Fringe Benefits Tax: 'Otherwise deductible rule'

Whether the 'otherwise deductible rule' pursuant to paragraph 19(1)(b) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) applies to reduce the taxable value of a loan fringe benefit in a situation where, the taxpayer used the loan to participate in an 'employee share acquisition scheme' upon which the taxpayer derives foreign source dividend income and in the year of the participation of the scheme, assessable income under section 139B of the Income Tax Assessment Act 1936 (ITAA 1936).

No. The 'otherwise deductible rule' pursuant to paragraph 19(1)(b) of the FBTAA does not apply to reduce the taxable value of a loan fringe benefit in a situation where, the taxpayer used the loan to participate in an 'employee share acquisition scheme' upon which the taxpayer derives foreign source dividend income and in the year of the participation of the scheme, assessable income under section 139B of the ITAA 1936.

The employees are participating in an "employee share acquisition scheme" under Division 13A of the ITAA 1936.

The employees will derive foreign sourced dividends from the scheme.

The employees will also derive only in the year of participation of the scheme, assessable income under section 139B of the (ITAA 1936).

Paragraph 19(1)(b) of the FBTAA does not allow a reduction in the taxable value of a loan fringe benefit under the "otherwise deductible rule" where the interest expense is incurred in deriving foreign source dividend income.

Also in paragraph 9 of Taxation Ruling IT 2606, the Commissioner states that '...interest on money borrowed to acquire shares will be deductible under the first limb of subsection 51(1) where it is expected that the dividends or other assessable income will be derived from the investment'. The concept of matching deductions against income is embodied in Taxation Ruling IT 2606 and carries through to fringe benefits tax for foreign source income and foreign source deductions.

In this situation, the interest on the loan fringe benefit was not incurred in gaining or producing the discount (assessable income under section 139B of the ITAA 1936), as the discount bears no relationship at all to the share investment. The discount is something that Parliament specified as income in a particular situation. Apart from that artificial connection, the discount has no relevance to the share investment.

Therefore, the 'otherwise deductible rule' will not reduce the taxable value of a loan fringe benefit where, the taxpayer used the loan to participate in an 'employee share acquisition scheme' upon which the taxpayer derives assessable income under section 139B of the ITAA 1936.