Private ruling: Fringe Benefits Tax - Loan Fringe Benefit
Published: May 2013
Ruling period: 01 April 2012 - 31 March 2016
Date scheme commenced: 1 April 2012

Ruling: Q1: Does a fringe benefit arise under the Fringe Benefits Tax Assessment Act 1986 where an option holder makes an election under clause X of the ESS? | A1: No | Q2: If the answer to Question 1 is 'no', does any other kind of fringe benefit arise under the FBTAA where an option holder makes an election under clause X of the ESS? | A2: No | Q3: If the answer to either Question 1 or Question 2 is 'yes', how is the taxable value of the relevant fringe benefit determined under the FBTAA? | A3: Not applicable

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The Company invites eligible employees to participate in the ESS. The sum of money (exercise price) required to be paid to exercise an option is specified by the directors of the Company at the time of grant of the options. No consideration is normally payable by the option holders at the time of the grant of the options. At the time of the exercise of the options the option holders must pay the exercise price unless otherwise provided for under the terms of the ESS. Clause X of the ESS provides that the option holders may elect that where the market price of a share exceeds the exercise price for such a share the option holder will receive a lesser number of shares than those originally provided for under the option but whose total market value is, nonetheless, equal to the product of the difference between the market price and the exercise price for each share times the number of shares originally provided for under the option.

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

Reasons for decision: Detailed Reasoning - Detailed reasoning: 1. As the answer to both Question 1 and Question 2 is 'no', this question is not applicable.

1. A 'loan fringe benefit' is defined in subsection 136(1) of the FBTAA as meaning 'a fringe benefit that is a loan benefit'. | 2. A 'benefit' is defined in subsection 136(1) of the FBTAA to include any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility. Consequently what can constitute a 'benefit' for the purposes of the FBTAA is very broad. | 3. It is essential for a 'loan fringe benefit' to arise that there must not only be a 'loan benefit' but that such a 'loan benefit' must also be, additionally, a 'fringe benefit'. | 4. A 'fringe benefit' is defined in subsection 136(1) of the FBTAA to mean 'a benefit...being a benefit provided to the employee or associate...in respect of the employment of the employee...'. | 5. Thus for a benefit to be also a 'fringe benefit' that benefit must be provided 'in respect of' an employee's employment. Whilst the expression 'in respect of ' has no fixed meaning, it has been considered by the courts in various statutory contexts on numerous occasions. | 6. Whilst an employee's employment may explain their selection to receive a benefit, in order to find that a benefit is provided 'in respect of' employment, there needs to be a sufficient or material, rather than a causal connection or relationship to employment. Refer J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. | 7. In this case, when an option holder chooses to exercise an option, they are required to pay the full amount of the exercise price. | 8. However, under clause X of the ESS, the option holder on the exercise of an option may elect that where the market price for a share exceeds the exercise price for such share the option holder receives a lesser number of shares than those originally provided for under the option but whose total market value is, nonetheless, equal to the product of the difference between the market price and the exercise price for each share times the number of shares originally provided for under the option. | 9. It is considered, therefore, that execution of the terms of clause X of the ESS provides a benefit by releasing the option holder from the required payment of the exercise price under the terms of the original grant of the relevant options. However, this benefit is provided as a result of the option holder exercising rights (previously obtained) under the terms of the ESS. | 10. The situation is considered to be analogous to that in FC of T v. McArdle 89 ATC 4051; (1988) 19 ATR 1901. McArdle was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump-sum payment. The Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years. | 11. In this case, when the option holder enters into the ESS the option holder obtains the right to the 'cashless conversion option' granted under clause X of the ESS. If this right is subsequently exercised by the option holder any resulting benefit would be in respect of the exercise of that previously obtained right under the ESS and not in respect of any relevant employment of the option holder. | 12. Thus, the benefit that arises to the option holder under the 'cashless conversion option' does not give rise to a 'fringe benefit' as no benefit has been provided to the option holder 'in respect of' any relevant employment relationship. | 13. Irrespective of whether any benefit that arises to the option holder under the 'cashless conversion option' can or cannot, subsequently, be determined to be a 'loan benefit' such benefit can never be a 'fringe benefit'. | 14. If there is no 'fringe benefit' there can never be a 'loan fringe benefit' as defined in subsection 136(1) of the FBTAA. Therefore, the question of whether there is, or there is not, a 'loan benefit' arising under the 'cashless conversion option' becomes effectively irrelevant. | 15. Consequently, no loan fringe benefit arises to the option holder under the 'cashless conversion option'. | 16. It is considered that the above view is not altered by whether the operation of clause X results in (a) a cash payment being substituted for an equity equivalent, (b) any potentially saved interest charges associated with a short-term loan from a financial institution that might have, otherwise, occurred and (c) any saving on brokerage or other fees that might have, otherwise, occurred. | 1. As determined above, at paragraph 13 of Question 1, the benefit that arises to the option holder under the 'cashless conversion option' does not give rise to a 'fringe benefit' as no benefit has been provided to the option holder 'in respect of' any relevant employment relationship. | 2. Therefore, for similar reasons it was determined above, at paragraph 15 of Question 1, that if there is no 'fringe benefit' there can never be a 'loan fringe benefit' as defined in subsection 136(1) of the FBTAA, then neither can there be any other kind of fringe benefit arising in this case. | 3. Consequently, no other kind of fringe benefit arises to the option holder under the 'cashless conversion option'. | 4. Once again, it is considered that the above view is not altered by whether the operation of clause X results in (a) a cash payment being substituted for an equity equivalent, (b) any potentially saved interest charges associated with a short-term loan from a financial institution that might have, otherwise, occurred and (c) any saving on brokerage or other fees that might have, otherwise, occurred.