Fringe benefits tax - a guide for employers

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Chapter 8 - Loan and debt waiver fringe benefits

8.1 What is a debt waiver fringe benefit?

A debt waiver fringe benefit arises where you (the employer) waive the obligation of an employee to pay or repay an amount owed to you. Such debts are normally waived for reasons related to the employment relationship.

In circumstances where you (the employer) write off a genuine bad debt (that is, a debt that cannot be recovered because, for example, the employee has no assets) and the write off is made for reasons unrelated to the employment relationship, a debt waiver fringe benefit does not arise.

Factors which indicate that an employer has written off a genuine bad debt for reasons unrelated to the employment relationship include:

• the employer is able to demonstrate all reasonable efforts were made to recover the debt
• the write-off was in accordance with company policy in relation to debts owed by non-employees.

In circumstances where the settlement of a debt owed by an employee to an employer is negotiated and results in the repayment of an amount that is less than the total debt outstanding, consideration should be given to whether a debt waiver fringe benefit has been provided. If it can be established that the reasons for releasing part of the debt are entirely unrelated to the employment relationship, a debt waiver fringe benefit will not arise.

8.2 Taxable value of debt waiver fringe benefits

The taxable value of a debt waiver fringe benefit is the amount of the debt that is released. For example, if you release an employee from an obligation to repay a loan of $1,000, the taxable value of the debt waiver fringe benefit is $1,000. Where the amount you waive includes an amount of principal and accrued interest (for example, $1,000 principal and $100 interest), the taxable value of the debt waiver fringe benefit is the total amount waived - that is, $1,100 in this example.

Goods and services tax (GST) does not affect the taxable value of debt waiver fringe benefits, so these benefits are always grossed up at the type 2 rate. For more on GST and fringe benefits tax (FBT), refer to What is fringe benefits tax?

8.3 What is a loan fringe benefit?

A loan fringe benefit arises where you provide a loan to an employee and charge a low rate of interest (or no interest) during the FBT year. A low rate of interest is one that is less than the statutory rate of interest (also known as the benchmark interest rate).

The use of the term 'loan' is quite broad. For example, if an employee owes you a debt but you don't enforce payment at the time the debt becomes due, the unpaid amount is treated as a loan to the employee. Such a loan commences immediately after the due date, at the rate of interest (if any) that accrues on the unpaid amount. If you later decide to recover the debt, a loan benefit continues to arise provided the employee is still obliged to repay the outstanding amount.

Where you make a loan to an employee under terms that allow for interest payments to be made less frequently than every six months, you are treated at the end of each six months as having separately loaned, at a nil rate of interest, any unpaid amount of interest. The period of the deemed loan is from the end of the six months until the interest is paid or becomes payable.

Where you release an employee from the obligation to repay the loan, a debt waiver fringe benefit arises (refer to section  8.1 ).

8.4 Statutory interest rate

The statutory interest rate is set by reference to the standard variable rate for owner-occupied housing loans of the major banks that the Reserve Bank of Australia published most recently before the beginning of the FBT year. This statutory rate is the basis for calculating fringe benefit values for all types of loans you provide, whether interest-free or at low interest. The statutory interest rate may differ for housing loans made to employees before 3 April 1986, or for loans bearing a fixed interest rate taken out before 1 July 1986.

The statutory interest rate for the following year is announced in a taxation determination, usually published in April. Following is a list of statutory interest rates from 1 April 1986 onwards:

Period during which loan was made

Date on which period commenced	Interest rate (% per annum)
1 April 1986	14.75
1 April 1987	14.75
1 April 1988	12.75
1 April 1989	14.25
1 April 1990	14.90
1 April 1991	13.50
1 April 1992	9.25
1 April 1993	7.25
1 April 1994	8.75
1 April 1995	10.50
1 April 1996	10.50
1 April 1997	7.55
1 April 1998	6.70
1 April 1999	6.50
1 April 2000	7.30
1 April 2001	7.55
1 April 2002	6.05
1 April 2003	6.55
1 April 2004	7.05
1 April 2005	7.05
1 April 2006	7.30
1 April 2007	8.05
1 April 2008	9.00
1 April 2009	5.85
1 April 2010	6.65
1 April 2011	7.80
1 April 2012	7.40
1 April 2013	6.45
1 April 2014	5.95
1 April 2015	5.65
1 April 2016	5.65

See also:

• Fringe benefits tax - rates and thresholds

8.5 Taxable value of loan fringe benefits

The taxable value of a loan fringe benefit is the difference between:

• the interest that would have accrued during the FBT year if the statutory interest rate had applied to the outstanding daily balance of the loan, and
• any interest that actually accrued.

GST does not affect the taxable value of loan fringe benefits, so these benefits are always grossed up at the type 2 rate. For more on GST and FBT, refer to What is fringe benefits tax?

Example

On 1 April 2016, an employee was given a $50,000 loan at an annual interest rate of 5% (payable six-monthly). No repayments of principal were required during the next 12 months. The statutory interest rate is 5.65%.

The notional interest on such a loan would be $2,825 ($50,000 × 5.65%).

The actual interest for the 2016-17 FBT year would be $2,500 ($50,000 × 5%). The difference of $325 ($2,825 - $2,500) would be the taxable value of the loan fringe benefit.

8.6 Fixed interest loans made before 1 July 1986

For this purpose, a fixed interest loan is one where the rate of interest can't be varied and that rate is specified in a document that existed at the time the loan was made.

Where a fixed interest loan was made before 1 July 1986, the statutory interest rate is the lesser of:

• the statutory interest rate that applies generally for the FBT year in which the value of the benefit is being determined, or
• the statutory interest rate that applied when the loan was taken out.

8.7 Housing loans made before 3 April 1986

The statutory interest rate for housing loans made before 3 April 1986 (other than fixed interest loans) is the lesser of:

• the statutory interest rate that applies generally for the FBT year in which the value of the benefit is being determined, or
• 13.5%.

So the maximum statutory interest rate for such loans is 13.5%.

8.8 Reduction in taxable value where interest would have been deductible to employee

The taxable value of a loan fringe benefit may be reduced in accordance with the 'otherwise deductible' rule, but only if the recipient of the benefit is the employee (that is, a loan provided to an associate is not eligible for this reduction). Broadly, this means that the taxable value may be reduced to the extent to which interest payable on the loan is, or would be, allowable as an income tax deduction to the employee. For example, if an employee were to use a loan from you wholly to purchase interest-bearing investments, any interest payable on the loan would be wholly deductible for income tax purposes. So under the otherwise deductible rule, the taxable value of this loan fringe benefit would be nil, regardless of whether you charged a low, or even a nil, rate of interest on the loan.

Special rules apply where the interest that would have been deductible to the employee is incurred in relation to a car (refer to section  8.10 ).

Applying the otherwise deductible rule produces different results depending on whether any interest charged was intended to be for any private element of the loan fringe benefit. This is because the employee is entitled to an income tax deduction for interest charged on the portion of the loan used to derive their assessable income, but not for interest charged on the portion of the loan used for private or domestic purposes.

Therefore, where the otherwise deductible rule applies, the taxable value of a loan fringe benefit is:

• the interest that would have accrued during the FBT year if the statutory interest rate had applied to the outstanding daily balance of the loan, reduced by
• any interest that actually accrued - this result is then further reduced by
• the otherwise deductible amount.

You can calculate the taxable value of a loan fringe benefit where the otherwise deductible rule applies using the following steps:

Step	Action
1	Calculate the taxable value of the loan fringe benefit ignoring the otherwise deductible rule.
2	Ignore any interest you charged on the loan and calculate the taxable value of the loan fringe benefit as if the loan was interest-free.
3	Now suppose that the employee had paid interest equal to the amount of the taxable value as calculated in step 2. How much of this hypothetical interest payment would have been income tax deductible to the employee?
4	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	Subtract the actual deductible amount (step 4) from the hypothetical deductible amount (step 3). The result is the amount you can deduct from the taxable value of the fringe benefit.
6	The taxable value is your result from step 1 minus your result from step 5.

 

Example: rate set without regard to employee's use of loan

On 1 April 2016, an employee is given a loan of $50,000 at 4% for the whole of the FBT year. No repayments of principal are required in that year. The 4% rate is set without regard to how the employee intends to use the loan. The employee applies 60% of the loan to interest-bearing investments and spends the remaining 40% on home improvements.

The statutory interest rate is 5.65%.

The taxable value is calculated as follows:

Step	Action	Result
1	Calculate the taxable value of the loan fringe benefit without the otherwise deductible rule. That is: (Amount of loan x statutory interest rate) - (Amount of loan x actual interest rate charged)	($50,000 × 5.65%) - ($50,000 × 4%) $2,825 - $2,000 = $825
2	Ignore any interest charged on the loan and calculate the taxable value of the loan benefit as if the loan was interest-free.	$50,000 × 5.65% =$2,825
3	Now suppose that the employee had paid interest equal to the amount of the taxable value calculated in step 2. How much of this hypothetical interest payment would have been income tax deductible to the employee?	$2,825 × 60% = $1,695
4	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?	$2,000 × 60% = $1,200
5	Subtract the actual deductible amount (step 4) from the hypothetical deductible amount (step 3). The result is the amount by which the taxable value of the fringe benefit may be reduced.	$1,695 - $1,200 = $495
6	The taxable value is the result from step 1 minus the result from step 5.	$825 - $495 = $330

Example: rate set with regard to employee's use of loan

On 1 April 2016, an employee is given a loan of $50,000 at 4% for the whole of the FBT year. No repayments of principal are required in that year. The employee intends to use 50% of the loan for interest-bearing investments and spend the remaining 50% on home improvements.

The statutory interest rate was 5.65%.

The 4% interest rate is set by the employer after considering how the employee intends to use the loan (that is, the employer knows that under the otherwise deductible rule there will be no FBT liability for that part of the loan used to produce income. Therefore, the employer charges interest at a rate sufficient to avoid incurring FBT on that part of the loan used for private or domestic purposes).

By the time the employee actually obtains the loan funds, the interest-bearing investments have increased in price and eventually cost 60% of the funds, so only 40% of the funds are spent on home improvements.

The taxable value is calculated as follows.

Step	Action	Result
1	Calculate the taxable value of the loan fringe benefit without the otherwise deductible rule. That is: (Amount of loan x statutory interest rate) - (Amount of loan x actual interest rate charged)	($50,000 × 5.65%) - ($50,000 × 4%) $2,825 - $2,000 = $825
2	Ignore any interest charged on the loan and calculate the taxable value of the loan benefit as if the loan was interest -free.	$50,000 × 5.65% = $2,825
3	Now suppose that the employee had paid interest equal to the amount of the taxable value calculated in step 2. How much of this hypothetical interest payment would have been income tax deductible to the employee?	$2,825 × 60% business use = $1,695
4	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? If the employer had not made allowance for the intended use of the loan, they would have charged interest at the statutory rate of 5.65%. However, because the employer reduced the interest rate to take into account the intended business use and the effect of the otherwise deductible rule, the employee's income tax deduction is limited to: the amount that would have been allowed as a deduction to the employee if no allowance had been made for the income-producing purpose for which some of the loan funds were to be used, reduced by the amount of the allowance that was made.	$50,000 × 5.65% interest rate × 60% business use. The employee would have been entitled to a deduction of: $2,825 interest × 60% business use = $1,695   = ($50,000 × 5.65% × 60%) - ($50,000 × 5.65% × 50%) =$1,695 - $1,412.50 = $282.50
5	Subtract the actual deductible amount (step 4) from the hypothetical deductible amount (step 3). The result is the amount by which the taxable value of the fringe benefit may be reduced.	$1,695 - $282.50 = $1,412.50
6	The taxable value is the result from step 1 minus the result from step 5.	$825 - $1,412.50 = 0

Note that there can be no negative figures.

8.8A Special rules under the law for otherwise deductible rule and jointly provided loan fringe benefits

As described in section  8.8 , the 'otherwise deductible' rule only applies if the recipient of a benefit is the employee. The FBT law also contains a design feature so that loan fringe benefits provided jointly to an employee and an associate are deemed to be provided solely to the employee. In cases where the otherwise deductible rules also apply, the law provides a special rule so that the otherwise deductible rule only applies to the employee's share of any deductible amount, and specifically excludes the associate's share of any deductible amount.

The otherwise deductible amount is calculated as:

• taxable value × employee's percentage of interest

Where:

• the employee's percentage of interest is the employee's (not the associate's) interest in the asset
  • which is purchased with all or part of the loan
  • is applied or used for the purpose of producing assessable income of the employee.
   

Example :

An employer provides an employee and her husband with a $100,000 low interest loan which they use to purchase shares. The loan fringe benefit has a taxable value of $10,000. The employee and her husband use the loan to purchase $100,000 worth of shares which they will hold jointly with a 50% interest each. The employee and her husband each include 50% of the dividends from the shares as assessable income in their income tax returns.

The otherwise deductible rule applies, but the taxable value can only be reduced by the employee's share in the income producing asset - that is, $10,000 × 50% = $5,000.

8.9 Substantiation requirements

Where you use the otherwise deductible rule, you must have an employee declaration to substantiate the extent to which the interest would have been 'otherwise deductible' to the employee. You must obtain the declaration from the employee before lodging the relevant FBT return or, if you don't have to lodge a return, by 21 May. Where the documentation is a declaration by the employee, it must be in a form approved by the Commissioner.

There is no need to obtain a declaration where the loan:

• is used solely to enable the employee to acquire shares in your company and the shares are owned by the employee throughout the period of the year when the loan is outstanding
• consists of you providing credit for a sale to the employee of goods or services used exclusively in the employee's employment - for example, where you sell protective clothing to an employee on interest-free credit terms.

See also:

• Declarations - for a copy of the Loan fringe benefit declaration.

8.10 Reduction in taxable value where interest that would have been deductible to the employee is incurred in relation to a car

Where a loan fringe benefit is provided in relation to a car owned or leased by the employee, there are special rules for determining how much, if any, of your expenditure would have been 'otherwise deductible' to the employee.

These special rules are actually two different methods of calculating the amount of interest that hypothetically would have been income tax deductible to the employee (that is, step 3 in the six-step procedure explained in section  8.8 ). The differences arise from the extent to which the car is used for business or employment-related purposes, and/or the type of evidence available to substantiate that use.

From 1 April 2016 only the first method - log book record and the third method - no log book and no kilometres requirements method are available. The log book record method is substantiated by means of log book records and/or odometer records. The no log book and no kilometres method is substantiated by an employee declaration only. For full details and the appropriate declaration, refer to Employee cars - applying the 'otherwise deductible' rule.

The employee declaration shown in section  8.9 is not suitable to be used for a loan related to a car.

8.11 Other reductions in taxable value

A number of fringe benefits attract concessional treatment. The concession is a reduction in the taxable value of the fringe benefit that results in a reduced amount of FBT, or even no FBT, being payable.

You calculate the taxable value of a loan fringe benefit in accordance with the valuation rules explained in 8.3 to 8.7. Where the otherwise deductible rule applies, you then reduce the taxable value as explained in section  8.8 .

If the fringe benefit is of a type that attracts the remote area housing assistance concession, you may reduce the taxable value further - as explained in section  19.2 of Reductions in fringe benefit taxable value.

8.12 Exempt loans

A loan benefit may be exempt from FBT in any of the following circumstances.

• If, as an employer, you are engaged in the business of lending money and the interest rate on a loan to an employee is fixed at a rate at least equal to the interest on a comparable loan made to a member of the public in the ordinary course of business at about the time the loan was made to the employee.
• If you are engaged in a business of lending money and, for each FBT year over which the loan extends, the rate of interest is variable but never less than the arm's length rate, you charge on loans made at about the time the loan was made to the employee.
• You advance money to an employee solely to meet expenses to be incurred within six months of the advance being made. The expense must be incurred in carrying out duties of employment with you, the employer who made the advance. It must be accounted for by the employee and any excess advance refunded or otherwise offset.
• An advance, repayable within 12 months, is made to an employee solely to pay a security deposit on accommodation - for example, a rental bond or service connection deposit. The accommodation must give rise to an exempt benefit, as explained in section  20.4 of Fringe benefits tax exempt benefits , or must be temporary accommodation eligible for a reduced taxable value in accordance with the relocation concessions (refer to section  19.4 of Reductions in fringe benefit taxable value ).

See also:

• MT 2019 - Fringe benefits tax: shareholder employees of family private companies and directors of corporate trustees
• TD 95/18 - Fringe benefits tax: can the making of a loan to an employee be an exempt benefit under subsections 17(1) or 17(2) of the Fringe Benefits Tax Assessment Act 1986 where the employee receives a reduced interest rate not available to members of the public?
• TD 95/17 - Fringe benefits tax: is the taxable value of a loan fringe benefit calculated only for those periods in the year of tax during which the interest rate on the loan was below the statutory interest rate?
• TD 93/90 - Income tax: does the 'otherwise deductible rule' apply to reduce the taxable value of fringe benefits provided to associates of employees?

Changes and updates

The following table details any major changes and updates made to this chapter.

February 2017

Section	Changes and updates
8.1 What is a debt waiver fringe benefit?	Rewritten for clarity
8.4 Statutory interest rate	Most recent statutory interest rates included and removal of pre-1 April 1986 rates.
8.8 Reduction in taxable value where interest would have been deductible to employee	Updated example for currency.
8.10 Reduction in taxable value where interest that would have been incurred by the employee is in relation to a car	Included sentence stating that the second method in chapter 21 is no longer available from 1 April 2016.
Various	Updated for style changes.
More information	Removed reference to older tax rate determinations.

ATO references:
NO Fringe benefits tax - a guide for employers