Private ruling: Fringe benefits tax (FBT)
Published: October 2012
Ruling period: 1 April 2008 to 31 March 2009
Date scheme commenced: 1 April 2008

Ruling: Q1: Was the residual amount forgone by the entity, in respect of the Loan granted to employee A, at the time of employee A's redundancy a 'benefit' for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A1: Yes, a debt waiver benefit under section 14 of the FBTAA. | Q2: Was the residual amount forgone by the entity, in respect of the Loan granted to employee B, at the time of employee B's redundancy a 'benefit' for the purposes of the FBTAA? | A2: Yes, a debt waiver benefit under section 14 of the FBTAA. | Q3: Was the residual amount forgone by the entity, in respect of the Loan granted to employee C, at the time of employee C's redundancy a 'benefit' for the purposes of the FBTAA? | A3: Yes, a debt waiver benefit under section 14 of the FBTAA. | Q4: If the answer to question 1 is 'yes', was the relevant benefit provided in respect of employee A's employment with the entity for the purposes of the FBTAA? | A4: Yes, the debt waiver benefit was provided to employee A in respect of employee A's employment with the entity. | Q5: If the answer to question 2 is 'yes', was the relevant benefit provided in respect of employee B's employment with the entity for the purposes of the FBTAA? | A5: Yes, the debt waiver benefit was provided to employee B in respect of employee B's employment with the entity. | Q6: If the answer to question 3 is 'yes', was the relevant benefit provided in respect of employee C's employment with the entity for the purposes of the FBTAA? | A6: Yes, the debt waiver benefit was provided to employee C in respect of employee C's employment with the entity. | Q7: If the answer to question 4 is 'yes' was employee A provided with a debt waiver fringe benefit in respect of that part of the Loan forgone? | A7: Yes | Q8: If the answer to question 5 is 'yes' was employee B provided with a debt waiver fringe benefit in respect of that part of the Loan forgone? | A8: Yes | Q9: If the answer to question 6 is 'yes' was employee C provided with a debt waiver fringe benefit in respect of that part of the Loan forgone? | A9: Yes | Q10: If the answer to question 4 is 'yes' but the answer to question 7 is 'no', was employee A provided with any other type of fringe benefit in respect of that part of the Loan forgone? | A10: Not Applicable | Q11: If the answer to question 5 is 'yes' but the answer to question 8 is 'no', was employee B provided with any other type of fringe benefit in respect of that part of the Loan forgone? | A11: Not Applicable | Q12: If the answer to question 6 is 'yes' but the answer to question 9 is 'no', was employee provided with any other type of fringe benefit in respect of that part of the Loan forgone? | A12: Not Applicable

Relevant facts and circumstances: The entity established a scheme for some of its employees. Participation in the scheme is limited to eligible employees invited by the entity to participate (the 'participants'). Under the scheme, participants are granted interest bearing loans (Loans) by the entity which are used to acquire stapled securities in the entity. The Loans have no fixed repayment plan. As long as the Loans remain outstanding, the securities are not able to be transferred or otherwise dealt with by the participants. All distributions of the securities (net of tax) are applied towards the repayment of the Loans. The employees were employed by the entity. They participated in the scheme. They were made redundant. The entity sold the employees' securities. The outstanding Loans exceeded the net proceeds from the sale of their securities. The entity exercised its discretion under the rules of the scheme in relation to the outstanding Loans of the employees and accepted the net proceeds of the sale of the securities in full satisfaction of the Loans.

Relevant legislative provisions: Fringe Benefit Tax Assessment Act 1986 section 14 | Fringe Benefit Tax Assessment Act 1986 section 136(1) | Fringe Benefit Tax Assessment Act 1986 section 147

Reasons for decision: Detailed Reasoning - Detailed Reasoning: The definition of 'debt waiver benefit' in subsection 136(1) of the FBTAA means a benefit referred to in section 14 of the FBTAA. Section 14 of the FBTAA states: 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. An inclusive definition of the word 'waive' is contained in subsection 136(1) of the FBTAA: waive includes release The words 'waive' and 'waiver' are not otherwise defined in the FBTAA. Therefore, the ordinary meaning of the words is relevant. Relevantly, the Macquarie Dictionary , 2001, rev. 3 rd edn, The Macquarie Library Pty Ltd, NSW defines 'waive' as 'to relinquish (a known right, etc) intentionally. Similarly, 'waiver' is defined as 'an intentional relinquishment of some right, interest, or the like'. The House of Lords considered the meaning of 'waiver' in Banning v. Wright (1972) 2 All ER 987. In that case, the tenant of leased premises sublet the premises in breach of the terms of the lease. The lease contained an option to renew and a provision for forfeiture. The lessor commenced proceedings for forfeiture. Following negotiations it was agreed that the lessee would pay an amount to the lessor, the lessor would discontinue the forfeiture proceedings and the lessee would still have his option to renew the lease. It was held that the amount paid by the lessee was in consideration of the waiver (or alternatively, the variation) of a term of the lease. Lord Hailsham LC said: In my view, the primary meaning of the word 'waiver' in legal parlance is the abandonment of a right in such a way that the other party is entitled to plead the abandonment by way of confession and avoidance if the right is thereafter asserted. Therefore, in the context of section 14 of the FBTAA, a provider waives an obligation of a recipient to pay or repay an amount if the provider gives up, abandons or relinquishes their right to be paid or repaid the amount. 'Obligation' is defined in subsection 136(1) of the FBTAA, in relation to the payment or repayment of an amount, to include 'an obligation that is not enforceable by legal proceedings'. Section 147 of the FBTAA states that, for the purposes of the FBTAA, a person shall be deemed to be under an obligation to pay or repay an amount notwithstanding that the amount is not due for payment or repayment. The employees' Loans became repayable on the earlier of the employees' termination of employment and the disposal of the securities. The entity sold the employees' securities in accordance with the rules of the scheme. However, as the net proceeds from the sales of the securities were less than the employees' outstanding Loans, the employees were liable to pay the difference within a certain period after receipt of a written demand. Therefore, upon the earlier of the employees' termination of employment and the disposal of the securities, the employees had an obligation to repay their outstanding Loans. The employees were not issued with a written demand for the difference between the net proceeds from the sale of their securities and their outstanding Loans. However, an amount does not have to be due for payment or repayment to be an obligation for the purposes of the FBTAA (section 147). The entity had a right to demand that the employees pay the difference between the net proceeds from the sale of the securities and the outstanding Loans. By the entity exercising its discretion under the rules of the scheme to accept the net proceeds of the sale of the employees' securities in full satisfaction of the Loans, the entity relinquished its right to be paid the difference between the net proceeds from the sale of the securities and the outstanding Loans. Therefore, the entity waived the obligation of the employees to repay the balance of their Loans. It is considered that employee A was, consequently, provided with a 'debt waiver benefit' under section 14 of the FBTAA. | Detailed Reasoning - Detailed Reasoning: For similar reasons to those used above in Question 1 regarding employee A, it is considered that employee B was provided with a 'debt waiver benefit' under section 14 of the FBTAA. | Detailed Reasoning - Detailed Reasoning: For similar reasons to those used above in Question 1 regarding employee A, it is considered that employee C was provided with a 'debt waiver benefit' under section 14 of the FBTAA. | Detailed Reasoning - Detailed Reasoning: The meaning of the phrase 'in respect of', as defined in subsection 136(1) of the FBTAA, includes 'by reason of, by virtue of, or for or in relation directly or indirectly to, that employment'. As discussed in ATO Interpretative Decision ATO ID 2001/253, 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… ATO Interpretative Decision ATO ID 2003/316 states that any benefit that arises to an employee upon the discharge of a limited resource loan is not a fringe benefit as it is not provided to the employee 'in respect of' the employment relationship. When the employee enters into a limited recourse loan, 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 are surrendered, any benefit would be in respect of the rights and not in respect of the employee's employment. It is considered that the decision in ATO ID 2003/316 is not relevant in this case. When the employees entered into the scheme, they were not granted a right to transfer their shares in full satisfaction of their outstanding Loans. As stated above, the employees' Loans became repayable on the earlier of the employees' termination of employment or the disposal of the securities. As the net proceeds from the sale of the securities were less than the employees' outstanding Loans, the employees were liable to pay the difference within a certain period after receipt of a written demand. The entity's decision to accept the net proceeds of the sale of the securities in full satisfaction of the employees' Loans did not arise from the exercising of a right by the employees under the rules of the scheme. It arose from the right of the entity to exercise its discretion. It is considered that there is a sufficient and material connection between the provision of the debt waiver benefits and the employment of the employees. Only eligible employees can participate in the scheme. As such, only current or former employees are eligible to have the entity exercise its discretion. The relevant benefits were not provided as a result of the employees exercising any rights previously obtained under the rules of the scheme. Accordingly, the debt waiver benefit provided to employee A was provided to them in respect of their employment with the entity. | Detailed Reasoning - Detailed Reasoning: For similar reasons to those used above in Question 4 regarding employee A, it is considered that the debt waiver benefit provided to employee B was provided in respect of employee B's employment with the entity. | Detailed Reasoning - Detailed Reasoning: For similar reasons to those used above in Question 4 regarding employee A, it is considered that the debt waiver benefit provided to employee C was provided in respect of employee C's employment with the entity. | Detailed Reasoning - Detailed Reasoning: The term 'debt waiver fringe benefit' is defined in subsection 136(1) of the FBTAA as meaning 'a fringe benefit that is a debt waiver benefit'. In basic terms, a fringe benefit, as defined in subsection 136(1) of the FBTAA, is a benefit provided to an employee (or associate) by an employer (or associate) or a third party under an arrangement with the employer (or associate) in respect of the employee's employment and such benefit is not otherwise exempted. It is considered that employee A was, therefore, provided with a debt waiver fringe benefit as it has already been determined above (at paragraph 12 of Question 1) that employee A had been provided with debt waiver benefit and also it has already been determined above (at paragraph 8 of Question 4) that the debt waiver benefit provided to employee A was provided in respect of employee A's employment with the entity. | Detailed Reasoning - Detailed Reasoning: It is considered that employee B was provided with a debt waiver fringe benefit as it has already been determined above (at paragraph 1 of Question 2) that employee B had been provided with debt waiver benefit and also it has already been determined above (at paragraph 1 of Question 5) that the debt waiver benefit provided to employee B was in respect of employee B's employment with the entity. | Detailed Reasoning - Detailed Reasoning: It is considered that employee C was provided with a debt waiver fringe benefit as it has already been determined above (at paragraph 1 of Question 3) that employee C had been provided with debt waiver benefit and also it has already been determined above (at paragraph 1 of Question 6) that the debt waiver benefit provided to employee C was provided in respect of employee C's employment with the entity. | Detailed Reasoning - Detailed Reasoning: As the answer to Question 4 and the answer to Question 7 were both 'yes' this question has no further application. | Detailed Reasoning - Detailed Reasoning: As the answer to Question 5 and the answer to Question 8 were both 'yes' this question has no further application. | Detailed Reasoning - Detailed Reasoning: As the answer to Question 6 and the answer to Question 9 were both 'yes' this question has no further application.

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