(tropical music)
-: The fringe benefits taxable value
can be reduced where the benefit is otherwise deductible
to the employee.
"Otherwise deductible" means the employee would've been
entitled to an income tax deduction in respect
of expenses incurred in earning their assessable income.
Let's consider Max, who receives an interest-free loan
of $10,000 from his employer, on the 1st of April.
As at the 31st of March in the same FBT year,
the entire balance of the loan is outstanding.
Max provides his employer with a declaration
that $4,000 of the loan was used to purchase
income-producing shares listed on the ASX,
and $6,000 was used for a family holiday to Tasmania.
If Max had incurred unreimbursed interest expenses
in borrowing funds to purchase income-producing assets,
that is, the shares,
then that interest would have been immediately deductible
under section 8-1 of the ITAA97.
In this case, $4,000, or 40% of the loan,
has been used to earn assessable income
from dividend-yielding listed shares.
Note that it is not $4,000 of the loan
that is otherwise deductible, only the interest expense
on that $4,000 would be otherwise deductible.
The notional interest expense on $4,000 of the loan
at the statutory interest rate for the relevant FBT year
would be subtracted from the total benefit provided.
Assume that the statutory interest rate was 6%.
The total benefit provided on the $10,000 loan
would therefore be $600.
As 40% of the loan was used for income-producing purposes,
the interest amount of $240 is deducted,
leaving a fringe benefits taxable value of $360,
which is the interest relating to the private portion
of the benefit provided.
The otherwise deductible methodology effectively passes on
the notional employee income tax deduction to the employer,
in the form of a reduction in taxable value
for FBT purposes.
It's important to note that the otherwise deductible rule
is not restricted to earning employment income
from the employer that provides the benefit.
It applies to any income-producing activity
that would have resulted in an allowable deduction
in the employee's individual tax return.
However, there are some important conditions
that we must remember.
The employee must provide a declaration to the employer,
stating the amount they could otherwise claim
in relation to the benefit.
Only employee notional deductions are considered,
not associates of employees.
Only immediate deductions are eligible.
that is, those amounts that would be fully deductible
in the income year incurred, per section 8-1 of the ITAA97.
Amounts deducted over a period of time,
such as depreciation or borrowing costs,
would not be included.
Furthermore, only certain fringe benefit types
can apply the otherwise deductible rule,
including expense payments, loans, property, board,
and residual fringe benefits.
To recap, the otherwise deductible rule applies to reduce
the fringe benefits taxable value of certain benefits
provided to an employee, by the amount that would have been
otherwise deductible by that employee.