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Fringe benefit tax
Tāke mō ngā huanga ki ngā kaimahi

Low-interest loans and fringe benefit tax

Find out about fringe benefit tax (FBT) on low-interest loans, including who needs to pay, how to work out their taxable value and what records you need to keep.

When you need to pay FBT on low-interest loans

If you provide a loan to an employee at less than either the prescribed rate of interest or market rate of interest you’ll need to pay FBT.

However, you don’t need to pay FBT if the loan is available to the general public for less than the prescribed rate of interest or market rate of interest, and you give the same loan to an employee.

Loans with different rules

These types of loans either don’t incur FBT or have different rules about when FBT applies:

  • wage advances
  • employee share loans
  • share purchase scheme loans
  • shareholder employee current account debit balances
  • company expense accounts
  • loans to life insurance policy holders.

For more information on these types of loans download our Fringe benefit tax guide (IR409).

Work out the taxable value of a low-interest loan

The taxable value of a low-interest loan is the difference between the interest on the loan and the interest calculated with either the prescribed rate or the market rate (the market rate is only available for employers who are classified as financial institutions).

Work out the taxable value of a low-interest loan with the Fringe benefit tax on low-interest loans calculator.

Prescribed rate of interest

The prescribed rate of interest is a standard rate set under the Income Tax Act 2007.

Market rate of interest

Banks, financial institutions or employers part of a group of companies with a member in the business of lending money to the public may choose to calculate the interest on a loan based on the market rate.

The market rate is the amount that would apply to an employee if they were to belong to a group that is:

  • assessed as having a similar credit risk to the group the employee belongs to, and
  • not associated with the employer, and
  • big enough to conduct the transaction independently, with no relationship to the employee.

If an employer has chosen to use the market rate instead of the prescribed rate they must:

  • advise us at least one year before the beginning of the income year in which the change will take place, and
  • use the market rate for at least the chosen income year and following income year.

If they wish to change back to the prescribed interest rate, they must advise us at least one year before the beginning of the income year in which the change will take place.

Note on use of market rate

Legislation has changed so that employers, who are part of a group of companies with a member in the business of lending money to the public, can use the market rate.

Due to this change, a transitional period was granted that will waive the standard notification period and allow them to use the market rate sooner.

Employers can start to use the market rate from the next quarter if they:

  • notify us before 1 April 2016 that they'll start using the market rate, and
  • file FBT on a quarterly basis only.

Record keeping for low-interest loans

Keep separate records for each type of fringe benefit as each one gets listed separately on your FBT taxable value calculation sheet.

Your records for low-interest loans must show the:

  • date the loan started
  • name of the employee receiving the loan
  • description of the loan
  • amount of interest charged, and
  • prescribed or market rate of interest.

Next steps