employee?
Step 4
Subtract the actual deductible amount (step 3) from the hypothetical deductible amount (step 2). The resulting figure is the amount by which the taxable value of the fringe benefit may be reduced.
The recipient must provide an employee declaration, showing the amount of the loan, the loan period and the percentage that is otherwise deductible.

Where a loan is a remote area housing loan, the taxable value of any loan benefit arising from the loan is reduced by 50%. In this regard a house is in a remote area if it is at least 40 kilometres from a town with a census population between 14,000 and 130,000, and at least 100 kilometres from a town with a census population of 130,000 or more (population figures based on the 1981 Census).

If the accommodation is in Zone A or B (for income tax purposes), it must be located at least 40 kilometres from a town with a census population between 28,000 and 130,000, and at least 100 kilometres from a town with a census population of 130,000 or more.

  • On 1 April 2014 an employee is given a loan of $100,000 at 5% for the whole of the FBT year and no repayments of principal are required in that year.
  • The 5% rate is set without regard to how the employee intends to use the loan money.
  • The employee applies 60% of the loan moneys to interest-bearing investments and spends the remaining 40% on home improvements.
  • The statutory interest rate is 5.65%.

Issue

What is the taxable value of the loan fringe benefit?

Answer

The taxable value of the loan fringe benefit (without the ‘otherwise deductible’ rule) is:
$5,650 ($100,000 x 5.65%) less $5,000 ($100,000 x 5%), that is $650

Step 1
Ignore any interest charged on the loan and calculate the taxable value of the loan benefit as if the loan was interest-free.
$100,000 x 5.65% = $5,650
Step 2
Assume that the employee had paid interest equal to the amount of the taxable value as calculated in step 1. How much of this hypothetical interest payment would have been income tax deductible to the employee?
$5,650 x 60% = $3,390
Step 3
Now look at the real loan situation. If the employee is being charged interest on the loan, how much of this interest is allowable as an income tax deduction to the employee?
$5,000 x 60% = $3,000
Step 4
Subtract the actual deductible amount (step 3) from the hypothetical deductible amount (step 2). The resulting figure is the amount by which the taxable value of the fringe benefit may be reduced.
$3,390 – $3,000 = $390
The taxable value of $650 may be reduced by $390 to $260.