Issue
Will the paragraph (r) exclusion from the definition of 'fringe benefit' in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) preclude a loan from being a loan fringe benefit where the loan has a nil rate of interest in the year it is made, and the loan is excluded from being taken to be a dividend under section 109D of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. The paragraph (r) exclusion from the definition of 'fringe benefit' in subsection 136(1) of the FBTAA will not preclude a loan fringe benefit arising where the loan has a nil rate of interest in the year it is made, and the loan is excluded from being taken to be a dividend under section 109D of the ITAA 1936.
Facts
The taxpayer is a shareholder and an employee of a private company.
The private company lent an amount to the shareholder in respect of their employment during the year ended 30 June 2002. There is a written agreement outlining the terms of the loan.
The rate of interest payable on the loan in the year it was made is nil. The rate of interest payable on the loan for years of income after the year in which the loan is made equals the benchmark interest rate (that is, the Indicator Lending Rates - Bank variable housing loans interest rate last published by the Reserve Bank of Australia before the start of the year of income).
The loan is unsecured and has a term of 5 years.
The taxpayer was a shareholder at the time the loan was made.
The loan is not a benefit to which subsection 58P of the FBTAA would apply.
Reasons for Decision
Fringe Benefits Tax (FBT) will apply to loan benefits (as defined in subsection 16(1) of the FBTAA) provided to employees that are otherwise fringe benefits.
The paragraph (r) definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a 'fringe benefit' does not include 'anything done in relation to a shareholder in a private company...that causes (or will cause) the private company to be taken under Division 7A...to pay the shareholder a dividend'.
Under subsection 109D(1) of the ITAA 1936 an amount lent by a private company to a shareholder during the current year is taken to be a dividend for the purposes of Division 7A if the loan is not fully repaid by the end of the current year, and Subdivision D of the same Act does not otherwise prevent the private company from being taken to have paid a dividend to the shareholder.
Specifically, under paragraph 109D(1)(c) of the ITAA 1936 where a loan is excluded under Subdivision D, for example, as it meets the requirements of section 109N of the ITAA 1936, the private company is not taken to pay a dividend.
Subdivision D of Division 7A of the ITAA 1936 sets out rules about payments and loans that are not treated as dividends.
Section 109N of the ITAA 1936 provides that a private company that makes a loan to a shareholder is not taken under section 109D of the ITAA 1936 to pay a dividend at the end of the year of income if the loan meets certain criteria.
The private company has met the required criteria in section 109N of the ITAA 1936 in terms of having a written agreement for the loan, and meeting the required minimum interest rate (equal to the benchmark interest rate) for years of income after the year in which the loan is made, and the term of the loan (5 years) does not exceed the maximum term (as defined in subsection 109N(3)) of 7 years for an unsecured loan.
For the income year ended 30 June 2002 the private company will not be taken to pay a dividend under section 109D of Division 7A of the ITAA 1936 in relation to the loan to the shareholder. Accordingly, the exclusion from the definition of 'fringe benefit' in the paragraph (r) definition of fringe benefit in subsection 136(1) of the FBTAA is not satisfied.
A loan fringe benefit will arise in relation to a loan excluded from being taken to be a dividend under Division 7A of the ITAA 1936 where no interest accrues in the year the loan is made, that is, for the period 1 April 2002 to 30 June 2002.