Private groups frequently encounter situations where company payments, loans or benefits are provided to shareholders, directors, or their associates. In such cases, both the Fringe Benefits Tax (FBT) regime and Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) may potentially apply. To prevent overlap and double taxation, the legislation includes a tie-breaker rule which determines which regime takes priority.
The interaction between FBT and Division 7A is governed by: Section 109ZB, ITAA 1936, and the definition of a fringe benefit in section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). For payments, FBT generally takes priority where the benefit is provided in the capacity of employee; however, for loans and debt forgiveness, Division 7A generally prevails (ITAA 1936, s 109ZB).
Broadly, where a benefit constitutes a fringe benefit, Division 7A will not apply to that same benefit. This tie breaker establishes that FBT takes priority, and Division 7A is effectively displaced where the FBT regime applies to a payment. Consequently, the critical question in any scenario is whether the arrangement gives rise to a fringe benefit.
The practical question is how to characterise a payment. This requires consideration of who incurred the expense, who is legally liable for it, and whether the company is paying it in the director’s capacity as employee or as shareholder. These facts and the supporting documentation will usually determine whether the FBT rules or Division 7A applies.
The first step is in determining if a fringe benefit has been provided. A fringe benefit will arise on which FBT applies where:
• It is provided by an employer (or associate),
• To an employee or associate, and
• It is provided in respect of employment.
This final condition—the employment nexus—is the critical determinant in most cases as was seen in the recent case of SEPL Pty Ltd ATF SFT Trust v Commissioner of Taxation [2026] FCAFC 36 (SEPL).
The SEPL decision, has been one of the most significant recent FBT cases involving directors, car benefits, and the s136 definition. The Court held that the Directors were NOT employees and reaffirmed a benefit is only a fringe benefit if there is a real and sufficient connection to employment. Critically, the evidence supporting this view was that there were no employment contracts, no salary, wages or employment entitlements and that the conduct of the directors was consistent with owners/controllers, not employees. This case is highly relevant because, if FBT does not apply (as in SEPL), Division 7A may still apply.
If no fringe benefit arises due to the absence of a sufficient connection to employment—the arrangement must be considered under Division 7A. Where a private company makes a payment, loan or forgives a debt, under Division 7A, a deemed dividend could arise which is taxable to the shareholder or their associate (subject to distributable surplus and other rules). If Division 7A applies, repayment or a complying loan arrangement before lodgement day may be critical to avoid a deemed dividend (for example, ITAA 1936, ss 109D and 109N).
In assessing whether FBT or Division 7A applies, the ATO will generally look to the substance and purpose of the arrangement rather than its form, including the surrounding facts and circumstances, whether the benefit forms part of a remuneration package, the commercial rationale for the arrangement, and whether similar benefits are provided to non-shareholder employees.
This distinction is often nuanced in closely held groups, where individuals act in dual capacities as both employees (e.g. directors receiving remuneration) and equity holders.
Key Takeaways
The key distinction is whether the company is paying the expense as part of the director’s remuneration as an employee, or instead providing a private benefit to them as shareholder. Here are the key takeaways:
• A company paying a director’s personal expenses is not automatically entitled to an income tax deduction (ITAA 1997, s 8-1).
• FBT is more likely to apply where the expense is paid as part of the director’s remuneration or employment package (FBTAA, s 20).
• Division 7A is more likely to apply where the expense is paid as a private benefit to the director in their capacity as shareholder or associate of a shareholder (ITAA 1936, s 109C).
• For payments, FBT generally takes priority over Division 7A where the benefit is provided in the capacity of employee; for loans and debt forgiveness, Division 7A generally prevails (ITAA 1936, s 109ZB).
Private companies should review these arrangements carefully and ensure that the director’s capacity, the nature of the expense and the documentation are addressed when the payment is made. Early review is often critical, particularly if there is any doubt about whether the expense is being paid as employment remuneration or as a shareholder benefit, or if a repayment or complying Division 7A loan may be needed before lodgement day.
Please contact Mimi Ngo if you would like to discuss these matters further.