Private ruling: Calculating the taxable value of a loan fringe benefit
Published: July 2012
Ruling period: 1 April 2012 to 31 March 2017 | The scheme has not commenced but is seriously contemplated.

Ruling: Q1: When calculating the notional amount of interest of a loan fringe benefit, can the employer use the actual interest rate charged for an owner occupied home loan instead of the yearly published (statutory) benchmark interest rate in Australia? | A1: No

Relevant facts and circumstances: The employer is considering giving an employee of the company a loan for a fixed period between A to F year duration. The loan will allow the employee to acquire an owner occupied holiday home. The company will provide the employee a loan at an interest rate lower than the statutory interest rate, due to the availability of home loan interest rates lower than the normal Australian home loan rate.

Relevant legislative provisions: Section 16 of the Fringe Benefits Tax Assessment Act 1986 | Section 18 of the Fringe Benefits Tax Assessment Act 1986 | Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision: Summary: A loan provided by the employer to an employee who has an obligation to repay the loan at low or no interest rate and the loan has not been fully repaid during the FBT year of tax, is a loan fringe benefit at the end of the FBT year and each or part of a FBT year after the first year the loan remains unpaid. Section 18 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) states the method of calculating the taxable value of a loan fringe benefit. The employer has to calculate the 'notional amount of interest' and compare it with the interest that 'actually accrued' on the loan. A loan can be provided interest free or at a low rate of interest. Normally, the notional amount of interest will be more than the interest actually accrued resulting in a taxable value of a loan fringe benefit on which fringe benefits tax is imposed. The notional amount of interest is defined in subsection 136(1) of the FBTAA, as the interest calculated on the daily balance of the loan outstanding using the statutory interest rate. The 'statutory interest rate' is defined in subsection 136(1) of the FBTAA as the 'benchmark interest rate'. The 'benchmark interest rate' is defined and is the interest rate known as the large bank housing lenders variable rate for housing for owner occupation. This rate is published by the Reserve Bank of Australia before the commencement of each FBT year. The published benchmark interest rate for 2012-2013 FBT year is 7.4 percent, as outlined in Taxation Determination TD 2012/7 Fringe benefits tax: what is the benchmark interest rate to be used for the fringe benefits tax year commencing on 1 April 2012? An employer has to calculate the notional amount of interest using the Australian benchmark rate of interest, even though funds are borrowed overseas. If the notional value exceeds the amount of interest accrued on the loan outstanding (after any repayments), then fringe benefits tax is applied on the taxable value of the loan fringe benefit amount. Section 18 of the FBTAA does not give the Commissioner any discretion to allow an employer to calculate the taxable value of a loan fringe benefit using any rate other than the statutory interest rate. The statutory rate is the basis for calculating fringe benefit values for all types of loans provided, whether interest-free or at low interest. The FBTAA applies to Australian based employers and an Australian interest rate is used. An employer cannot use any other benchmark interest rate. The employer cannot use a different rate of interest therefore, only the published Australian benchmark interest rate can be used to calculate the notional amount of interest of the loan given to an employee.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.