ATO ID 2003/317: Debt waiver benefits: benefit upon discharge of limited recourse loan
Date of decision: 7 April 2003
Year of income: Year ending 30 June 2003
Business line: Superannuation and Employer Obligations

Issue
Can a 'debt waiver benefit' as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) arise when an employee discharges a loan through the transfer of shares to the lender and the shares have a lesser value than the loan balance?

Decision
No. A 'debt waiver benefit' does not arise provided the terms of the loan allow the employee to transfer the shares to the lender in full and final satisfaction of the loan balance.

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. At the time of transfer, the value of the shares is less than the amount of the loan balance. The employee elects to transfer the shares to the lender. 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
Summary: A 'debt waiver benefit' is defined in subsection 136(1) of the FBTAA to mean a benefit referred to in section 14 of that Act. Section 14 of the FBTAA states that: Where, at a particular time, a person (in this section referred to as the 'provider' ) waives the obligation of another person (in this section referred to as the 'recipient') to pay or repay to the provider an amount, the waiver shall be taken to constitute a benefit provided at that time by the provider to the recipient. The word 'waive' was considered by the Court in Banning v. Wright (1972) 2 All ER 987 where it was held to mean the giving up or abandoning of some right. Where, under the terms of a loan agreement, a lender accepts a transfer of shares in full satisfaction of the loan balance, there is no release or waiver of any obligation to pay or repay an amount. Thus, the discharge of a loan through the transfer of shares to the lender, where the shares have a lesser value than the loan balance, is not considered to give rise to a debt waiver benefit.

Legislative references: Fringe Benefits Tax Assessment Act 1986 section 14 subsection 136(1)
Case references: Banning v. Wright (1972) 2 All ER 987
Related ATO interpretative decisions: ATO ID 2003/315 | ATO ID 2003/316
Subject references: Fringe benefits tax Fringe benefits Debt waiver fringe benefits Loan fringe benefits