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Fringe benefits tax (FBT) - A guide for employers

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 or forgive an employee's debt. For example, if you sold goods to an employee and later tell them not to bother about paying the invoiced amount, you have provided a debt waiver fringe benefit.

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.

GST does not affect the taxable value of debt waiver fringe benefits, so these benefits are always grossed up at the type 2 rate. Chapter 1 contains more information about GST and FBT.

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 do not enforce payment after 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.

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 (see 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. As explained below, 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. The statutory interest rate for the year commencing 1 April 2006 is 7.30%.

Following is a list of statutory interest rates:

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. Chapter 1 contains more information about GST and FBT.

8.6 Fixed interest loans made before 1 July 1986

For this purpose, a fixed interest loan is one where the rate of interest cannot 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 specified in the table at 8.4 as applying 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 (see 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:

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 do not 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, or
• 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.

The loan fringe benefit declaration is available in PDF format.

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 three 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 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.

The first method is substantiated by means of logbook records and/or odometer records. The second and third methods are substantiated by an employee declaration only. See Chapter 21 for full details and the appropriate declaration.

The employee declaration shown in 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 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 19.2.

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 20.4, or must be temporary accommodation eligible for a reduced taxable value in accordance with the relocation concessions (see 19.4).

More information

Legislative References:

A New Tax System (Goods and Services Tax) Act 1999
The Act

Child Care Act 1972
The Act

Consular Privileges and Immunities Act 1972
The Act

Diplomatic Privileges and Immunities Act 1967
The Act

Fringe Benefits Tax (Miscellaneous Provisions) Act 1986
The Act

Fringe Benefits Tax Act 1986
The Act

Fringe Benefits Tax Assessment Act 1986
The Act
subsection 17(1)
subsection 17(2)
Division 7
section 30
section 39A
section 58ZC
section 58ZD
section 135C
subsection 140(1A)
section 148
section 158
section 159

Income Tax Assessment Act 1936
Division 7A
section 26AAB

Income Tax Assessment Act 1997
The Act
86-60

International Organisations (Privileges and Immunities) Act 1963
The Act