Member Q&A: Interest-free arrangements to repay overpaid salary

Question

We have inadvertently overpaid a staff member a significant amount of wages. At the moment, we are looking to setup a repayment plan, where the employee would pay back, on an interest-free basis, the amount over 3-5 years.

Can you please confirm that each new FBT year, to calculate the fringe benefit, we use the outstanding balance of the debt at 1 April, multiplied by the relevant statutory interest rate for the FBT year.

We also refer you to chapter 8.3 of the Fringe Benefits Tax – a guide for employers, and in particular the following paragraph:

Where you make a loan to an employee under terms that allow for interest payments to be made less frequently than every six months, you are treated at the end of each six months as having separately loaned, at a nil rate of interest, any unpaid amount of interest. The period of the deemed loan is from the end of the six months until the interest is paid or becomes payable.

Does this mean we need to calculate the FBT after the first 6 months by applying interest to the balance at that time? Can you clarify what paragraph 8.3 means?

Answer

The arrangement to allow time to repay the overpaid wages will constitute a loan benefit based on the Commissioner’s views in Taxation Determination 2008/10.

We confirm that a loan fringe benefit will exist in any year in which the recipient is under an obligation to repay the whole or any part of the loan. That is, there is a benefit for as long as any part of the loan remains unpaid, the opening balance each FBT year being the previous FBT year’s closing balance and the taxable value for the FBT year being calculated as the difference between:

• the notional amount of interest, calculated at the statutory interest rate on a daily balance of the loan, and
• any interest actually accruing on the loan.

The extract from paragraph 8.3 you refer is only relevant to a ‘deferred interest loan’. A ‘deferred interest loan’ is essentially a loan on which interest accrues, but where the interest is not payable at least every 6 months. Once interest has accrued for 6 months on such a loan, there is deemed to be a separate and additional interest-free loan of the accrued unpaid interest. Such a new loan arises at the end of each 6-month period and continues until the interest accruing in that 6 months is paid.

These provisions do not apply where the original loan is interest-free (as in your case), or where interest is payable at least every 6 months.

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