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RD 34: Employment-related loans: value using prescribed interest rates
or “How employers calculate the value of loans given to employees”
You could also call this:

“Valuing employee loans using market interest rates”

If you’re an employer who lends money to the public or is part of a group of companies that does, you can choose to value the benefit of an employment-related loan using market interest rates. This means you’ll calculate the benefit as the difference between the market interest on the loan and the actual interest charged or income earned from the loan.

If you choose this method, you need to use it for the current income year and the next one. You can’t change how you calculate the benefit’s value for an income year unless you tell the Commissioner at least 1 year before the start of that income year. However, there are some exceptions to this rule for certain employers.

Market interest is the amount of interest calculated at the rate that would apply to a group of borrowers similar to your employee, or the lowest rate you offer to customers with similar characteristics to your employee. The interest is calculated on the daily balance of the loan during a quarter or tax year.

This method of valuing the benefit allows you to more accurately reflect the true value of the loan benefit provided to your employee based on current market conditions.

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Next up: RD 36: Repayment of employment-related loans

or “Paying back loans from your job with your work income”
Next

Part R General collection rules
Employment-related taxes: Value of fringe benefits

RD 35Employment-related loans: value using market interest rates

  1. An employer may choose to value a benefit provided to their employee in an employment-related loan using the market interest on the loan if—

  2. the employer is in the business of lending money to the public:
    1. the employer is in a group of companies that has a member which is in the business of lending money to the public.

      1. The value of the benefit referred to in subsection (1) in a period is the amount by which the market interest on the loan is more than—

      2. the amount of interest that accrued on the loan in the period; or
        1. when the loan is a financial arrangement and it is appropriate having regard to the nature of the loan, the income that would have accrued to the employer’s benefit in the period as calculated under the yield to maturity method.

          1. Having made an election under subsection (1), the employer must use the method for the income year to which the election relates and for the next income year.

          2. An employer may not change the method of calculating the value of the benefit for an income year, other than from a method given by a paragraph of subsection (5) to the method given by the other paragraph of subsection (5), unless the employer notifies the Commissioner of the proposed change at least 1 year before the start of the income year in which the change is to occur.

          3. Despite subsections (3) and (4), the method chosen by an employer described in subsection (1)(b) takes effect for the first quarter beginning after the Commissioner receives the election, if the employer—

          4. is not in the business of lending money; and
            1. does not pay FBT on an income year basis under section RD 60; and
              1. does not pay FBT on an annual basis under section RD 61; and
                1. notifies the Commissioner of the proposed change before 1 April 2016.

                  1. Despite subsections (3) and (4), if subsection (4B) applies to the employer’s chosen method, the employer must use the method for a period beginning with the start of the first quarter to which the election applies under subsection (4B) and ending with the finish of the income year following the income year that includes the start of the first quarter.

                  2. In this section, market interest means the amount of interest calculated at the rate of interest that—

                  3. would apply to a borrower belonging to a group of persons to whom a loan of the kind provided to the employee is offered when—
                    1. the group has a comparable credit risk to the group to which the employee belongs; and
                      1. membership of the group arises from a factor or factors that do not include a connection between a member and the employer; and
                        1. the group is sufficient in number to ensure a transaction on an arm’s length basis; or
                        2. is the lowest rate of interest for a loan, of the kind provided to the employee, that is provided by the lender—
                          1. to customers for which the characteristics that are treated by the lender as relevant to the rate of interest for a loan are similar to those of the employee; and
                            1. in the ordinary course of business; and
                              1. during the quarter (the loan quarter) in which the loan is provided to the employee, or during the preceding quarter if calculating the rate for the loan quarter is impracticable.

                              2. For the purposes of subsection (5), the amount of interest is the amount accrued on the loan during the quarter or tax year calculated on the daily balance of the loan at the rate referred to in the subsection.

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                              Notes
                              • Section RD 35(1): replaced, on , by section 225(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                              • Section RD 35(4): amended, on , by section 258(1) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                              • Section RD 35(4B) heading: inserted, on , by section 225(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                              • Section RD 35(4B): inserted, on , by section 225(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                              • Section RD 35(4C) heading: inserted, on , by section 225(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                              • Section RD 35(4C): inserted, on , by section 225(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                              • Section RD 35(5): replaced, on , by section 258(2) (and see section 258(3) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                              • Section RD 35 list of defined terms group of companies: inserted, on , by section 225(3) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                              • Section RD 35 list of defined terms year: inserted, on , by section 225(3) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).