Tax Updates: 24 June 2024

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at [email protected].


Employee share loans & associates

Inland Revenue (IR) has issued QB 24/03 to explain whether the employee share loan exclusion from Fringe Benefit Tax (FBT) can apply when an associate of the employee enters into a loan to acquire shares in connection with the employee’s employment.


While the QB is targeted towards trusts, the most likely associated person of the employee is used to facilitate the purchase of the employer’s shares as an alternative to the employee directly acquiring the shares (for various reasons). The commentary within the QB could equally apply to other associated persons, such as the employee’s spouse.

In accordance with section CX 10 of the Income Tax Act 2007 (‘the Act’), a fringe benefit arises when an employer provides a loan to an employee unless the loan is an ‘employee share loan’. This latter phrase is then defined within section CX 35 of the Act as:

Employee share loan means a loan made to an employee if—

  • the loan is made for the sole purpose of enabling the employee to acquire, under a scheme of acquisition, —
    • shares, rights, or options in a company that is their employer;
    • shares, rights, or options in a company that is associated with their employer; and,
  • the employee uses the loan only for the purpose of the acquisition; and,
  • the employee beneficially owns the shares, rights, or options throughout the term of the loan; and,
  • the employee must immediately repay the loan in full if they stop being the beneficial owner of any of the shares, rights, or options; and,
  • the company issuing the shares, rights, or options must maintain a dividend-paying policy throughout the loan term.

So, if you or your client has an Employee Share Scheme (ESS) in which the employee has been issued an interest-free loan to acquire the shares and all of the above boxes can be ticked, then the loan to the employee, and particularly its interest-free (or less than prescribed rate) terms, will not trigger any FBT exposures.

The logic behind the exclusion is due to the dividend-paying policy requirement of the employee share loan definition – if the employee was being charged interest on the loan, then such interest would be a deductible expense for the employee – incurred in acquiring an income-generating asset. Consequently, the imposition of FBT in such scenarios where interest was not charged would be considered ‘over-taxation’.

The question then becomes, however, what if the shares are being acquired by an employee’s associate instead? Will any loan now provided to the associated person also qualify for the FBT exclusion?

Well, yes is the conclusion reached in QB 24/03, and this is based on the application of section CX 2(5)(b), which, under section GB 32, treats a benefit provided by the employer to the employee’s associates as having been provided directly to the employee.

Therefore, in essence, the associated family trust, in this instance, would simply step into the shoes of the employee. The consequence is that if the employee share scheme loan benefit had been provided to the employee instead and would have been an excluded benefit due to satisfying all the conditions set out in section CX 35, then the same benefit provided to the family trust would also be excluded from FBT.

If you’re considering reading QB 24/03 yourself, it’s a 14-page, relatively easy read.


This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.

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