ATO ID 2003/688: FBT - payment of interest to an employee by an employer
Date of decision: 2 July 2003
Year of income: Year ending 31 March 2004
Business line: Superannuation and Employer Obligations

Issue
Does the payment by an employer of a marginally higher than market rate of interest to an employee/investor, give rise to a fringe benefit under the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Decision
No. The payment of a marginally higher rate of interest to an employee who has invested funds with their employer, does not have a sufficient or material connection with employment and does not give rise to a fringe benefit.

Facts
The business of the employer includes paying interest to members of the public who invest funds. The employer offers to pay a rate of interest that is marginally higher than the market rate, to its employees, if they invest funds. The offer to all employees is made on the same terms and conditions as to members of the public apart from the rate of interest.

Reasons for decision
Summary: Section 40 of the FBTAA provides that where an employer provides property to an employee, the provision of the property is taken to constitute a benefit. Money is considered to be property for the purposes of section 40 of the FBTAA. Therefore, the payment of money in the form of interest, by the employer to an employee in these circumstances, constitutes a property benefit. However, for a benefit to be a fringe benefit, it must be provided in respect of employment. Whilst the expression 'in respect of' has no fixed meaning, it has been considered by the courts on numerous occasions. In J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 it was noted that the term 'in respect of employment', includes benefits where ... there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment ... It is considered that in these circumstances, the property benefit provided, being the total amount of interest paid by the employer to an employee investor, does not possess a 'sufficient or material' connection to employment. The payment of the total amount of interest is considered to be a consequence of the relationship of investor, despite the interest paid to employees being marginally higher than comparative rates available to members of the public. Accordingly, the property benefit provided by the employer to an employee in the form of interest on funds invested, is not a fringe benefit, as it is not provided in respect of employment. The total amount of interest received by an employee in these circumstances, is ordinary income for the purposes of section 6-5 of the Income Tax Assessment Act 1997.

Legislative references: Fringe Benefits Tax Assessment Act 1986 section 40
Case references: J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402 2000 ATC 4151 (2000) 44 ATR 22