Calculation of fringe benefits from employment-related loans
Clause 203
Issue: Support for the proposal
Submission
(KPMG, PwC)
Two submitters have expressed support for the proposal.
Comment
The proposed amendment will allow persons in the same group of companies as a person who lends money to the public to use the market interest rate method of calculating the fringe benefit arising from an employment-related, low interest loan.
Currently, the method is restricted to employers who themselves lend money to the public, as the method requires the employer to assess what the market interest rate would be on a comparable loan to an unrelated third-party borrower.
Officials welcome the support for the proposal.
Recommendation
That the submission be noted.
Issue: Transitional rule
Submission
(PwC)
Proposed section RD 45(4C) should refer to a period ending “with the finish of the” year, rather than “with or after the finish of the” year.
Comment
Under existing legislation, when an employer chooses to use the market interest rate method, they must use the method for at least the income year following that in which the election was made and the following income year – in other words, for two income years. They must also give advance notice of a change in method at least one year before the start of the income year to which the method is to apply. These minimum periods are intended to deter “flip-flopping” between calculation methods to get the lowest calculation rate.
The proposed amendment that allows a wider set of organisations to use the market interest rate method includes transitional provisions modifying both the normal minimum notification period and the minimum application period so that an employer can apply the market interest rate method soon after enactment of the amendment. As this may result in a change of method part-way through an income year, the intention was that the method would then be applied for at least the rest of that income year and the following income year.
The submitter argues that, as drafted, proposed new section RD 45(4C) would allow a person to apply the method indefinitely whereas the existing rule entitles a person to use the method for only a two-year period, unless they make a further election.
Officials do not agree that the existing rule can only be applied for two years unless a further election is made. Both the current and transitional minimum application periods are intended to allow an employer to apply the elected valuation method for an indefinite period of time, so long as it is at least as long as the specified minimum time period. However, officials acknowledge that the two provisions express this concept differently, which could be confusing.
Officials therefore agree that the wording of the proposed transitional rule in section RD 45(4C) should be better aligned with that in the existing minimum application period to make it clearer that both provisions are intended to allow an employer to apply the elected valuation method for an indefinite period of time, so long as it is at least as long as the specified minimum time period. Accordingly, the matter has been referred to drafters.
Recommendation
That the submission be accepted, subject to officials’ comments.
Issue: “Income year” versus “tax year”
Submission
(PwC)
Proposed section RD 45(4C) should refer to “income year” rather than “tax year”.
Comment
The existing minimum application period is expressed in terms of income years whereas the transitional application period refers to tax years. Given this difference, and the submitter’s previous argument that the application period rule only entitles a person to use the method for a two-year period, the submitter is concerned that the interaction of the two application rules could result in the market valuation method not being able to be applied continuously when a taxpayer has a non-standard balance date.
As noted above, the rules are intended to allow an employer to apply the chosen valuation method indefinitely, provided the minimum application period is met. Therefore, there should not be a problem with applying the method continuously.
However, when the employer has a non-standard balance date, so their income year does not align with the tax year, the transitional rule will produce a result that is inconsistent with the previously stated intent that the rule should treat the period of application for part of an income year as if it were for a whole income year.
Officials therefore agree that references in the proposed section RD 45(4C) to “tax year” should be replaced with “income year”. This will also necessitate a further minor change to address the situation where the first quarter for which the method is used straddles two income years – for example, when the method is first used for the October to December quarter 2015 and the income year ends on 31 October 2015. The matter has been referred to drafters.
Recommendation
That the submission be accepted, subject to officials’ comments.