Issue
Can a limited recourse loan facility attached to an employee loan give rise to a residual fringe benefit or property fringe benefit under the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?
Decision
No. The provision of a loan with a limited recourse loan facility to an employee can only give rise to a loan fringe benefit.
Facts
An associate of an employer provides an employee with a limited recourse loan with which to acquire shares.
Under the terms of the loan agreement the employee may elect to transfer the shares to the lender in full and final satisfaction of the loan balance.
The terms of the loan agreement are accepted as being commercial.
The provision of the loan gives rise to a 'loan fringe benefit' as defined in subsection 136(1) of the FBTAA.
Reasons for Decision
When the employee is provided with a limited recourse loan the non-recourse feature of the loan protects the employee from loss, should the value of the shares be below the loan balance when the loan is discharged. This protection is commonly referred to as downside risk protection (DRP).
Thus, under the terms of the loan agreement, the employee is considered to obtain at least two advantages or benefits - one being the use of the lenders money, the other being the right to DRP.
The right to DRP may give rise to a property benefit or alternatively a residual benefit provided it is not also a benefit pursuant to Division 4 of Part III of the FBTAA (Division 4).
That is, a benefit that is a loan benefit cannot be: • A property benefit by virtue of the exclusion contained within the definition of 'property benefit' at subsection 136(1) of the FBTAA. • A residual benefit by virtue of the exclusion contained within section 45 of the FBTAA.
In Westpac Banking Corporation v. Federal Commissioner of Taxation (1996) 70 FCR 52; (1996) 34 ATR 143; 96 ATC 5021, the Court examined loans provided by the bank to its employees. The loans were at a concessional interest rate and the usual loan establishment fees charged to the public were generally waived.
The Court found that the benefits relating to the loan establishment service were not within the subject matter of Division 4 and more generally, that Division 4 was not an exclusive code for all benefits that in any way relate to loans.
Whilst all benefits that relate to a loan may not necessarily fall within Division 4, where a loan is provided on a commercial basis, the DRP benefits that specifically arise under the terms of the loan are considered to be within the subject matter of Division 4.
As such the DRP benefits that arise under terms of a limited recourse loan cannot also give rise to either property benefits or residual benefits.