The Commissioner of Taxation suffers a defeat for his views on the application of fringe benefits tax to employee benefit arrangement cases and is now forced to rethink his position. As well as losing this case, the Commissioner was roundly criticized by the Full Federal Court for his approach to the administration of the taxation legislation. This also follows earlier criticism levelled at the Commissioner by the Inspector General of Taxation. Taxpayers and their advisers will be watching keenly to see whether the Australian Taxation Office changes its approach to administering tax legislation.
Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16 (22 February 2007)
ABC Learning Centres Ltd (ABC Public) is a listed public company on the Australian Stock Exchange (ASX). ABC Developmental Learning Centres Pty Ltd (ABC) is a wholly owned subsidiary of ABC Public. ABC operated childcare centres in Queensland and Victoria.
As part of a restructure of the business, ABC moved to a franchise model operating through regional management companies (RMC) under a Regional Manager (RM). ABC continued to hold the licences to operate each child care centre but the day-to-day operation of a centre devolved to the RMC and the RM under the terms of a licence agreement.
No RM held any office or employment in any other RMC or in ABC Public, ABC or any associated companies. There was no connection between any RMC, ABC Public, ABC or any associated companies through office holders or employees.
ABC Public decided it wanted to establish a Carers Share Plan (CSP) to benefit specified employees of the RMCs. The CSP envisaged the establishment of an independent professional trustee that would administer a trust with the property consisting of fully paid shares in ABC Public issued to the trustee for no consideration and in accordance with specified guidelines.
Indooroopilly Children Services (Qld) Pty Ltd (Indooroopilly), an RMC, together with a number of other RMCs, sought a private ruling from the Commissioner of Taxation on whether the issue of shares of ABC Public to the trustee of the CSP would give rise to a fringe benefit to ABC Public or any RMC.
The Commissioner ruled that the issue of shares would give rise to a fringe benefit to an RMC but not to ABC Public.
Indooroopilly objected to the ruling but the Commissioner disallowed the objection. Indooroopilly then appealed to the Federal Court.
Collier J held that the shares to be gifted to the trustee were not a fringe benefit because they were not provided with any particular employment. In reaching this decision, Her Honour relied on the construction of ‘fringe benefit’ of Kiefel J in Essenbourne Pty Ltd v Federal Commissioner of Taxation 2002 ATC 5201 and applied by Hill J in Walstern v Federal Commissioner of Taxation (2003) 138 FCR 1. This line of reasoning was not challenged in several subsequent cases involving the Commissioner.
The Commissioner appealed.
The Commissioner argued that for a benefit to be a ‘fringe benefit’ it need not be provided to an employee; it was sufficient if it was provided to an ‘associate’ of the employee. ‘Associate’ is defined in the legislation as including a trustee of a trust estate where the person is capable of benefiting under the trust.
The Commissioner contended a fringe benefit was provided to the trustee of the trust as an “associate” of each of the employees, because each of the employees was capable of benefiting under the trust although none of the employees benefited at the time of the issue of the shares and may never have benefited under the trust considering its discretionary nature.
The Full Court rejected the Commissioner’s argument unanimously.
The Court followed Essenbourne Pty Ltd v Federal Commissioner of Taxation 2002 ATC 5201 (Essenbourne) and Walstern v Federal Commissioner of Taxation (2003) 138 FCR 1, agreeing the definition of ‘fringe benefit’ for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), requires reference to a particular employee in connection with the benefit provided.
Edmonds J, with whom the other Judges agreed, said:
“This does not mean … that a benefit provided to a number of employees or a benefit provided to a common associate of a number of employees – such as the trustee of a trust under which those employees are capable of taking a share of the benefit – cannot be a ‘fringe benefit’. It will be a fringe benefit provided the identity of each of the employees who will take a share of the benefit is known with sufficient particularity, at the time the benefit is provided, to enable it to be said that the benefit is provided in respect of the employment of each of those employees.
However, where, as here, the identity of those employees capable of taking the benefit who will in fact take the benefit, is not known at the ‘provision time’, as wide as the phrase ‘in respect of the employment’ is … if the reference to ‘the employee’ throughout the definition [of ‘fringe benefit’] is to a particular employee, as I think it is, I am unable to conclude that the benefit here provided by ABC Public to the trustee of the CSP is a ‘fringe benefit’; at the ‘provision time’ the benefit is not provided in respect of the employment of any particular employee or all of the employees capable of benefiting taken as a whole, only some of them, and they are not known.”
The Commissioner appeared to adopt a position before the Full Federal Court that he was not bound by earlier single judge decisions on the meaning of ‘fringe benefit’. In particular, because he was dissatisfied with the ruling in the Essenbourne case and elected not to appeal it because it was not an appropriate vehicle to test the issue in the Full Federal Court, he would maintain his view as set out in Taxation Ruling TR 1999/5 (which conflicted with court decisions).
The Full Federal Court was surprised by the Commissioner’s position (Edmonds J called it astonishing).
Allsop J, said:
"From the material that was put to the Full Court, it was open to conclude that the appellant was administering the relevant revenue statute in a way known to be contrary to how this Court had declared the meaning of that statute. Thus, taxpayers appeared to be in the position of seeing a superior court of record in the exercise of federal jurisdiction declaring the meaning and proper content of a law of the Parliament, but the executive branch of the government, in the form of the Australian Taxation Office, administering the statute in a manner contrary to the meaning and content as declared by the Court; that is, seeing the executive branch of government ignoring the views of the judicial branch of government in the administration of a law of the Parliament by the former. This should not have occurred. If the [Commissioner] has the view that the courts have misunderstood the meaning of a statute, steps can be taken to vindicate the perceived correct interpretation on appeal or by prompt institution of other proceedings; or the executive can seek to move the legislative branch of government to change the statute. What should not occur is a course of conduct whereby it appears that the courts and their central function under Chapter III of the Constitution are being ignored by the executive in the carrying out of its function under Chapter II of the Constitution, in particular its function under s 61 of the Constitution of the execution and maintenance of the laws of the Commonwealth."
The Commissioner sought to clarify his position, saying it was confined to the facts of the case and the submissions put by Indooroopilly and not as a statement of broad principle. Nonetheless, the Commissioner did say, ”It is only in very confined circumstances where the Commissioner would not follow a decision of a single judge of the Federal Court”.
The Commissioner’s “clarification” did not help him because the Court determined that the Commissioner should have approached the application for a private ruling after considering earlier decisions or sought a declaration from the Court on the proper construction of the relevant provisions and then applied that construction in the ruling. The appeal was allowed.
The Australian Taxation Office (ATO) has issued an Impact of Court Decisions report stating they would not appeal the Full Federal Court’s decision and that they would review FBT assessments associated with outstanding employee benefit arrangement cases.
The ATO also said it was unaware that it could have sought a declaration from the Court to obtain a ruling on how to construe the law and it was seeking advice from the Solicitor General and the Australian Government Solicitor.
In May 2006, the Inspector General of Taxation produced a report highly critical of the litigation practices of the ATO. The ATO has received yet further heavy criticism from the Full Federal Court. Taxpayers and their advisers will be watching keenly to see whether the ATO changes its approach to the administration of taxation legislation following these criticisms.
For further information, please contact Stephen Newman on +61 3 9608 2219 or s.newman@cornwalls.com.au or
Tamara Young on + 61 3 9608 2129 or t.young@cornwalls.com.au
