Loan Fringe Benefit
Assuming that the loan does not attract the operation of Division 7A, a further question is whether any FBT liability may arise for the employer in respect of the provision of the loan.
Under Section 16 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) the loan will constitute a benefit provided by the employer to the employee. Due to the existence of a clear employment nexus, the loan will then be a “fringe benefit” as defined in Section 136 of the FBTAA unless:
a) It is an exempt benefit; or
b) The loan is treated as a deemed dividend under Division 7A.
Assuming that neither of these exemptions applies, the loan would give rise to a “loan fringe benefit”.
The elimination of a liability to FBT on the loan fringe benefit will usually depend on the benefit having no taxable value.
This would be achieved through one of two mechanisms:
a) Ensure that the loan fringe benefit has no taxable value under Section 18 FBTAA, for the reason that the employer charges interest that is at least equal to the statutory rate determined by the commissioner each year; or
b) Ensure that the loan fringe benefit has no taxable value under Section 19 FBTAA due to the operation of the “otherwise deductible” rule.
Where the loan is made under a Division 7A loan agreement, it is possible to structure the agreement so that the interest rate meets the statutory requirements for both Division 7A and FBT purposes. In that case, it should not matter for FBT purposes whether the share acquired by the employee is expected to generate income.
However in order for the otherwise deductible rule to apply, it must be the case that the employee would be entitled to a deduction in respect of interest on the loan if interest were charged.
Applying basic principles of deductibility under Section 8-1 ITAA 1997, this requires that the loan must be used for the purpose of acquiring an income producing asset.
This means that in order to use the otherwise deductible rule where the loan is used to fund the acquisition of shares, there must be a reasonable expectation that the shares will generate income in the form of dividends.