Fringe benefit tax on specific categories of benefits: Low-interest loans
FBT applied to low-interest loans
When an employer provides a low-interest loan to an employee, that loan is subject to fringe benefit tax. But the tax is not charged on the actual loan. Here we:
- define a loan for the purposes of fringe benefit tax
- explain how we use the prescribed rate or market rate of interest to calculate fringe benefit tax on low-interest loans.
What is a loan?
A loan includes:
- all advances (for example, salary advances)
- deposits
- money lent in any way
- any credit given, including a delay in recovering a debt and the debit balance in the current account of a shareholder-employee.
When another person (for example, an associated company) provides a loan on behalf of the employer, the loan may still be subject to fringe benefit tax.
Calculation based on the prescribed rate of interest
We calculate fringe benefit tax on loans by comparing the interest on the loan with the interest calculated using either the prescribed or market rate. The market rate is only available to employers who are classified as financial institutions.
Employers who are not classified as a financial institution must continue to calculate the taxable value of the low interest loan using the prescribed rate as determined by the Inland Revenue.
The prescribed rate of interest is a standard rate set by regulation under the Income Tax Act. The prescribed rate is reviewed quarterly in light of market rates.
The prescribed rate of interest may change at one of two times.
- If the rate increases, it will do so at least one month before the start of the quarter to which the new rate applies.
- If the rate falls, it will do so at least one month before the end of the quarter to which the new rate applies.
For those employers who are financial institutions they may elect to calculate the interest on a loan based on market rate. This will remove the possible anomaly which exists when the prescribed interest rate exceeds the current market rate.
Market interest is the amount of interest that would apply to an employee who belongs to a group of persons when the following criteria is met:
- group is assessed as having a comparable credit risk to that which the employee belongs; and
- the group is not associated to the employer; and
- group is sufficiently large to conduct the transaction on an arms length basis
Example
A bank provides loan facilities to its employees on terms that are not those offered to the general public, but are identical to those that a bank offers to a group of employees of a government department. The market interest rate would be the rate offered to the group of employees of the department.
Fringe benefit tax may be charged if the interest on the loan is less than the interest calculated using the prescribed or market rate on the daily balance of the loan. Fringe benefit tax is charged on the difference.
Date published: 14 Oct 2004
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