ATO ID 2011/54: Expense payment fringe benefit: employee loan from a trust repaid by employer
Date of decision: 1 June 2011
Year of income: Year ended 31 March 2011
Business line: Superannuation and Employer Obligations

Issue
Where an employer pays amounts which have been salary sacrificed by an employee to the trustee of a trust as repayments of principal on an interest free loan: has the employer provided an external expense payment fringe benefit under section 23 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) the taxable value of which is not reduced by the 'otherwise deductible' rule (ODR) under section 24 of the FBTAA?

Decision
Yes. Each payment made by the employer to the trustee is taken to constitute the provision of an expense payment benefit under section 20 of the FBTAA provided by the employer to the employee. The trust is not a employee share trust within the meaning of the Income Tax Assessment Act 1997 (ITAA 1997) and the benefit provided to the employee is not excluded from the definition of 'fringe benefit' in subsection 136(1) of the FBTAA under paragraph (ha) of that definition. The benefit is a 'fringe benefit' and an 'external expense payment fringe benefit' as defined in subsection 136(1) of the FBTAA. The taxable value of the external expense payment fringe benefit is determined under section 23 of the FBTAA and is equal to the amount of the loan repayment. The taxable value of the external expense payment fringe benefit is not reduced by the ODR in section 24 of the FBTAA. This is because each repayment on the loan is a repayment of principal on an interest free loan and the employee would not have been entitled to an income tax deduction had the employee incurred and paid these amounts.

Facts
The employer establishes an employee benefit arrangement which operates through a trust. The employer makes a loan contribution to the trust. The trust deed allows the trustee to provide an interest free loan to the employee. The employee receives a loan from the trustee. The employee uses the loan funds to acquire units in the trust. The trustee invests in the employer by acquiring shares and notionally allocates those shares to the units in the trust. The employee agrees to forego part of the remuneration that they would otherwise expect to receive as salary or wages in return for the employer making a repayment to the trustee in respect of the loan from the trustee to the employee. The employee loan is reduced by the amount of each repayment. The salary sacrifice arrangement (SSA) is an 'Effective SSA' as described in Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements .

Reasons for decision
Summary: Section 20 of the FBTAA relevantly provides that: Where a person (in this section referred to as the "provider"): (a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the "recipient") to pay an amount to a third person in respect of expenditure incurred by the recipient; or (b).....; the making of the payment referred to in paragraph (a),....., shall be taken to constitute the provision of a benefit by the provider to the recipient. The employee has an obligation to the trustee for the loan. Under the arrangement the employer is the person who makes payments in discharge of the employee's loan obligation to the trustee. Each payment made by the employer to the trustee is, under section 20 of the FBTAA, taken to constitute the provision of a benefit by the employer (the provider) to the employee (the recipient). The provision of a benefit under section 20 of the FBTAA is an 'expense payment benefit' as defined in subsection 136(1) of the FBTAA. Under the statutory framework of the FBTAA, each category of benefit provided must also be a 'fringe benefit' to be subject to fringe benefits tax. The definition of 'fringe benefit' in subsection 136(1) excludes under paragraph 136(1)(ha) of that definition: a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997 ) Subsection 130-85(4) of the ITAA 1997 provides that an employee share trust for an 'employee share scheme' (ESS), is a trust whose sole activities are: ATO ID 2010/108 has now been withdrawn but considered whether a trust qualifies as an employee share trust for the purposes of subsection 130 85(4) of the ITAA 1997. The Commissioner's current view on the interpretation of subsection 130 85(4), including the application of the "sole activities" and "merely incidental" tests, is set out in Taxation Determination TD 2019/13 (see in particular paragraph 4 and paragraphs 5-9). A trust in which the trustee is permitted to and includes in its activities the lending of money for employees to acquire units in the trust would not be an employee share trust as described in subsection 130-85(4) of the ITAA 1997. The trust is not an employee share trust within the meaning of the ITAA 1997, and the benefit provided to the employee under section 20 of the FBTAA is not a benefit excluded from the definition of 'fringe benefit' in subsection 136(1) of the FBTAA under paragraph (ha) of that definition. Each benefit provided to the employee under the present arrangement is a 'fringe benefit', 'expense payment fringe benefit' and 'external expense payment fringe benefit' as defined in subsection 136(1) of the FBTAA. The taxable value of each external expense payment fringe benefit under section 23 of the FBTAA is equal to the amount of the loan repayment, subject to this amount being reduced by the ODR under section 24 of the FBTAA. Subsection 24(1) of the FBTAA applies where the recipient of the expense payment fringe benefit is an employee. The taxable value of the external expense payment fringe benefit is not reduced by the ODR under section 24 of the FBTAA as the loan repayments are repayments of principal on an interest free loan and the employee would not have been entitled to an income tax deduction under section 8-1 of the ITAA 1997 had the employee incurred and paid these amounts.

Legislative references: Fringe Benefits Tax Assessment Act 1986 section 20 section 23 section 24 subsection 136(1) paragraph 136(1)(ha)
Related public rulings and determinations: TR 2001/10 | TD 2019/13
Other references: TA 2011/5
Subject references: Fringe benefits tax Employee share trust FBT salary sacrifice FBT expense payment fringe benefit