ATO ID 2003/316: Fringe benefit: benefit arising upon discharge of a 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 fringe benefit as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) arise upon the discharge of a limited recourse loan provided to an employee?

Decision
No. Any benefit that arises to the employee upon the discharge of a limited recourse loan is not a 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. 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: When the employee transfers shares to the lender to discharge the loan, and the value of those shares is less than the balance of the outstanding loan, a benefit is considered to arise to the employee. 'Fringe benefit' is defined at subsection 136(1) of the FBTAA to include: 'A benefit provided to the employee or to an associate of the employee ... by ... the employer ... in respect of the employment of the employee... .' [emphasis added] Thus, for a benefit to be a 'fringe benefit' it must be provided 'in respect of' the employment. Whilst the expression 'in respect of ' has no fixed meaning, it has been considered by the courts in various statutory contexts on numerous occasions. Whilst an employee's employment may explain their selection to receive a benefit, in order to find that a benefit is provided 'in respect of' employment, there needs to be a sufficient or material, rather than a causal connection or relationship to employment. Refer J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. The benefit that arises upon the discharge of the loan is considered to be provided as a result of the employee exercising rights (previously obtained) as a debtor under the loan agreement. The situation is considered to be analogous to that in FC of T v. McArdle 89 ATC 4051; (1988) 19 ATR 1901. McArdle was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump-sum payment. The Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years. In this case, when the employee enters into the loan agreement they obtain the right to transfer the shares to the lender in full satisfaction of the debt. If these rights are subsequently exercised and the shares surrendered, any benefit would be in respect of the exercise of these rights, and not in respect of employment. At the time the shares are surrendered, the rights given up are considered to have a value equal to the loan balance. Thus, the benefit that arises to the employee upon the surrender of the shares, does not give rise to a fringe benefit as no benefit has been provided to the employee 'in respect of' the employment relationship.

Legislative references: Fringe Benefits Tax Assessment Act 1986 subsection 136(1)
Case references: J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402 2000 ATC 4151 (2000) 44 ATR 22
Related ATO interpretative decisions: ATO ID 2003/315 | ATO ID 2003/317
Subject references: Fringe benefits tax Fringe benefits Loan fringe benefits Employee share loan benefit In respect of employment Employee share schemes & options