1. An employee's total remuneration package typically includes cash in the form of salary. It might also include a range of non-cash benefits provided by or at the behest of the employer. The non-cash benefits might be very valuable to the employee. The best-known example of a non-cash benefit is the provision of a company car that is available for private use by the employee or an associate of the employee.
2. Before the introduction of the Assessment Act, difficult questions might arise over whether particular benefits should be counted as part of an employee's assessable income. Those issues are largely resolved because the benefits are subject to FBT.
3. The FBT is imposed on the taxable value of fringe benefits provided by employers to their employees according to formulae set out in the Assessment Act. The concept of a 'benefit' is defined widely in s 136, while the method for establishing the 'taxable value' of car fringe benefits (the non-cash benefits in question in this case) is set out in Part III Div 2. Section 66 makes clear FBT is actually paid by the employer. While the value of fringe benefits must still be identified by an employee in his or her tax return, those amounts do not form part of their assessable income: s 23L, Income Tax Assessment Act 1936 (Cth) (ITAA36).
4. The parties in this case accept the liability to pay FBT only arises in relation to 'fringe benefits' as defined in s 136 of the Assessment Act. I will not quote the entire definition of that expression here. It is very long, and most of it is not at issue for present purposes. Relevantly, the definition refers to a benefit - a widely defined concept, as I have already noted - being provided by an employer (or their associate) to their employee (or that individual's associate) in respect of the employment of the employee. The definition goes on to expressly exclude a list of benefits and payments that are not relevant for present purposes. I note the word 'provided' is also defined broadly: it includes allowing, conferring, giving, granting or performing.
5. The words 'employer' and 'employee' are central to the operation of the Assessment Act. They are (at least for present purposes) unhelpfully defined in s 136(1) to include:
   • in the case of 'employer[s]' - current, future and former employers; and
   • in the case of 'employee[s]' - current, future and former employees.
6. A current employee is defined as a person who receives or is entitled to receive 'salary or wages'. The expression 'salary or wages' is defined as a payment from which an amount must be withheld under a provision in Schedule One to the Administration Act. The table in s 12.35 of the Administration Act in turn refers to withholding an amount from salary, wages, commission, bonuses or allowances paid to an individual "as an employee". For the sake of completeness, I note s 137 of the Assessment Act directs the decision-maker to analyse the circumstances in which the benefit is paid or conferred when deciding whether the relationship between the persons said to be employer and employee is, in fact, an employment relationship. I should add 'employment' is also defined in s 136 to mean:

... in relation to a person, [...] the holding of any office or appointment, the performance of any functions or duties, the engaging in of any work, or the doing of any acts or things that results, will result or has resulted in the person being treated as an employee.

7. The references in these provisions to 'employer', 'employee' and 'employment relationship' are not exhaustive. They ultimately rely on common law concepts of employment and the characterisation of employment relationships.
8. In written submissions, the applicant argued (at [37]) there was no relevant anterior legal relationship between the brothers and the applicant. The qualifier 'relevant' is doing a lot of work in those circumstances, since there surely was a legal relationship - and perhaps several - between the applicant and the directors. Companies make payments and benefits to individuals for a variety of reasons. Save in cases of fraud or misappropriation, the payments or benefits will always be referable to one of several different kinds of lawful relationship, such as an employment relationship. If the applicant in this case establishes there is no relevant employment relationship, it will succeed in this case without more. But if the applicant fails to establish there is no employment relationship, it may yet succeed in the review if it establishes the benefits in question were not provided in respect of the employment of the employee but were referable to another relationship between the applicant and the individuals concerned.

1. The history of the establishment of this family business is recorded in the written statements of Mr Smith (an assumed name for the purposes of these proceedings). Mr Smith was the director who was called to give evidence. Mr Smith said his parents, the patriarch and matriarch of the family, established the [redacted]. The first asset the family business acquired was a [redacted]. The patriarch worked in the business and members of the family pitched in as their education commitments allowed. Mr Smith confirmed in his statement (exhibit 3 at [63]) the children were not paid salary or wages because it was a family business.
2. The business prospered and the patriarch soon considered acquiring additional businesses. He took advice and decided to establish the family trust with the applicant as corporate trustee.
3. The deed which established the family trust was signed on [redacted]. The patriarch was the appointor of the trust. As appointor, he had the power to appoint and replace the trustee. He was also described as the nominated beneficiary. The trust deed was subsequently varied. The undated deed of variation was also reproduced in the hearing book. The variations are not material for present purposes.
4. The patriarch's wife became the nominated beneficiary under the trust in due course, but there was also a lengthy list of eligible beneficiaries that included the patriarch and matriarch, their children and grandchildren, siblings, spouses, some other family members, and entities in which eligible beneficiaries might have an interest: see clause [29] of the trust deed.
5. The deed afforded the trustee wide latitude to determine distributions to any eligible beneficiary. It also permitted the trustee to employ any beneficiary without the individual's remuneration being regarded as a distribution. The deed required the trustee to keep "complete and accurate records of all receipts and expenditures or account of the Trust Fund" but it also pointed out (at clause [3I(vi)] the trustee could determine to make a distribution "by oral declaration or written statement whether or not published to any person...". Clause [23] makes clear the trustee company was expected to exercise its powers and discretions under the deed by passing a resolution of the board. Clause [5(f)] also permitted the trustee company:

...to allow any Eligible Beneficiary to occupy have custody of or use any immovable property or chattels for the time being forming part of the Trust Fund on such terms and conditions...as the Trustee shall think fit...

6. The applicant company had 100 issued shares. Initially, the patriarch and matriarch were both directors of the applicant. The patriarch held 60 shares, the matriarch held 20, and their oldest son also held 20 shares. The patriarch died in [redacted]. His shares were split equally amongst his three sons. The matriarch retired as a director in [redacted] and her 20 shares were split between her two youngest sons. The three sons now control all the shares in the applicant company, and they are also the directors who collectively comprise the board. While the eldest brother controls ten more shares than his other brothers, Mr Smith suggested in his evidence that they effectively operated as equals and the board's decision-making was accompanied by a high degree of consensus and trust. (I will return to describe the governance and operations of the trust below.)
7. Mr Smith discussed the history of the applicant and the trust in his statement and in his oral evidence. He explained how the applicant acquired other businesses and grew significantly over time. During the period under review, the applicant's principal business was comprised of two chains of [redacted]. Suffice to say the family business operated through the applicant company has become a large and growing concern. Over time, hundreds of other companies have been established or acquired by the family. While the applicant was not a holding company for all those entities, Mr Smith said the directors of the applicant met as a 'group' board each month and ran the various enterprises and entities as if they were part of a corporate group. They even developed a 'group' brand name for the larger enterprise as if it were an integrated group: transcript at p 87. Some of the entities in this notional group were special purpose vehicles. Other entities conducted discrete businesses. Some entities held rights or assets or provided discrete services that were used by other companies controlled by the brothers. The companies consumed some common services (including finance, treasury and tax; information technology; and some human resources functions) that were centrally managed. Mr Smith said in his oral evidence that the three directors of the applicant were also directors and shareholders of most of the other entities in the notional group, and they would hold meetings to make decisions for particular entities as required. He added the applicant company was the principal 'trading business' and employed most of the staff.
8. Mr Smith explained in his oral evidence that all three directors were keenly aware of the financial affairs of companies and businesses across the notional group. He explained some of the businesses generated healthy cashflows but other entities had significant capital needs. The brothers had to manage those competing pressures before deciding how much money was left over for distribution through the trust to the beneficiaries in accordance with the deed: transcript at pp 90-91.
9. Mr Smith confirmed in cross-examination that the brothers had decided the profits of the trust available for distribution should be shared amongst them equally: transcript at p 87. When asked about that decision in more detail, Mr Smith explained his sister - an eligible beneficiary under the terms of the trust - had been provided for separately by her father, and (subject to what follows) his mother did not regularly receive dividends: transcript at p 87.
10. It was unclear what the other eligible beneficiaries thought (or even knew) about this agreement between Mr Smith and his brothers regarding the allocation of dividends amongst themselves. The attitude of the other eligible beneficiaries makes no difference for present purposes. I am not here to consider the operations of the trust and the claims of potential beneficiaries except insofar as it is relevant to the applicant's liability to taxation.
11. While Mr Smith said the brothers made board decisions collectively, they each tended to focus on different aspects of the group's operations. Mr Smith confirmed he was mostly responsible for overseeing the shared services provided to group companies during the period under review: transcript at p 89. Having said that, Mr Smith explained there were executives employed to manage the functions that the directors oversaw. Mr Peadon, counsel for the Commissioner, asked Mr Smith about the handling of taxation issues. Mr Smith said there was an executive who was head of taxation who reported to the (employed) chief financial officer (CFO). The CFO reported to Mr Smith, although Mr Smith emphasised the CFO and other senior executives "had equal access and could take Equal direction from any of the directors or respond to them. We all had standing to talk to them. But I was [the CFO's] principal contact": transcript at p 90.
12. Mr Peadon asked Mr Smith about the amount of time Mr Smith devoted to his role with the applicant. The questions were prompted by written answers that had been provided to the Commissioner in response to an earlier request for information about the use of motor vehicles by the directors. The document containing the written answers (reproduced as document T44 at p 226 of the Hearing Book) colourfully asserted:

All three Directors devote their whole life to the running of the business. Their working day starts the moment they wake up and does not end until they sleep. ...[T]hey are effectively on call 24 hours per day to run the business.

13. Mr Smith did not recollect providing that response or even seeing it, but added he thought the response was factually correct. After Mr Peadon zeroed in on the apparent extravagance of the claim, Mr Smith responded (transcript at p 96):

...I think it's fairly close to being correct. It's a pretty immersive experience, looking after the interests that we do. So I don't think it's incorrect. I think you could add to it, elaborate and make it better, but I don't think it's incorrect.

14. Later in the cross-examination, Mr Smith confirmed he had independent business interests of his own which did not include other family members. But Mr Smith said those interests occupied a tiny fraction of his time. He went on to insist the earlier description of his commitment to the trust's business was accurate, saying (transcript at pp 97):

It's not like we worked half-time and spent the other half-time on a boat. We spent every waking minute - I mean, the most valuable thing we do is just think, not be on the tools typing emails. And so from the minute - I think it's a fair thing to say that we are completely immersed in the interests of the [redacted] group. That's a very - if I could rewrite this to make it more accurate, sir, I would, but I think you could make it better. But I don't think it's fair. And I'd like to be fair to both of us. I don't think it's fair to say it's incorrect.

15. I have already noted Mr Smith presented as a measured and careful witness. While he was cross-examined in detail and occasionally exhibited some irritation, the substance of his evidence was not called into question. I had no reason to question the veracity of his answers and I accept he was a witness of truth who did his best to assist the Tribunal. I have no difficulty with his claim that his endeavours on behalf of the applicant consumed the lion's share of his time. I accept at least some of his time was devoted to oversight of the affairs of companies in the wider 'group'; he acknowledged the directors tended not to distinguish between activities of the applicant company and those of other companies in which the family had an interest. In circumstances where he claimed - and I have no reason to doubt - the applicant company was the principal operating company within the wider network and the profits of other companies were paid into the trust, I accept his role as a director was a busy one that left little time for other pursuits. I should add I have no difficulty with Mr Smith's claim that, to his knowledge, all three brothers exhibited the same commitment to the applicant in terms of time and effort. I accept Mr Smith's evidence that he was aware of his brothers' lifestyles, attitudes and commitments. While Mr Peadon was critical of the applicant's decision not to call the other directors so they could speak for themselves, I am satisfied Mr Smith had knowledge of their actions and attitudes so that his evidence provides a satisfactory basis for a decision in these proceedings.

1. The Commissioner says the applicant clearly paid the non-cash benefits in question to the directors as employees. That proposition requires careful analysis because companies who are also employers might make payments or provide non-cash benefits to individuals in a variety of circumstances other than as part of an employment relationship. It is therefore important for me to say something about the variety of those relationships before I focus on the indicia of an employment relationship.

The range of potential relationships that may subsist between companies and natural persons

1. A corporation is a legal person that has a separate existence from the humans with whom it interacts. (A corporation may be a civil actor, but - in the absence of artificial intelligence that allows a corporate entity to self-actualise - a corporation requires human actors to think and act on its behalf.) The challenge in a case like this is to identity and characterise the relationship between the particular entity and its human actors. There must be a lawful relationship of some kind because companies do not enjoy the same liberties as natural persons when it comes to expending their resources.
2. The most obvious relationship is that which exists between a company (the most common form of corporation) and its shareholders or members and directors. That relationship is defined at first instance by the terms of the company's constitution and any replaceable rules that are applicable. The constitution and replaceable rules take effect as a contract between the company, its individual members, and its officers in accordance with s 140 of the Corporations Act 2001 (Cth). The parties to the constitution (ie, the corporate contract) have rights and obligations under that contract, albeit that individuals may also have rights and duties under legislation.
3. The constitution of the applicant in this case is set out in its Memorandum and Articles of Association. There is nothing unusual in the drafting of these documents. The Memorandum confirms the company has the powers required to act as a trustee under any trust. The Articles also expressly authorise particular corporate acts. The general powers and function of the directors are dealt with in Article [99], which provides (relevantly): "The business of the Company shall be managed by the Directors...". The constitution makes clear the Directors undertake their management role collectively as a board (Articles [105]-[107]) although the Articles also permit the board to allocate responsibilities amongst committees comprised of a single director or directors (Article [109]).
4. The applicant points out a director does not inevitably become an employee of the company simply because he or she is managing the entity's business. Management is the ultimate constitutional responsibility of directors, after all, and the constitution is not of itself a contract of employment. While directors in larger public companies typically confine themselves to directing the business and leave 'day-to-day' management to employees engaged for that purpose, the distinction between direction and management is not so clear cut in family companies and small businesses. In any event, the applicant says there is nothing unusual in this case about its directors playing an active role in the management of the business in their capacity as directors, particularly in circumstances where they are also eligible beneficiaries under the trust with an established expectation that they will be able to access the resources of the company as if they were the owners.
5. Which is not to say a director of the applicant cannot also be an employee. Article [94] refers to "Directors' contracts". The article expressly permits a director to hold "any office or place of profit (except that of auditor) under the company" or under any subsidiary. It will be a question of fact in each case whether such an arrangement would give rise to an employment relationship. If there is a contract, it is necessary to determine whether it is a contract of service, a contract for service, or a contract of a quite different kind. A director engaged under a contract of service (ie, a contract of employment) is conventionally referred to as an 'executive director'.
6. Article [96] also expressly authorises the board to appoint one of their number to the office of 'Managing Director'. The terms of that appointment might be contained within a contract between the company and the director in question - typically a contract of service. In Lincoln Mills (Aust) Ltd v Gough [1964] VicRp 27; [1964] VR 193, Hudson J explained the offices of director and managing director "are separate and distinct": at 197. His Honour went on to explain (at 198):

The duties of a managing director as such are those of an executive officer, and in relation to the performance of them he is subject to the control and directions of the whole board. His remuneration and term of office are also matters to be fixed and determined by the whole board and as the cases shew the fixing and determination thereof will bind the company to the managing director in contract, just as it would be bound to a manager or other executive officer not occupying the position of director.

7. In this case, remuneration is dealt with in Article [97]. That article provides for the general meeting to be involved in approving "the remuneration of the Managing Director and of any other executive Director". The article goes on to provide the remuneration is:

...fixed by the Directors and may be by way of a fixed salary or of commission on dividends profits or turnover of the Company or of any corporation in which the Company is interested or by participation in any such profits or by way of pension or retiring allowance or by any or all of those modes.

8. The applicant points out there is no record in this case of the board approving an employment relationship or seeking approval from the general meeting for any remuneration paid to any of the three directors (exhibit 3 at [64]-[69]), including the director who was occasionally described in company correspondence and promotional material as 'managing director'.
9. I will come to the common law tests that help identify whether a particular relationship will be characterised as a contract of service which establishes an employment relationship. But I will first deal with how companies go about deciding to confer benefits on individuals, whether by way of a contract of employment or otherwise. It is helpful to do so because directors of small and family businesses sometimes fail to clearly understand the capacity in which they act. As a result, they may conflate the property of the company (and its interests as a separate entity) with their own property and interests. They might also informally assume forms, processes and titles which are poorly understood. Casual and self-aggrandizing references to an insider as a 'chief executive officer', 'managing director' or 'executive director' are not necessarily definitive of that person's status, duties, and powers, especially where the title is assumed informally. While the use of those terms might create the basis for a finding of apparent authority in dealings with third parties, the casual use of a title does not inevitably mean the parties are in an employment relationship. I am still required (at least for present purposes) to characterise the relationship by reference to the legal rights and liabilities which actually arise: see Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 at [57] Per Kiefel CJ, Keane and Edelman JJ.
10. Using a corporate structure has consequences. One cannot insist on the reality of the corporate structure when it suits but ignore it when it becomes inconvenient. Having said that, one must exercise caution when examining the affairs of small companies and family enterprises. Their affairs will often be attended by a level of informality and fluidity that causes discomfort for lawyers and management consultants: see DQTB and Commissioner of Taxation [2023] AATA 515 at [6] per SM Olding; see also Anglo-American Investments (Trustee) Pty Ltd v Commissioner of Taxation [2022] FCA 971 at [54] per Logan J. It can be misleading to examine the operations of a family business against the nomenklatura, standards and managerial conventions of larger, more bureaucratic organisations.
11. In the absence of statutory intervention, it has long been accepted that members are not, by virtue of their membership, liable for the obligations of the company. That is precisely because those obligations are the obligations of the company as a separate entity. The members are one step removed (and therefore to some extent insulated) from the relationship between the company and the third party that gives rise to the obligations: see, generally, Salomon v A Salomon & Co Ltd [1896] UKHL 1; [1897] AC 22; see also Maclaine Watson & Co Ltd v Department of Trade and Industry [1989] UKHL J1026-1, [1990] 2 AC 418, [1989] 3 WLR 969 (the International Tin Council case). Officers are also generally protected from liability for the company's debts and obligations (although there are various statutory exceptions that 'pierce the corporate veil' to fix directors with responsibility for obligations in some circumstances). Members and directors do not have any interest in the property of the company by virtue of their membership or office (see Macaura v Northern Assurance Co Ltd [1925] AC 619). That sometimes comes as a surprise to founders and family members who may control the membership and refer to themselves as 'the owner' of the company, or refer to the entity as 'their company'. Officers and members are certainly not entitled to treat the property of the company as if it were their own, even where they are the sole directors and shareholders or where the company is a trustee and they are the beneficiaries under the trust in question. Directors are obliged to deal with company property in accordance with their obligations to the company. An officer who misuses their position to gain advantage for themselves or anyone else will contravene their fiduciary obligations and the obligation contained in s 182 of the Corporations Act.[2] As fiduciaries who are also subject to the duty set out in s 181(1), a director acting as such must act:

(a) in good faith in the best interests of the corporation, and > > (b) for a proper purpose.

12. The obligation to act for a proper purpose has substance, and it is relevant to cases where directors decide the company should confer a benefit on someone - or on the directors themselves, for that matter. While human persons are generally at liberty to dispense their largesse as they see fit, directors can only authorise the expenditure of corporate resources for a corporate purpose. As Bowen LJ observed in Hutton v West Cork Railway Co [1883] UKLawRpCh 129; (1883) 23 Ch D 654, the directors have wide latitude in deciding which expenditures were for or reasonably incidental to a corporate purpose. But there are limits. As his Lordship memorably explained (at 673):

The law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company.

13. It follows that where a company confers a benefit on someone, it should be possible to characterise the basis on which the benefit is provided and explain how - at least generally - it is referable to a corporate purpose. Is a payment in a particular case:

(c) a dividend (where made to a shareholder); > > (d) directors' fees (where paid to a director); > > (e) a loan advance, or repayment of a loan to an insider, associate, member or third party; > > (f) made under a contract of service or a contract for service; > > (g) made pursuant to some other contractual or legal obligation, most obviously in connection with the supply of goods or services; > > (h) a gift authorised in the constitution; or > > (i) distribution of an amount by a trustee company under the terms of the trust?

14. This list is not exhaustive but intended to illustrate the diversity of relationships that might provide a conduit or occasion for the payment of monies. The character of a payment should be apparent in the company's accounts and records. Where the company is transferring or dealing in property, the dealing should be documented by the decision-maker and recorded in the company's books so the connection between the transaction and a corporate purpose is apparent. One would expect the company to be especially careful in documenting a decision to confer a benefit on a corporate officer (eg, permitting that individual to make private use of a motor vehicle at company expense). That is important because the conferral of the benefit might otherwise raise concerns that the officer is breaching fiduciary and statutory obligations.
15. Nice questions can arise over the conferral of benefits in a company that acts as trustee where the trust is established for the benefit of individuals who might also have a role in the management of the company. The trust deed presumably articulates the basis on which the trustee may make distributions to beneficiaries. The deed might also authorise the trustee to permit beneficiaries to access trust property on favourable terms, and the deed might have something to say about how those transactions are to be recorded. Subject to their other duties and the terms of the trust, the directors of the corporate trustee may decide to authorise a distribution or confer a benefit under the trust which the directors receive in their individual capacity as beneficiaries. The conferral of that benefit may be entirely explicable with reference to the trust deed, rather than on some other basis, such as an employment relationship.

1. I next turn to the common law approach to characterising employment relationships. Many of the cases referred to in the parties' submissions were decided in a context where there was no doubt that a service relationship of some kind existed. The challenge in most of those cases was to distinguish a contract of service from a contract for service. That is not the challenge before me, as the applicant rightly points out in its submissions at [36]. The applicant says this case is different because there is no relevant anterior relationship between the directors and the company. As I have already explained, I am satisfied there are one or more anterior relationships that may be relevant, but I accept none of them suggests a contract of employment. That said, the cases dealing with the existence of an employment relationship are obviously relevant.
2. The essential lesson from recent High Court decisions like Personnel Contracting Pty Ltd and ZG Operations Pty Ltd v Jamsek [2022] HCA 2 is the importance of focusing on the legal rights and duties that attend the relationship. As Gordon J explained in Personnel Contracting (at [181]):
   1. The question [ie whether it is an employment relationship, as opposed to some other form of association] must always focus on the nature of the relationship created by the contract between the parties.
3. Ideally, the agreement between the parties will be recorded in writing. That is what happened in Personnel Contracting and Jamsek where there were comprehensive written agreements in evidence. In the absence of any suggestion of a sham, the Court was able to characterise the relationships in those cases with reference to the terms contained in the documents. In doing so, the Court was applying basic principles of contract law. Evidence about what happened in the course of the relationship following the bargain was of limited use, most obviously because parties might strike a bargain but then not enforce or abide by its terms in practice. (Evidence of subsequent behaviour suggesting the parties had negotiated a variation of the contract might still be relevant.) The plurality and Gordon J (with whom Steward J agreed) in Personnel Contracting still cited the statement of Mason J in Stevens v Brodribb Sawmilling Company Pty Ltd [1986] HCA 1 that "it is the totality of the relationship between the parties which must be considered": at [20]. Kiefel CJ, Keane and Edelman JJ explained the observations of Mason J in Stevens were not intended as "an invitation to broaden the inquiry beyond the contractual rights and duties of the parties": at [56]. Gordon J explained (at [162]):
   1. The resolution of the central question requires consideration of the totality of the relationship between [the parties to the contract], which must be determined by reference to the legal rights and obligations that constitute that relationship. Where the parties have entered a wholly written employment contract, as in this case, the totality of the relationship which must be considered is the totality of the legal rights and obligations provided for in the contract, construed according to the established principles of contractual interpretation.
4. The reference in her Honour's judgment to a wholly written employment contract is important. In Stevens, there was no written agreement which purported to define the terms of the relationship. That meant it was necessary to cast the evidentiary net wider in such a case for the purpose of establishing the contractual rights and duties of the parties which might permit characterisation.
5. I have already noted there is no written contract of employment for any of the three directors in this case, and no record of any resolution to enter into such an agreement. I expect the board of an organisation of this size and complexity would formally resolve and record its decision to enter a contract of employment with an officer if that were the applicant's intention. That expectation is grounded in particular on (a) Mr Smith's description of the applicant's internal arrangements which suggested there was a level of sophistication, formality and regularity in the way its affairs were managed notwithstanding the fact it was operated in some respects like a family business; and (b) the evidence that the applicant had negotiated formal written contracts of employment with other managers that were supplemented by binding policies and procedures that applied to those managers pursuant to their contracts of employment.
6. The evidence regarding the employed managers inevitably invites a question over why the applicant did not commit to the same formalities in relation to the officers if it intended to employ them. Even if there was not a written contract of employment with each of the three officers, one would still expect the terms of any agreement - including the amount of salary or remuneration and the form of any fringe benefits payable - to be formally noted by the board if an employment relationship was intended. That has not occurred. The most obvious explanation for the absence of that evidence is the fact the applicant did not intend there to be an employment relationship.
7. I give little weight to the fact the directors occasionally referred to themselves by titles which might suggest to outsiders (and even some insiders) that those officers were employees. I refer in particular to the evidence that one or more of the directors was described as the 'chief executive officer' or even on occasion as a 'managing director'. Mr Smith also spoke about using other terms to describe himself and his brothers, including 'founder' and 'executive director'. Mr Smith was asked about the adoption of titles during his evidence. He explained (transcript at p 79) the use of titles was informally discussed amongst the directors, but it was never the subject of a board resolution. Mr Smith pointed out that one his brothers expressly chose to describe himself as 'managing director' because that was the title his father used.
8. The casual approach to the use of titles by board members underlined the fact this was and is still a family business, albeit a large and relatively sophisticated one with established processes and professional advisers. I have already noted the analysis of what occurs in small companies and family-run businesses can be complicated by the inapposite use of language and titles borrowed from the context of larger enterprises. It is important not to be distracted by the use of self-aggrandizing titles awarded to insiders in these businesses that may not accurately describe their relationships or role. The mere use of those titles does not of itself (at least in this case) suggest there was a formal contract of employment or an intention to establish such an agreement.
9. The use of the expression 'executive director' in some board documents illustrates the potential confusion that might arise. During cross-examination, Mr Peadon asked Mr Smith about the board's 'delegation of authority' policy that clearly applied to all employees. That policy expressly referred to Mr Smith and his two brothers as 'executive' directors. The following exchange ensued (transcript at pp 88-89):

Mr Smith: I think executive directors in this context is designed to distinguish us from non-executive directors. That is the intent of that designation. I coined it myself. > > Mr Peadon: Yes. And there's no trick in this - because I think your evidence is entirely consistent about it? > > Mr Smith: Sure. > > Mr Peadon: It's because you had an active role - each of you had an active role - and call it senior management or call it executive, but each of you had an active role in the trust business? > > Mr Smith: Yes. Please don't misunderstand me. I'm not trying to be cute in my answers, I just want to be very precise. And so to the extent to which we interchange these words, I just want to be careful that I'm not misquoted. And so I think words like, 'hands on,' are fair. But the minute you move into executive management, I'm just careful because there were people employed to do every job in the business. And so I'm never going to describe myself as hands off. I was not hands off, and I'm not hands off. But that's different to saying I was an executive manager of the business. I think they're two different things with different connotations and meanings. And so I think to say - if we talk about substance rather than form, that's probably an easier conversation - without in any way directing you to what questions to ask me, I don't mean that. Certainly I'm just trying to say I'm active, yes, I'm hands on yes, but I think when you move to saying you're a manager of the business, I don't think that's quite accurate.

10. Mr Smith's answers might be regarded as self-serving, but they are consistent with the balance of the evidence about the operation of this family-run business. Mr Smith makes clear that, to the extent titles were used, they might be used idiosyncratically to underline the brothers' special status within the company and the wider group. I am not satisfied they amount to some sort of statement that the directors understood they were really employees after all. (The fact the same policy was adopted and assumed to apply to all the companies in the wider network of family enterprises when some of those entities were not formally related to the applicant points to the fluid nature of what was occurring.)
11. In the absence of formal written contracts of employment that are identified as such, it is necessary to look at other evidence which might point to the existence of an employment agreement (as distinct from some other relationship).
12. One of the rights and duties one expects to feature in an employment relationship is the right of one party to exercise control over the performance of work by the other, even if that right is not routinely asserted in practice: see Hollis v Vabu [2001] HCA 44 at [43]- [45] per Gleeson CJ, Gaudron, Gummow, Kirby And Hayne J; see also Stevens at [19]-[20] per Mason J. The applicant points out in written submissions in this case that the Commissioner's own ruling recognises "control is the most important factor to be considered" when determining whether an employment relationships exists.[3] As Kiefel CJ, Keane and Edelman JJ explained in Personnel Contracting at [73], the focus on the existence of a right to control the performance of a worker "serves to sensitise one to the subservient and dependent nature of the work of the employee...". In written submissions, the Commissioner's counsel points to the fact each director was subject to the ultimate authority of the board. As Mr Peadon pointed out, any one director could be directed or overruled by the other two directors through a simple majority vote.
13. Mr Peadon's point has some force. Corporate officers are generally not free agents when they go about the performance of their roles. A corporate officer would ordinarily submit to the board's decisions and policies, most obviously because that is what the constitution of the company requires: see s 140 of the Corporations Act.
14. Mr Smith explained in his statement and during cross-examination that he carried out his work on behalf of the company with a high degree of autonomy, particularly in those areas of responsibility where he took the lead by agreement with his brothers. But he also made clear in his oral evidence and statements that he regarded himself as being bound by the collective decision-making processes of the board. I acknowledge there is also some evidence that he and his brothers generally observed company policies that were applicable to employees - although Mr Smith pointed out in his statement that he did not regard himself as being formally bound to observe policies like the Vehicle Usage Policy or policies regulating annual leave, management of confidential documents, or working from home arrangements: exhibit 3 at [69]. Mr Smith conceded he and his brothers abided by budgets and accepted limits to what I take to be an implicit referral of authority as they went about their allocated responsibilities in the company as directors: exhibit 3 at [40]. Having said that, he also noted he and his brothers were not subject to any formal limits (apart from the budgets) on the amount of business expenses they incurred, whereas those limits applied to employed managers: exhibit 3 at [70].
15. It is helpful to understand this evidence in context. I have already explained this was a family business that has existed over a long period. Mr Smith spoke of the family members working in the business when it was small and they were children. In those days, their father ran the business and the children helped out without being paid. While the business had grown enormously and there were many changes, it was clear from Mr Smith's evidence that the business still had to be understood with reference to the family. He explained (exhibit 3 at [63]):

We regarded ourselves as the owners of the family business and the persons ultimately entitled to the profits of the business.

16. That evidence goes to the heart of the brothers' approach to (and the nature of their relationship with) the applicant. Mr Smith spoke of a close bond between the brothers who were motivated to advance the shared interests of their family. That familial relationship impacted on the way the board operated. Mr Smith made clear in his evidence that the three brothers conceived of themselves as being in control of the applicant as if they were its owners, albeit that they acted collectively through the applicant's board. He accepted the brothers generally complied with the board's delegation of authority policy as they did so, but he also made clear in cross-examination that the brothers tended to observe the substance or spirit of the policy rather than its strict terms. As Mr Smith explained (transcript at p 89):

I think it broadly [was operated in accordance with the policy]. If I'm honest I think the delegation - I think the brothers probably regularly may have not technically complied with the policy. I can't say that they would have had it committed to memory. But, you know, no egregious breaches, but I don't think the brothers ran the business or oversaw the business strictly. But they understood the spirit intended of the policy, and they understood the sorts of decisions - the most important part of this policy for the owners/directors, was what decisions required unanimity and what decisions could be made with a phone call and a majority. That's really how it impacted the brothers the most.

17. That evidence is consistent with the other evidence provided by Mr Smith to the effect that this was a family business which was operated competently and with a level of sophistication - but was a family business all the same. The brothers appeared to exercise control in the same way over other companies in the wider family network of businesses, even though some of those companies had no formal connection with the applicant. There is nothing in the evidence of Mr Smith which suggests he understood the individual directors as being in a subservient relationship like that described in Personnel Contracting. The brothers behaved like owners; they did not expect to be subject to supervision or control in the way they discharged their responsibilities - responsibilities which extended beyond the affairs of the applicant in any event.
18. The Commissioner emphasises the board's right to exercise control indicates the existence of an employment relationship. I acknowledge it is the existence of a right to exercise control rather than the exercise of that right which is significant when characterising an employment relationship. But one must not lose sight of the fact that the board's right to control a director, such as it is, arises out of the applicant's constitution which operates as a contract. If the existence of such a constitutional right (and corresponding obligation) were treated as an indicator of an employment relationship, almost every director (and certainly every director performing responsibilities as a member of a committee pursuant to Art 109) would qualify as an employee. To put it differently: the capacity to exercise control is conventionally taken to be an indicator of an employment relationship because the right to control the work performed is a defining feature of such relationships. Where the capacity to control arises out of a different legal relationship which offers an adequate explanation for the behaviour of the parties, the evidence suggesting control may be of limited value in the characterisation process. At most, one may be able to say evidence that one party has a right to control another is consistent with, but not determinative of, the existence of an employment relationship. In those circumstances, other indicia are more important.
19. There are cases in which courts have considered the extent to which an individual is integrated into the organisation of the business. That test is likely to be more useful when the decision-maker is attempting to distinguish between an employment relationship and a contract for service with an independent contractor. In this case, the position of the directors at the apex of a network of private companies does not sit comfortably with the conception of an employee who plays a defined and subordinate managerial role. Mr Smith made clear that the board of the applicant tended to serve as a decision-making forum for most if not all the sprawling family businesses, even those entities that were not formally connected to the applicant. Mr Smith's description of the individual directors' oversight and involvement was also telling. While he said each of the directors tended to have areas of responsibility within the company and served as a point of contact for the professional managers, his remarks during cross-examination (transcript at p 90) about reporting lines make tolerably clear that the employed managers operated within a hierarchy that formally reported to the board. The practical control exercised by individual directors was the product of managers assuming those directors were able to speak for the board. There was no formal board resolution that expressly authorised the individual directors to make delegated decisions in relation to the functions.
20. There is some confusing evidence surrounding the applicant's payment of contributions into superannuation funds in respect of Mr Smith and his brothers during the period under review. Mr [redacted], the group's accountant, confirmed in his statement (exhibit 1 at [49]) that the applicant recorded having made employer contributions in respect of each of the three brothers in the 2016, 2017 and 2018 years of income up to the concessional contributions cap. He said contributions paid by the applicant in 2019 and 2020 were treated as personal contributions made into individual superannuation accounts at the direction of each brother. He acknowledged (at [51]) the applicant claimed a tax deduction in respect of the contributions each year. Mr [redacted] said he did not question the way the applicant's financial staff characterised the contributions in any of those years because he was satisfied it made no practical difference for tax or other purposes how the payments were recorded. He explained:

Given that the brothers were directors of [the applicant], I did not at that time turn my mind to whether the brothers were in fact "employees" in the traditional sense.

21. Ernst & Young wrote to the Commissioner on the applicant's behalf on 13 August 2019 (reproduced as document T50 at p 280 of the s 37 documents) to explain the incidental private use of the motor vehicles which lies at the heart of this dispute. The letter acknowledges the way the contributions had been treated by the applicant but pointed out the obligation to make superannuation contributions in respect of an employee arises out of the Superannuation Guarantee (Administration) Act 1992 (Cth) (the SGAA). Section 12(2) of the SGAA expands the ordinary meaning of the word 'employee' to include "[a] person who is entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate...".
22. The Commissioner points out the applicant chose not to call any internal witnesses with first-hand knowledge of the decision to make and record employer contributions. Mr Smith was of limited assistance in this regard: when asked about the superannuation contributions during his evidence-in-chief, he said he was unaware of any payments being made to him or his brothers through the payroll system: transcript at p 81. It follows there is no direct evidence to support the assertion of Ernst & Young that the contributions were made in fulfilment of a perceived obligation under the SGAA but were not intended as a concession that the directors were employees for other purposes. The Commissioner also points to the fact the individual officers were recorded in the payroll system as evidence in and of itself suggested they were regarded as employees.
23. I acknowledge (as of course I must) that the applicant bears the onus of proof. The argument contained in the Ernst & Young letter is not evidence of the company's thinking process; it appears to be an ex post rationalisation provided by an outside adviser. It may be that internal witnesses could have shed light on their understanding of what occurred. Even so, the letter does point to the danger of drawing any inferences from the fact the officers were included on the payroll system or the fact that employer contributions were made. At best, the evidence on this point is a weak indicator of an employment relationship that must be weighed along with the other indicia. That weighing process would likely reach the same result even if there was some evidence that an officer within the applicant's payroll office had formed the opinion the officers should be treated as employees. Evidence of such an opinion would not necessarily be of value: it might be shaped by the conduct of individuals within the company rather than shed light on the actual terms of an agreement. The other evidence I have described tends to suggest the relationships in question are not properly characterised as employment relationships when one has regard to the underlying rights and obligations.
24. I should add Mr Smith pointed out in his statement that he was unaware the brothers had ever been registered in the applicant's payroll system because the brothers had never been paid wages or salary. They received no regular income from the applicant and they had no entitlement to leave under the company's leave policy. (He said the brothers would inform each other and their staff when they took leave from the business but that was not because they had any obligation to do so.) The applicant pointed out in submissions that the payment of regular salary or wages would ordinarily be a feature of an employment relationship.
25. The applicant says the evidence does not suggest an employment relationship existed. I agree for the reasons I have explained, in particular:
    • The absence of any evidence of a board resolution to establish a contract of employment in circumstances where I would expect there would be a record of a resolution to that effect if it was intended;
    • the evidence of control - a typical feature of a contract of service - was of limited value given the control that was potentially exercisable was referable to the underlying corporate contract and did not of itself point to an underlying employment contract;
    • the directors were not integrated into the hierarchy of the applicant but appeared to sit at the apex of that company and a wider network of family businesses;
    • the other indicia of an employment relationship do not clearly point in that direction.

But what if there was an employment relationship?

1. My finding that there was no employment relationship should conclude the matter in the applicant's favour. But what if, contrary to my finding, the individual directors were found to be in an employment relationship? As I have already explained, the benefits they received in the form of private use of motor vehicles would only be regarded as fringe benefits under the FBT Act if they were provided by the employer in respect of their employment. If the applicant discharges its onus of establishing the benefits in question were provided to an employee otherwise than in connection with employment, the applicant is still entitled to succeed.
2. There is no clear evidence that the private use benefits were provided to the individual directors in lieu of directors' fees or remuneration. The case that was ultimately run at the hearing focused on the trust. I have already referred to the terms of the trust deed which permitted the trustee to provide an eligible beneficiary with access to trust property such as motor vehicles. The applicant's case boils down to an argument that the provision of motor vehicles was effectively an exercise of that power or a distribution under the trust.
3. That argument is complicated by the fact there is limited evidence of a decision being made by the trust to supply the motor vehicles to the directors in their capacity as beneficiaries, and the value of the private use of the property was not recorded in any resolutions or in the accounts as a distribution to the individual brothers.
4. Mr Smith's statement (exhibit 3 at [71]ff) discussed the distribution of income from the trust during the years in question. He confirmed none of the three brothers received distributions in their own names in 2016-2020 but distributions were made into their individual family trusts. Mr Smith said (at [92]) those distributions were their only source of income from the business because they were not paid salary or wages or directors' fees. He said each brother was able to instruct the applicant's financial officers to make distributions into their own beneficiary accounts. He said that was a transparent process and each brother knew what the other was doing in this regard: at [87]-[88]. Mr Smith justified that approach in his statement (at [83]), saying:

The overriding principle agreed by my brothers and me is that over the long term we should share equally in the profits of [the applicant's] business, even if the amount of profit distributed to each of us differs on a year-by-year basis depending on our individual circumstances

[My brothers] and I have never regarded ourselves as employees of [the applicant] at any time, including during the Relevant Period. We regarded ourselves as the owners of the family business and the persons ultimately entitle to the profits of the business. Even when we were children or, in [the case of the eldest brother], a young adult, working part time in the business, my parents did not regard us or treat us as 'employees' - we worked in the business without wages to increase the profits of the business to provide for my family and on the basis that we would one day take over the family business (if we wished to).

6. That sense of entitlement to the resources formally owned by the applicant is said to explain what occurred in relation to the vehicles that were made available for private use. The applicant argued that even if there was an employment relationship in existence between the directors and the company, the brothers accessed the benefits in question because they perceived they were entitled to do so as beneficiaries, not employees. But what of the fact the benefits in question in this case were not attributed in the records of the trust to the brothers' individual beneficiary accounts?
7. Mr Smith noted monies were distributed into the account of the matriarch during this period that were used to meet the expenses of various family members, including the brothers, such as the payment of school fees of grandchildren, the purchase of real estate, the payment of phone bills and travel costs, and the payment of medical expenses for other family members: at [77]. To that extent, the matriarch's account served as a kind of family account. It became a conduit for delivering profits from the business to family members.
8. Which brings us back to the motor vehicles. Mr Smith explained there was an established practice of attributing the costs or value of the brothers' private use of the motor vehicles to the matriarch; her beneficiary account was debited to reflect those amounts. The debits were then offset by distributions from the trust.
9. Mr Peadon cross-examined Mr Smith in some detail about the circumstances of this collateral arrangement. There does not appear to be any dispute that the debits or distributions occurred, but the motivation and characterisation of these transactions was at issue. Mr Smith said the convoluted way of accounting for the private use of the business vehicles was part of the long-standing practice of attributing cash and non-cash benefits provided to family members to the matriarch's account rather than by making separate trust distributions. As I understand the argument, the convoluted process did not change the underlying nature of what was going on: the benefit was being extracted from the applicant out of a sense of entitlement rather than in connection with an employment relationship. That sense of entitlement arose from the brothers' shared perception of themselves as the beneficial owners of the business.
10. Mr Peadon's cross-examination highlighted the fact the brothers were not the only beneficiaries under the trust. The cross-examination also raised doubts over whether other potential beneficiaries shared the brothers' conception of their entitlement to the assets of the trust. In written submissions, the Commissioner pointed out there was little in the way of contemporaneous evidence that shed light on these distributions. I acknowledge that is so, and it is surprising given the sophistication that I have otherwise observed in the conduct of the applicant's affairs. But I also acknowledge the terms of the trust deed appear to contemplate distributions being validly made with a degree of informality.
11. I have already observed that Mr Smith was a reliable witness who did his best to assist the Tribunal. His position in the company was such that he would have been aware of the arrangements in respect of the motor cars that he and his brothers were able to access. He has given evidence that the distributions were made in a circuitous way, and I have no reason to doubt they occurred as he said. Whether the circumstances of those distributions might invite attention in other respects is not a question before me.
12. My focus is necessarily on whether the benefits - specifically, the private use of the motor vehicles - were provided to the brothers "in respect of the[ir] employment" (assuming, contrary to my findings, there was an employment relationship). I note s 136(1) of the Assessment Act defines the expression 'in respect of' as follows:

"in respect of", in relation to the employment of an employee, includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.

13. This definition was discussed by the Full Federal Court in J&G Knowles and Associates Pty Ltd v Commissioner of Taxation [2000] FCA 196. In that case, the directors of a trustee company authorised loans to themselves in circumstances where they and their families were the ultimately beneficiaries of the trust in question. The trustee company was assessed for FBT on the interest free loans. The Tribunal at first instance concluded (and a single judge on appeal accepted) the employment of the directors was the "principal connecting reason" for the loans given the directors were not, in fact or law, the owners of the company or its assets. On appeal to the Full Court, the trustee company accepted the directors were only able to sign cheques as a consequence of their employment. But the company argued that causal connection between the directors' employment and the benefit was not enough to establish the benefits were in respect of the employment.
14. The Full Court agreed that more was required beyond establishing a bare causal connection with employment. Heerey, Merkel and Finkelstein JJ explained (at [23]):
    1. It cannot be said that any causal relationship between the benefit and the employment is a sufficient link so as to result in a taxable transaction. For example, a discretionary trust with a corporate trustee might be established to purchase a family home for the benefit of its directors and their family. It does not follow that the rent free occupation of that home on the authority of the directors is a benefit provided "in respect of" their employment for the purposes of the Act. While there is a causal relationship between the provision of the benefit and the employment it is not a sufficient or material relationship. The rent free occupancy arises because the trust was established for that purpose; a reason extraneous to the employment of the directors.
15. After discussing various authorities in different contexts dealing with how one might establish such a connection, the Full Court explained the real issue "is whether there is a sufficient or material...causal connection or relationship between the benefit and the employment": at [26]. The Full Court observed (at [28]-[29]):
    1. While the width of the definition of "fringe benefit" was designed to capture benefits that, in truth, were other than remuneration, the stated purpose suggests that asking whether the benefit is a product or incident of the employment will be helpful. If it is not then the benefit is likely to be extraneous to the employment and will not bear FBT, notwithstanding that the employment might have been a causal factor in the provision of the benefit. In particular, the fact that a benefit is provided to a director because it was authorised by that director will not, of itself, be sufficient to characterise the benefit as one which is "in respect of" the employment. Without more, it is not a product or incident of that office.
    2. To put the matter another way, although the process of characterising the benefit provided in a particular case can involve questions of fact and degree, it is not sufficient for the purposes of the Act merely to enquire whether there is some causal connection between the benefit and the employment.
16. Having made those observations, the Full Court returned to analyse the Tribunal's findings on the material before it. That material pointed to two possible conclusions: either the directors felt entitled to apply the assets of the trust for their benefit because they were beneficiaries under the trust and their employment as directors was only relevant to the extent it provided the occasion for them to help themselves; or the directors agreed between themselves that each of them was entitled to draw and apply the company's funds for their benefit as an incident of their directorship. The Full Court reasoned there was unlikely to be a sufficient connection with employment in the first scenario, but there would be a sufficient connection in the second: at [33].
17. On remittal, the Tribunal decided the employment provided the means by which the loans came about. But it concluded that particular causal connection was not sufficient in circumstances where the individual directors who authorised the loans did so in the belief the trust was established and its assets were held for their benefit.
18. The applicant in this case says the reasoning in Knowles applies here. It says the directors believed they were entitled to all the property and profits of the applicant because they were beneficiaries under the trust. The fact the high-end motor vehicles were registered in the applicant's name and used principally for business purposes as the directors went about their management tasks did not change the analysis: the trust deed permitted beneficiaries to be provided with access to property for their own purposes.
19. The Commissioner pointed out only the three directors had access to the vehicles in question, and they were only given access in the first place because they were directors. That is true, but it does no more than identify a causal connection between the engagement and the provision of the benefit. The Commissioner also pointed out it was possible to distinguish Knowles because the directors in that case were, collectively, the beneficial owners - whereas in this case, there were many other eligible beneficiaries apart from the three directors concerned.
20. I agree there are unanswered questions over the three brothers presuming to claim the benefits of the trust for themselves when other family members who might be eligible beneficiaries have apparently been left out. But whatever the regularity of the brothers' actions in charge of the trust, the fact is their motivation is the same as the directors in Knowles: they are helping themselves to benefits because (as Mr Smith explained) they genuinely believed they were entitled to them as beneficiaries, not because they see it as a reward for their work as directors, or as employees.

1. The applicant was not in an employment relationship with the three directors. If I am wrong in that conclusion, I am not satisfied the benefits were available to those individuals in connection with their employment in the relevant sense. The objection decision is set aside and I decide in substitution that the objection should be allowed.
2. I will make separate orders for the redaction of these reasons to protect the applicant's anonymity following the private hearing.

I certify that the preceding 94 (94) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe

........................................................................

[1] She repaid those debited amounts out of her distributions from the trust pursuant to a private agreement between her and her sons: see exhibit 3 at [74]; see also exhibit 5 at [4]-[9].

[2] They may also be criminally liable under s 184(2) of the Corporations Act

[3] Check Taxation Ruling 2005/16 '[FULL TITLE??]' at [30]