Income tax and fringe benefits tax: loan account offset arrangements
||Please note that the PDF version is the authorised version of this ruling.
FOI status: may be released
| What this Ruling is about || 1 |
| Ruling || 2 |
| Date of effect || 25 |
| Examples || 26 |
| This Ruling, to the extent that it is capable of being a 'public ruling' in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner.
What this Ruling is about
1. This Ruling is concerned with those arrangements which
are used to reduce the interest payable on a customer's loan account.
These are commonly referred to as 'interest offset arrangements' but are
called 'loan account offset arrangements' in this Ruling. These products
are generally structured so that no interest is derived by the customer
and therefore the customer is not liable to pay income tax in respect of
the benefit arising from the account. This Ruling:
- outlines the manner in which acceptable loan account offset
arrangements usually operate; and
- explains the limits on acceptable
How do acceptable loan account arrangements
2. An acceptable loan account offset arrangement
must operate in one of the following two ways.
3. The customer is granted a line of credit. Interest is
payable only on the amount which has been drawn down, with the customer
able to deposit funds in the account at any time to reduce the balance
of the loan. (That is, every repayment which is in excess of the
interest owing on the drawn-down amount is a repayment of the
principal.) There is usually no entitlement to receive interest when the
balance of the account is in credit.
4. If there is an entitlement to interest on credit
balances in the account then the full amount of that interest is
assessable income to the customer. Additionally, the account while it is
in credit will not be an acceptable loan account offset arrangement.
However, this does not mean that the interest on the deposit account
cannot be offset against any interest on a loan account. It simply means
that during the period in which the account is in credit the taxation
advantages usually associated with a loan account offset arrangement do
not apply. Once the account is in debit it may qualify as a loan account
5. An acceptable arrangement may also involve a deposit
account with an overdraft, or a credit or debit card facility.
6. The customer operates two accounts - a loan account and
a deposit account. To be acceptable, it is essential that there be no
entitlement, either in law or in equity, to receive interest payments or
payments in the nature of interest on the amounts credited to the
deposit account. The only benefit arising in the deposit account should
be the right of the customer to ensure that the interest payable on the
loan account is reduced in the way described in paragraph 7.
7. The reduction in the loan account interest referred to
in paragraph 6 should be achieved by offsetting the balances of the two
accounts. That is, the interest payable on the loan account should be
calculated by dividing the outstanding loan principal into two
components. A reduced rate of interest (often the lending rate less the
ordinary deposit account rate) is charged on an amount equal to the
balance of the deposit account. The reduced interest rate can never be a
negative, ie. the deposit rate used cannot exceed the loan rate used. In
those cases where the deposit rate would exceed the loan rate the
deposit rate actually used in the calculation must be limited to the
loan rate (see Example 3, paragraphs 31 and 32). The usual lending rate
of interest on loans of this type is charged on the remainder of the
8. If an account is made up of a series of sub-accounts,
some of which are used for deposits and some for loans, then the
sub-accounts will be treated, for the purposes of this Ruling, as
separate accounts. Consequently, a loan offset account arrangement
involving such accounts will fall for consideration under the principles
applying to dual accounts (paragraphs 6 and 7).
What limits are imposed on acceptable loan account offset
9. The following questions and answers should illustrate
which loan account offset arrangements we will accept.
- What happens in a dual account arrangement if the computer
systems used by a financial institution cannot be adapted to calculate
the interest payable on the loan account in exactly the same way as
described in paragraph 7?
10. This Office accepts that the computer systems of many
financial institutions are not adapted to effect an interest calculation
in exactly the way described in the paragraph 7.
11. Accordingly, we will accept a calculation based on a
set-off of a notional amount of interest accruing on each of the
that the balance used to calculate the notional interest on the deposit
account does not exceed the balance of the loan account. That is not to
say that if the balance of the deposit account exceeds that of the loan
account, the set-off cannot occur. It simply means that the balance used
in calculating the notional interest arising on the deposit account must
not exceed the balance of the loan account.
12. This method of calculation is accepted because it
produces the same result as that achieved by a balance offset
calculation. But, any loan account offset arrangement which does not
impose the limit on the balance used to calculate the set-off benefit
will not be accepted.
13. We also accept that these calculations of notional
interest might occur on the basis of different periods, say, daily
balances for the deposit account but monthly balances for the loan
- Is there a limit on the kind of loan account that can be
linked with a deposit account?
14. No. There is no limit on the nature of the loan
account which may be made the subject of loan account offset arrangement
provided that the loan and deposit accounts are with the same financial
- Is there a limit on the number of loan accounts or savings
accounts which may be linked?
15. No, provided that all the accounts are with same
financial institution. The financial institution must ensure that the
loan account interest calculation is as described above.
- Is the arrangement unacceptable simply because the interest
calculated also includes a service or administration
16. A loan account offset arrangement does not become
unacceptable simply because the interest calculated in respect of either
the debit balance in a single account or the loan in dual account
arrangement also includes an amount which is attributed to an
- What happens if the interest is
17. If the loan account offset arrangement links a
savings account with a loan on which the interest is deductible, the
deduction allowable to the customer for the interest cannot exceed the
reduced amount of interest (i.e., the interest payable after the offset
has been taken into account) actually incurred by the customer.
- What happens in a dual account arrangement if it tries to
offset present deposits and future
18. A loan account offset arrangement which attempts to
link a deposit account which presently exists with a loan account which
might be taken out at some future time is not acceptable.
- In a dual account arrangement, what happens if a second
person's deposit account is linked to the loan account offset
arrangement of another person?
19. A loan account offset arrangement which seeks to link
the deposit account of customer B (who is not a party to the loan) with
the loan account offset arrangement of customer A is not acceptable. For
example, a loan account offset which links a parent's deposit account
with a daughter's loan account is not acceptable. On the other hand a
loan account offset which links a husband and wife's mortgage account
with the wife's deposit account is acceptable.
- What happens if a loan account offset arrangement is
provided to an employee?
20. If a financial institution offers a loan account
offset arrangement only to its employees, the reduction in the interest
charged to the employees is a loan fringe benefit under section 16 of
the Fringe Benefits Tax Assessment Act 1986
(the FBTAA). Whether this benefit is taxable will be determined by
comparing the actual interest charged on the loan with the interest
chargeable using the statutory benchmark interest rate (s.18,
subs.136(1) of the FBTAA). The taxable value of this benefit must be
determined for each loan to each employee every year.
21. Conversely, if the financial institution offers the
loan account offset arrangement to all of its customers, irrespective of
whether or not those customers are also its employees, a loan fringe
benefit does not arise. But it should be noted that the terms of the
loan account offset arrangement as it is offered to the employees should
be on the same terms and conditions as those offered to other customers.
However, the fact that a lower rate of interest is paid on an employee's
loan will not, by itself, be sufficient to make an otherwise acceptable
22. If a financial institution, in addition to allowing
all its customers (including its employees) to use a loan account offset
arrangement, charges its employees a reduced rate of interest, the
fringe benefits tax liability is determined only by reference to the
interest chargeable under the reduced interest rate. (The further
reduction of the loan interest as a result of the offset is not a loan
fringe benefit if the employee is able to use the loan account offset
arrangement in the same way as any other customer of the bank.) However,
the amount actually charged is relevant if only employees of the
financial institution are able to use loan account offset arrangements
or if the terms of an employee's loan account offset arrangement differ
materially from those of other customers.
- Can two separate financial institutions link a deposit
account held by a customer with one of them with the loan account of the
same person held with the other?
23. The ATO does not accept any arrangement of this kind.
- Is there a tax avoidance arrangement to which Part IVA
24. In the acceptable loan account offset arrangements
described in paragraphs 3 to 7, Part IVA does not apply. Although there
may be a tax benefit in the arrangement, we consider that the conclusion
required by paragraph 177D(b) cannot be made. That is, having regard to
the matters listed in subparagraphs (i) to (viii) of paragraph 177D(b),
the conclusion that the customer opened the account or accounts for the
sole or dominant purpose of obtaining the tax benefit cannot be
Date of effect
25. This Ruling applies to years commencing both before
and after its date of issue. To the extent that this Ruling differs from
any private ruling given by this Office to a financial institution
offering a loan account offset arrangement, this Ruling will only apply
to customers of that institution from 1 July
Example 1 - An acceptable loan account offset
26. The XYZ Building Society offers its customers a dual
account offset arrangement called the Loan Extinguisher Account.
Customers are invited to deposit funds into the Loan Extinguisher
Account with no right to interest. In return XYZ gives a reduction in
the interest charged on the loan account. The customer's only
entitlement is to the reduction in the interest charged on the home
27. The XYZ Building Society uses a two-step calculation
of the interest payable on the Loan Account.
28. Step 1 is to charge a reduced rate of interest on
that part of the balance of the Loan Account which equals the amount
credited as the balance of the Loan Extinguisher Account. The rate
charged on this part is the difference between the current Loan Account
lending rate and the rate of interest payable on such a balance in an
ordinary deposit account. Step 2 is to charge the normal lending rate
against the balance of the Loan Account.
Example 2 - An unacceptable single account offset
29. Big Bank Australia (BBA) wants customers to reduce
the number of accounts they have so that BBA can reduce its own
transaction costs. It decides to market a new account - the Do It All
Account. This account is designed as an interest bearing deposit or
overdraft account which can be linked to a credit or debit card
facility. It is also designed to operate on a net interest basis.
30. That is, BBA propose to operate the account so that
there is only one interest liability at the end of, say, each quarter.
Therefore, they develop a system whereby the interest earned on the
account when it is in credit is offset against any interest chargeable
to the customer on a debit balance. The net income is either credited or
debited to the customer's account each quarter.
31. This arrangement is not an acceptable loan account
Example 3 - How does the concessional rate of interest
charged against a loan to an employee affect the operation of a dual
account loan offset arrangement?
32. Suppose an employee of a financial institution is
granted a $100,000 loan at the concessional interest rate of, say, 5%
per annum (at a time when the usual lending rate offered to the
institution's other customers is 10%) and the employee has $20,000 to
deposit with the institution. Suppose also that $20,000 deposit, if
deposited in an interest-bearing account rather than a loan account
offset arrangement, would attract an interest rate of 6% per annum. Can
the financial institution allow a loan account offset arrangement to
operate on a notional interest set-off basis in the way described in
paragraphs 9 to 12?
33. Our view is that a simple notional set-off of
interest is not acceptable. If the balances of the accounts are offset,
the result is that the employee will be liable to pay interest of 5% on
$80,000. Therefore, as in paragraph 10, the financial institution must
impose a limit in determining the notional interest set-off. However, in
this case, the limit to be imposed must restrict the interest rate used
to calculate the notional interest payable on the deposit to the same
rate of interest used to calculate the interest on the
Commissioner of Taxation
18 March 1993
Previously released in draft form as EDR75
ISSN 1039 - 0731
- balance offset
- derivation of income
- interest offset
- offset accounts
- ITAA 177D
- FBTAA 16
- FBTAA 18