Fonterra Interest-Free Loans and Fringe Benefit Tax

A co-operative is about members standing together to help each other.  Fonterra is ably demonstrating this co-operative spirit by offering a loan to its suppliers of 50 cents per share interest free, until 31 May 2017.

Some owners are concerned about the financial viability of their farm manager or sharemilker and have offered to share the benefits available from the co-operative.

There is a tax problem if the interest-free loan to an employer is shared with an employee.  The problem is that the benefit represented by the interest-free loan is a fringe benefit and it will be taxed at the employee’s marginal tax rate.

Fringe benefit tax is designed to discourage employers from offering benefits to their employees e.g. free lunches, free petrol etc.

Where an owner wants to provide a benefit to an employee, there are other ways of achieving that outcome without a tax penalty.  We can discuss these options with you.

It is different for sharemilkers.

Where the milker has a lower-order or 50/50 sharemilking arrangement with the supplier/owner, there is no fringe benefit tax because the nature of the legal relationship between the sharemilker and the owner is not that of employer/employee, but rather an independent contract.  FBT only applies to benefits to employees.

An owner can on-lend a portion of the interest-free loan to a sharemilker.

However, if the owner is a limited liability company, there are other tax problems with a company lending money without interest to a third party, especially if the third party is “associated” or “related” for tax purposes, e.g. where the son is the sharemilker.

An owner on-lending money, interest free, is not the best way to assist.

Your objective is to ensure that your milker, either as an employee or as a sharemilker, is solvent so that the bank will continue to support your sharemilker through these hard times.

Again, there are options available to the owner to assist the sharemiker in continuing to operate a solvent business without making available an interest-free loan.

And, anyway, the benefit of being a shareholder and the cost of funding that capital is one which should be preserved by the shareholder.

If you need any further assistance regarding the various options available to you, we are happy to briefly discuss this issue with you, initially without cost or obligation.