Recent media coverage has highlighted the use of loan forgiveness schemes in executive remuneration, particularly in private equity–backed companies. These arrangements typically involve executives receiving loans to acquire shares in their employer, with the expectation that the loans will later be forgiven upon exit or when performance conditions are met.
Attractive on paper, such schemes can allow executives to obtain equity without upfront cash outlay and, if loan forgiveness is treated as a capital gain, potentially shift taxation from marginal income tax rates (up to 47%) to the more concessional capital gains tax regime. However, the Australian Taxation Office (ATO) has consistently maintained that loan forgiveness in an employment context constitutes assessable income. Depending on the structure, the forgiveness may fall under section 15-2 of the ITAA 1997 (employment-related benefits) or trigger fringe benefits tax obligations for the employer.
The issue attracted attention in the case of Virgin Australia, where loans provided to senior executives to fund share acquisitions were later forgiven. The ATO has indicated such forgiveness is essentially disguised remuneration and should be taxed accordingly.
For private equity funds and portfolio companies, the risks are significant. Executives may face unexpected income tax liabilities, employers may incur fringe benefits tax exposure, and investors face reputational scrutiny if these schemes are perceived as tax avoidance.
Key takeaway: businesses considering or operating loan-funded share schemes should seek tax advice and ensure alignment with ATO guidance. Structures designed to convert remuneration into concessional capital treatment are likely to be challenged.
Should you wish to discuss these matters please contact us.
