Private ruling: FBT – otherwise deductible rule
Date of advice: 20 April 2018
Published: July 2018
Ruling period: From 1 July 2018 until 30 June 2022
Date scheme commenced: The scheme is proposed to commence after 1 July 2018

Ruling: Q1: Can the taxable value of expense payment fringe benefits that arise from the employer’s payment or reimbursement of the interest on the investment loan incurred by employees be reduced under section 24 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A1: Yes. | Q2: Will section 67 of the FBTAA apply to entity A in relation to the payment or reimbursement of interest expense of the arrangement? | A2: No.

Relevant facts and circumstances: You are entity A. Entity B will make loans to certain employees to fund their investment in a series of Notes issued by entity A. Entity B is a subsidiary of entity A. The employees are employed by entity A or companies which are an associate of entity A. The employees are Australian residents for tax purposes. Entity A will make a payment in discharge, in whole or in part, of the obligation of the employees to pay the interest to Entity B to a valid salary sacrifice arrangement. The Notes Employees will purchase one or more Notes from entity A. Employees may invest in various series of Notes, each providing a different exposure to an underlying asset. Employees will not be able to withdraw from the investment during the term. All Notes will pay distributions. Employees will obtain the loan for 100% of the amount that the employee wants to invest in the Notes. Employees must use the funds only to acquire the Notes. Employees will direct Entity B to use the proceeds received by the employee on Maturity of the Notes to repay the loan amount. The interest payment date is generally the same as the Issue Date, and will be no earlier than 1 July. The term of the investment and the Investment Loan will be less than 12 months. The Issuer expects to issue the Notes annually depending on demand from employee investors on substantially the same terms as described above.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 24 | Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: The taxable value of expense payment fringe benefits that arise from the employer’s payment or reimbursement of the interest on the investment loan incurred by employees can be reduced under section 24 of the Fringe Benefits Tax Assessment Act 1986 . | Detailed Reasoning - Detailed reasoning: The ‘otherwise deductible rule’ in section 24 broadly provides that if an employee would have been allowed a once-only deduction for the expenditure had the employer not paid or reimbursed it, the taxable value of the benefit will be reduced. Section 24 sets out the conditions required to be satisfied for the ‘otherwise deducible rule’ to apply. The application of these conditions is discussed below. | Detailed Reasoning - Expense payment fringe benefit: Paragraph (a) of subsection 24(1) applies where: “(a) the recipient of an expense payment fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer” ‘Expense payment fringe benefit’ is defined in subsection 136(1) as a ‘fringe benefit’ that is an ‘expense payment benefit’. ‘Expense payment benefit’ is defined in section 20 as follows: 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) reimburses another person (in this section also referred to as the recipient), in whole or in part, in respect of an amount of expenditure incurred by the recipient; the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient. In the present case, entity A as the employer and the provider will make a payment in discharge, in whole or in part, of the obligation of the employee (the recipient) to pay the interest to entity B (a third person) under the loan pursuant to a valid salary sacrifice arrangement. Therefore, the interest payment will be an expense payment benefit. The expense payment benefit in this case is also a ‘fringe benefit’ as defined under subsection 136(1) – the benefit is to be provided during the year of tax, being a benefit entity A provided to its employees in respect of the employment. Therefore, it is also an expense payment fringe benefit under subsection 136(1), and paragraph (a) of subsection 24(1) will be satisfied. | Detailed Reasoning - Deductibility of Interest: Paragraph (b) of subsection 24(1) applies where, if the employee had, at the time when the employee’s expenditure was incurred, incurred and paid that expenditure (the gross expenditure ), they would have been entitled to a once-only deduction in respect of the gross expenditure. Section 8-1 of the Income Tax Assessment Act 1997 (1997) broadly allows a general deduction for losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of an exempt income. The interest expense is incurred solely for the acquisition of the Notes. The ownership of the Notes entitles the relevant employees to distributions. It is accepted that if the interest expense were to be incurred by the employees themselves, it would be regarded as having been incurred in gaining or producing assessable income, and would therefore be deductible. The deduction would be a ‘once-only deduction’ as defined in subsection 136(1) of the FBTAA as no percentage of the interest would be allowable as a deduction in any other year of income. | Detailed Reasoning - Reduction of taxable value: Paragraph (ba) of subsection 24(1) provides for the determination of the ‘notional deduction’ which is used to calculate the reduction of the taxable value under the ‘otherwise deductible’ rule. Applying the provision, the notional deduction equals: ● GD (gross deduction) which is the amount of the interest that an employee would be entitled to under section 8-1 if they incurred the interest; in this case being the entire amount of the interest expense; minus ● RD which in the present case is nil, given that there is no recipients portion in relation to the expense payment. The notional deduction is the amount to which the taxable value of the expense payment fringe benefit will be reduced pursuant to the formula that appears beneath paragraph 24(1)(f) to which paragraph (g) will apply. | Summary: Section 67 of the FBTAA will not apply to entity A in relation to the payment or reimbursement of interest expense of the arrangement. | Detailed Reasoning - Detailed reasoning: Section 67 is the general anti-avoidance provision of the FBTAA. In explaining the circumstances in which it is intended to apply, the Explanatory Memorandum to the Fringe Benefits Tax Assessment Bill 1986 states: The clause is intended to apply where, on an objective view of a particular arrangement and its surrounding circumstances, it would be concluded that the arrangement was entered into for the sole or dominant purpose of having an amount omitted from an employer’s fringe benefits taxable amount of any year of tax in respect of a benefit provided to a person. The circumstances in which the Commissioner can apply section 67 are set out in paragraphs 67(1)(a) and (b) which contain the following requirements: ● an employer obtains (or would have done so but for section 67) a tax benefit in respect of a year of tax; and ● the tax benefit was obtained in connection with an arrangement under which a benefit is or was provided to a person; and ● the arrangement was entered into, or commenced to be carried out on or after 19 September 1985; and ● one of the persons who entered into, or carried out the arrangement did so for the sole or dominant purpose of enabling the employer to obtain a tax benefit. Subsection 67(2) of the FBTAA provides: A reference in this section to the obtaining by an employer of a tax benefit in respect of a year of tax in connection with an arrangement under which a benefit is provided to a person is a reference to an amount not being included in the aggregate fringe benefits amount of the employer of the year of tax in respect of that benefit where the amount would have been included, or could reasonably be expected to have been included, in that aggregate fringe benefits amount if the arrangement had not been entered into or carried out. The circumstances of this case are that under valid salary sacrifice arrangements the employees forgo salary in exchange for a fringe benefit in the form of payment of interest on an investment loan. It has been determined that the payment of interest would be deductible to the employees if it were incurred by the employees themselves, so the amount of the fringe benefit has been reduced under the otherwise deductible rule. On an objective review of the transaction, it is concluded that the sole or dominant purpose in carrying out the arrangement does not constitute a purpose to purely obtain a tax benefit to the employer. The Commissioner will not seek to apply section 67 to the arrangement.