Changing payroll software and the timing of payroll processing requires an “advance’ to employees – any FBT risks?

Question

Due to a change in your payroll system, payroll timing will move from “in advance” to “in arrears”.  To transition to the new arrangement and to ensure employees do not “go without” a pay period. We are proposing a short term loan to employees (presumably to be made on the day they would otherwise have received their net fortnightly take home pay but for the change).

The loan to each employee would be based on their usual fortnightly net take home pay. 

The loan would be repayable by the employee in equal fortnightly after-tax payroll deductions over 6 pay periods (12 weeks).

No interest would be charged on the loan.

The loan will be advanced and fully repaid within a single FBT year.

Are there any FBT risks to this process we should consider?

Answer

Section 16 of the Fringe Benefits Tax Assessment Act 1986 (the FBT Act) provides that where an employer makes a “loan” (which includes an advance of money) to an employee this constitutes a loan benefit.

Section 18 of the FBT Act provides that the taxable value of the loan benefit is determined by the amount by which the notional amount of interest in relation to the loan (in that FBT year) exceeds interest that has accrued on the loan in that same period.

The loan is interest free meaning the taxable value of the loan benefit would be the amount of notional interest that accrues on the loan before it is fully repaid.

Notional interest is calculated on the daily outstanding balance using the statutory interest rate which for a loan made/repaid during the 2026/27 FBT year is 8.27%.

Whilst the loan terms prima facie give rise to a taxable fringe benefit section 58P of the FBT Act should apply to each loan benefit.

Section 58P provides that where the notional taxable value of a benefit (including a loan benefit) is below $300 and having regard to other criteria listed in section 58P (if satisfied) the benefit may be treated as minor benefit and exempt from FBT.

The other section 58P criteria are taken to be satisfied, in particular given:

1. The benefit is provided to assist the employee to deal with unusual circumstances caused by the change to payroll processes/timing of pays;
2. The benefit lacks frequency and regularity which may otherwise exclude it from section 58P despite the taxable value (i.e. even if below $300); and
3. The benefit is not provided wholly or principally as a reward for services rendered.

The key issue relevant to section 58P is ascertaining the taxable value of the benefit by reference to employee net fortnightly take home pay, the repayment schedule and the applicable statutory interest rate ( for 2026/27 being 8.27%).

If the amount of a loan to a particular employee is of a value whereby application of the statutory interest rate to the daily outstanding balance of the loan (which reduces evenly across the 6 fortnightly repayment periods) gives rise to a taxable value of notional interest of less than $300, then the $300 threshold criteria of section 58P is also met.

We would also cite TR 2008/10 as supporting the position being taken.

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