Fringe Benefit Tax (FBT) Series 5 - Loan to Employees and Division 7A Issues

In this part of our FBT series, we look at a type of benefit that’s less common but can carry significant FBT consequences: Loan Fringe Benefits.

Whether you're helping an employee with a personal loan, financing a vehicle purchase, or simply allowing deferred payments, if you're not charging market interest, it may trigger FBT.

What is a Loan Fringe Benefit?

If you lend money to an employee at an interest rate below the statutory interest rate, it is a loan fringe benefit. The same applies if you lend money to an employee at no interest.

A loan includes:

• an amount you give an employee on the understanding they will repay you; and

• a debt an employee owes to you that you do not force them to pay by the due date.

What is a debt waiver fringe benefit?

If you waive an employee's loan debt (that is, you don't require them to repay it), it is a debt waiver fringe benefit. For example, if you sell goods to your employee and later tell them they don't have to pay the invoice for the goods, you have provided a debt waiver fringe benefit.

However, it is not a debt waiver fringe benefit if you write off a debt for reasons unrelated to the employment relationship. In this case it is a genuine bad debt.

How is the Loan Fringe Benefit Calculated?

The taxable value of a loan fringe benefit is the difference between:

• The interest the employer actually charges, and

• The interest that would be charged at the ATO's benchmark rate (The ATO’s benchmark interest rate for 2024–25 is 8.77% p.a.)

For example, if you lend $50,000 to an employee and charge 2% interest, the FBT will be calculated on the 6.77% shortfall.

Loan to Shareholders or Their Associates (Division 7A Loan)

However, if a private company lend money to its shareholders or their associates, this may fall under Division 7A of the Income Tax Assessment Act 1936, not under the FBT regime.

Division 7A is a specific anti-avoidance rule designed to prevent private companies from making tax-free distributions to shareholders (or their associates) in the form of loans, payments, or forgiven debts.

If a loan is made and not properly structured, the ATO may deem the loan an unfranked dividend and this dividend will be assessable to the recipient as taxable income.

How to Avoid a Deemed Dividend

To avoid these tax consequences under Division 7A, you must:

1. Put a division 7A loan arrangement in place before the tax return lodgment due date:

   • Ensure the loan follows the minimum interest rate (i.e. 2024-25 ATO benchmark interest rate is 8.77%) and maximum term

   • Repay within maximum term is 7 years if the loan is unsecured or 25 years if the loan is secured

   • Make minimum annual repayments as required

2. Alternatively, repay the full amount of the loan before the tax return lodgement due date.

We will look into this topic in more details in a separate article.

Wrapping Up the FBT Series

That concludes our 5-part series on FBT, covering:

1. FBT Basics

2. Car Fringe Benefits

3. Electric Vehicles

4. Entertainment Fringe Benefits

5. Loan Fringe Benefits

The FBT system is full of technical rules but with careful planning and proper documentation, businesses can avoid unnecessary tax while staying tax-compliant.

If you’d like help reviewing your current FBT risks or setting up tax-effective benefit structures, feel free to reach out for a consultation.

We’re here to help (https://www.goodpca.com.au/contact-us).

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