Employers and employees who have incorporated interest free loans into their salary packaging have been confronted with a potentially expensive sting in the Budget according to Deloitte Growth Solutions Tax Director Les Szekely.

“Pre-Budget, interest free loans from an employer jointly to an employee and an associate were free of FBT if used for income producing purposes. After the Budget release, the FBT exemption will be limited to loans made solely to the employee, said Mr Szekely.”

The proposed change is quite reasonable in that it closes a loophole used to effectively split income with lower tax bracket associates of high income employees.  However the Budget indicates that existing arrangements will need to be unwound by March 2009, from which time the share of the loan used by the employees associate will attract FBT.

“The problem is that such benefits may not be so simple to unwind. For example, assume the funds were borrowed by an employee and their spouse to acquire an investment property jointly owned on a 90/10 basis. With effect from April 1 2009 FBT will become payable on 90% of the notional interest on the loan.”

The impact will be felt by the banks, finance companies and similar employers amongst whom such salary packaging practices has become widespread as one of the few ways to give senior employees a tax break.

“Whilst the proposed changes are correct in principle it would have been better to grandfather existing arrangements or give them a longer transitional period. As it is many employers and employees will be scrambling to work out how to unwind existing arrangements which now face an unexpected and potentially substantial additional FBT cost,” added Mr Szekely.