Indooroopilly Children Services (Qld) Pty Ltd v Commissioner of Taxation

Indooroopilly Children Services (Qld) Pty Ltd v Commissioner of Taxation - [2006] FCA 734 - FCA 1997 case summary — Zoe

[26]

21 In the Explanation, the Commissioner continued to maintain the views expressed in TR 1999/5, in preference to the views of Kiefel J in Essenbourne. TR 1999/5 explains the approach of the Commissioner to circumstances where property is gifted to a trust and an employee who is a beneficiary of that trust is able to benefit from that gift. As explained by par [1] of TR 1999/5, the Ruling considers, inter alia, whether a payment by an employer of money (which does not constitute salary or wages or an exempt benefit) to the trustee of a trust or non-complying superannuation fund is a fringe benefit, and the value of that benefit. The view was expressed in the Explanation that the Ruling applied to the circumstances of this case, and that further for reasons outlined in pars 45-49 of TR 1999/5 a fringe benefit could arise notwithstanding that a benefit provided to a trust was not provided in respect of a specific employee. 22 Paragraphs 45-49 of the Ruling are as follows: '[45] The definition of fringe benefit in subsection 136(1) is in relation to "an employee". It is considered that there will be a fringe benefit, notwithstanding the payment of the money to the trust is not in respect of a specific employee. Such a construction is the natural consequence of the use of the indefinite article "an". It is sufficient if the benefit is provided in relation to employees generally. [46] Alternatively, where the contribution is not made in respect of a particular employee or employees, the benefit will be provided in relation to each and every employee (as the trust or non-complying superannuation fund may be for the benefit of all employee). [47] The foregoing construction of the definition of fringe benefit is supported by the fact that paragraph 136(1)(hb) specifically exempts from the definition: "a benefit constituted by the acquisition by a trust of money or other property where the sole activities of the trust are obtaining shares…in a company…of the employer, and providing those shares…to employees of the employer; [emphasis added]." [48] Such an exclusion would be otiose if the definition of fringe benefit did not include benefits provided to an associate of the employees in respect of the employees generally. [49] An alternative view relies on the reference to "the employee" in paragraph (b) of the definition of fringe benefit. As outlined above, we do not accept this view.' 23 By objection dated 14 July 2005 the applicant objected to the ruling of the Commissioner in response to Question 1 of the Ruling Application. As I noted earlier in this judgment, the Commissioner disallowed the objection in a letter of 13 September 2005 containing the Notice of Decision on Objection. 24 An Application was then filed with this Court whereby the applicant appealed against the appealable objection decision.

[58]

The Cases Essenbourne 34 As I have already noted, the first issue involves consideration of 'fringe benefit' as decided in Essenbourne. It is useful therefore to consider the case and the principle articulated by Kiefel J, currently in dispute. 35 In Essenbourne, the employer was a family company which owned a motor dealership in Queensland. The three key employees were three sons of the Marino family, which controlled Essenbourne Pty Ltd. The sons received low salaries in keeping with the corporate strategy of coping with periods of business downturn, and enabling surplus funds to be re-invested in profitable years. In light of the low salaries, a superannuation fund, an employee share fund and an employee incentive trust were established to provide benefits primarily to the three employees of Essenbourne Pty Ltd who were family members. This was in addition to the salaries they received, and in order to retain their services. 36 Various capital contributions were made to each entity, however the critical payment for present purposes was a contribution by Essenbourne Pty Ltd of $252 000 to the employer incentive trust on 30 June 1997. This sum was calculated on the advice of the solicitor of Essenbourne Pty Ltd, and was equivalent to the sum which could be contributed to the superannuation fund on the basis of the age of all members of the superannuation fund. On the same day, the three key employees were allotted each one third of the Employee Units in the trust, ie 84,000 units each. The employees were not required to pay for those units. 37 The Trust Deed of the employee incentive trust provided that the Trust was to provide benefits and incentives to employees, and that the employer (Essenbourne Pty Ltd) was to make contributions for the benefit of 'its employees generally' (cl 5.1). Further, the Deed allowed the trustee to issue Bonus Units in respect of Employee Units to the holders of those units on such basis as the trustee, with the consent of the employee, might determine (cl 10.1). 38 Essenbourne Pty Ltd claimed a deduction for the contribution of $252 000 for that income year, which was disallowed by the Commissioner of Taxation. 39 More relevantly for present purposes however, the Commissioner assessed Essenbourne Pty Ltd to fringe benefits tax, on the basis that the contribution of $252 000 was a property benefit or a residual benefit to the three employees of Essenbourne Pty Ltd. 40 Essenbourne Pty Ltd objected and subsequently appealed to the Federal Court. 41 As Kiefel J noted, the Commissioner had not suggested the three brothers, employees of Essenbourne Pty Ltd, were entitled to the trust money or the property in which the money was invested. Her Honour also observed that under the Trust, the brothers had only the prospect of Bonus Units issuing (par 50). 42 While Kiefel J accepted the Commissioner's proposition that it was not necessary that an employee be in receipt of a benefit where it has been provided to an associate of that employee, the fact of provision of a benefit to an associate is not enough in itself to make that benefit a 'fringe benefit' within the meaning of the FBTAA. As her Honour pointed out: 'The difficulty in the Commissioner's approach is that it does not identify a benefit to a particular employee. The statute may deem a benefit to be provided to an employee where it is provided to the employee's trustee, but this would not obviate the apparent necessity to identify the employee in question. The definition of 'fringe benefit' would appear to require the identification of the employee to whom the benefit is provided. This is the principal contention of Essenbourne.' (par 51) (emphasis added) 43 Her Honour agreed with the contention of Essenbourne Pty Ltd that the definition of 'fringe benefit' required reference to a particular employee in connection with the benefit said to be provided. This requirement of the definition was not, in Kiefel J's view, satisfied in Essenbourne. Given the nature of the contest before me, it is important and relevant to set out her Honour's reasoning on this point: '[54] In my view Essenbourne is correct in its contention that the definition of "fringe benefit" requires reference to a particular employee in connexion with the benefit said to have been provided. This is reflected in the references to a benefit being "provided to the employee or to an associate of the employee" and to the benefit being provided "in respect of the employment of the employee" (emphasis added). The latter reference, in particular, can only be to a particular person's employment. The Commissioner submitted that the reference to "an employee" in the definition should be read as "employees", in the case of certain benefits, as s 23 Acts Interpretation Act 1901 (Cth) would permit. In my view the Assessment Act requires that the particular employee be identified in connexion with the benefit. It is their employment which, after all, provides the necessary "link" to the benefit: see J & G Knowles & Associates Pty Ltd v FC of T (2000) 96 FCR 402. The definition does not admit of a reference to a number of employees in connexion with the benefit, the subject of the assessment. …

[60]

45 In each of the Federal Court decisions Walstern, Spotlight Stores and Caelli Constructions, the learned judge followed and applied the principles decided by Kiefel J in Essenbourne. 46 In Walstern, Hill J decisively and unambiguously agreed with Kiefel J in Essenbourne on this issue. His Honour said: '(at 22) As I have already noted, I would, as a matter of comity, follow the decision of Kiefel J in Essenbourne unless the case was either distinguishable or I was of the view that the decision was clearly wrong. On this point the case is not distinguishable. Further, far from being of the view that her Honour was clearly wrong, I am of the view that her Honour was clearly right. The definition of "fringe benefit" in s 136(1) of the FBTA Act makes clear the importance of identification of the employee. The benefit itself is one which is said to be "in relation to an employee". The benefit is required to have been provided to the employee (or associate of the employee) and is required to be in respect of the employment of the employee. The definition of "property fringe benefit" (if that is the kind of benefit relied upon) requires relevantly provision of property to a particular person there referred to as "the recipient". The valuation formula relevantly here requires that there be a benefit provided "to a person" in respect of the employment of an employee. Any contribution made by an individual employee is taken into account in determining the taxable value of the benefit. Although not relevant in the present case, the exclusion of a benefit otherwise deductible to an employee contemplates taking into account the specific circumstances of the employee himself or herself. It is not surprising that the legislation requires a link between the benefit and a particular employee (or associate of a particular employee) because historically the purpose of the Fringe Benefits Tax Act 1986 (Cth) is to provide a specific means of taxing benefits which are a substitute for income to an employee and in respect of which the provisions of the 1936 Act and particular s 26(e) were thought to be defective. Income tax is a tax upon the taxable income of a particular employee. While fringe benefits tax is a tax for which an employer is made liable and is payable at the maximum personal income tax rate, the theory of fringe benefits tax legislation is that it operates as a final withholding tax payable by the employer on amounts that essentially are or would be income of the employee…' 47 Similarly, in Spotlight Stores, Merkel J agreed with Kiefel J. His Honour said: '[121] In Essenbourne…Kiefel J concluded that the definition requires that for the benefit to be provided in respect of the employment of "the employee", a "particular employee" must be able to be identified in connection with the benefit. In Walstern…Hill J agreed with Kiefel J's view. In the present case, it is clear that when the benefit (that is, the $15 million contribution) was provided it was not provided, whether to "the employee" or to Spotlight Incentive as an "associate" of "the employee", in respect of the employment of any particular employee because the employees of Spotlight were not beneficiaries of the Incentive Trust at that time. The Commissioner contended that I should not follow Essenbourne or Walstern but I am not satisfied those decisions are clearly wrong and, accordingly, propose to follow them. It must follow that Spotlight is entitled to succeed in its appeal in relation to its FBT objection.' 48 Finally, in Caelli Constructions Kenny J assumed that Essenbourne correctly stated the law, and applied the principle to the facts of the case (par 61).

[61]

Principles of precedent 49 As I have already noted, in Walstern (at FCA par 87 per Hill J) and Caelli Constructions (at FCA par 61 per Kenny J) their Honours stated their views that the decision of Kiefel J in Essenbourne was correct, and stated the law. Merkel J in Spotlight Stores did not need to discuss the Essenbourne case in great detail, however his Honour observed that he proposed to follow Essenbourne and Walstern as, notwithstanding the submissions of the Commissioner in Spotlight Stores, his Honour was not satisfied that those decisions were clearly wrong (at FCA par 121). Hill J in Walstern had also indicated that, as a matter of comity, he would have followed the decision of Kiefel J in Essenbourne unless he had formed the view either it was distinguishable or that the decision was clearly wrong, neither of which was the case (at par 87). 50 In Hicks v Minister for Immigration and Multicultural and Indigenous Affairs [2003] FCA 757 at [76] French J said: 'The injunction to judicial comity does not merely advance mutual politeness as between judges of the same or co-ordinate jurisdictions. It tends also to uphold the authority of the courts and confidence in the law by the value it places upon consistency in judicial decision-making and mutual respect between judges. And where questions of law, and statutory construction, are concerned the proposition that a judge who has taken one view of the law or a statute is 'clearly wrong' is one not lightly to be advanced having regard to the choices that so often confront the courts particularly in the area of statutory construction. Indeed, where a serious doubt arises on the part of one judge, about the correctness of the law as stated by another, in a matter of importance, it may be desirable for a case to be stated to the Full Court for early resolution of the question in contention.' 51 In my view, there is little to add to the observations of his Honour in Hicks. Similar observations have been made in many other Federal Court cases including La Macchia v Minister for Primary Industries and Energy (1992) 110 ALR 201 at 204 (per Burchett J), Bank of Western Australia v Federal Commissioner of Taxation (1994) 55 FCR 233 at 255 (per Lindgren J), Nezovic v MIMIA (2003) 133 FCR 190 at 206 (per French J), and Koara People v State of Western Australia [2006] FCA 66 at par 29 (per Nicholson J). The principle of comity is applied in other Australian courts in respect of decisions of single judges: I note, by way of illustration, Durovic trading as Shell Tornik Roadhouse v Judge, unreported Supreme Court of New South Wales, Rolfe J, 25 February 1997; Zotovic v Dobel Boat Hire Pty Ltd (1985) 62 ACTR 29 at 32 (per Blackburn CJ); Anteden Pty Ltd v Glen Eira City Council [2000] VSC 366 par 25 (per Balmford J); McDermott Projects Pty Ltd v Chadwell Pty Ltd (2002) 2 QdR 363 at 365 (per Holmes J); and Swetnam Brothers Pty Ltd v Grundy, unreported Supreme Court of Tasmania, Wright J, 14 March 1997. The principle of judicial comity as between Courts of equal status is long-standing in the United Kingdom; the principle is discussed, with many case citations, in Halsbury's Law of England, 4th Edition Reissue vol 37 at par 1244. I also note similar comments in A MacAdam and J Pyke, Judicial Reasoning and the Doctrine of Precedent in Australia (Butterworths, Sydney, 1998) at 179-180. 52 Accordingly, in my view it would be appropriate to follow the principle articulated in Essenbourne and followed by three other judges of the Federal Court before me, unless in my view the principle is clearly wrong, or the facts before me are distinguishable.

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