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

The Case of the Applicant 18 So far as is relevant for present purposes, the case of the applicant is as follows: · the ABC Public shares were provided by ABC Public to the trustee of the CSP. ABC Public was not an associate of the RMCs whose employees potentially could receive a benefit;

· the ABC Public shares were provided by the trustee of the CSP to particular employees. The trustee was also not an associate of those RMCs;

· no employee had any entitlement to ABC Public shares unless and until he or she qualified for appointment, and was appointed those shares by the trustee of the CSP;

· there was no sufficient or material link between the issue of shares by ABC Public to the trustee of the CSP, and the employment of any employee of an RMC. Instead, the CSP acted as a true incentive to the employees to remain in employment with an RMC because an employee could only benefit if and when the trustee of the CSP exercised its discretion in his or her favour. When the trustee exercised its discretion in an employee's favour, any benefit in the form of dividends or shares would be assessable income to the employee;

· in order to fall within the definition of 'fringe benefit', the relevant benefit must be in respect of the employment of the employee: Essenbourne. In this case, no specific employees were identified as being in receipt of benefits under the proposal; and

· the proposal could properly be characterised as falling within the exclusionary principles in par (ha) of the definition of 'fringe benefit' in s 136(1) FBTAA, namely that it was 'a benefit constituted by the acquisition by a person of a share or right under an employee share scheme (within the meaning of Div 13A of Pt III of the Income Tax Assessment Act 1936)'. Such schemes are specifically excluded from being a 'fringe benefit' by par (ha) of the definition.

Reasons of the Commissioner 19 Detailed reasons for the answer to Question 1 were set out in a document entitled 'EXPLANATION: (This does not form part of the Notice of Private Ruling)'. This document was attached to the Notice of Private Ruling Authorisation Number 53514, which was in turn sent by letter dated 30 June 2005 under the hand of Mr Duffus of the Australian Taxation Office to Harris Black Chartered Accountants. 20 In summary, the reasons that the issue of ABC Public shares to the trustee of the CSP were deemed by the Commissioner to give rise to a fringe benefit in relation to the rulee RMCs as employers were as follows: · shares are considered to be property and therefore a 'benefit' for the purposes of the FBTAA;

· when ABC Public issued shares to the trustee, ABC Public was considered to provide property to the trustee pursuant to s 154 FBTAA;

· the trustee of the CSP was considered to be 'an associate' of an employee where the employee was capable of benefiting under the trust. Therefore when ABC Public issued shares to the trustee of a trust and an employee was capable of benefiting under that trust, a benefit would be provided to an associate of the employee;

· in considering whether one of the ABC entities could be a relevant person for the purposes of either par (e) or par (ea) of the definition of 'fringe benefit', there appears to have been some confusion in the Explanation. In the Commissioner's analysis with respect to whether an ABC entity could be 'an arranger' for the purposes of par (e), the Commissioner refers to 'ABC issu(ing) shares to the trustee of a trust' and 'ABC intends to issue shares to the trustee for the benefit of the RMCs employees', when the entity actually issuing the shares was ABC Public. (In the final analysis, the Commissioner was of the view that it was arguable that the entity issuing shares was not an 'arranger' within the meaning of par (e));

· in relation to the possible operation of par (ea) however, the Commissioner was of the view that ABC would be 'a person (the provider)' if:

o the RMCs participated in or facilitated the issue of shares to the trustee, and knew or ought to have known they were doing so; or

o the RMCs participated in, facilitated or promoted the CSP, and knew or ought to have known they were doing so;

The Commissioner stated in the Explanation that if the RMCs were to provide this information to the trustee 'they would be participating in or facilitating the issue of shares to the trustee and participating in or facilitating the CSP and would know or ought reasonably to know they were doing so. Where the information was provided to the trustee by ABC, the RMCs are still considered to be participating in or facilitating the issue of shares to the trustee and participating in or facilitating the CSP, because it is only as a result of their agreement with the ABC (under the Licence Agreement) that ABC is able to provide this information'. This reasoning was further explained by the Commissioner in the letter of 13 September 2005 to Harris Black Chartered Accountants, setting out the Reasons for Decision of the commissioner in finding against the applicant in relation to its Notice of Objection Against Private Ruling. The Commissioner, through Mr Duffus, pointed out in that letter that:

· ABC also provided information to ABC Public for ABC Public to calculate the gifting of shares to the trustee;

· ABC only had that information to allow it to prepare the payrolls for the RMCs; and

· the only way ABC could lawfully pass on such information to ABC Public was with the participation or facilitation of the RMCs.

The Commissioner was of the view that in these circumstances the RMCs would know, or ought reasonably to know, that the RMCs were doing so pursuant to par (ea).

Accordingly in the view of the Commissioner it followed that for the purposes of par (ea) of the definition of 'fringe benefit', ABC was 'a person (the provider)';

· the Commissioner noted that 'fringe benefit' in s 136(1) FBTAA meant, inter alia, a benefit provided in 'respect of the employment of the employee'. In his view the CSP operated as an employee incentive scheme providing rewards to RMC employees for services they provided as employees. Accordingly, the issue of shares by ABC Public to the trustee of the CSP was a product or incident of the employment of the RMC employees;

· the reference in the definition of 'fringe benefit' to a benefit being provided to 'an employee' meant that a fringe benefit could arise notwithstanding that a benefit provided to a trust might not be provided in respect of a specific employee;

· in any event, the Commissioner was of the view that the facts in this case were arguably distinguishable from those in Essenbourne. In particular, the Commissioner noted that cl 36 app 4 to the Application for Private Ruling stated that the initial issue of ordinary shares by ABC Public would be calculated by reference to the number of employees who had signed an AWA, held positions as set out in that document and had served a certain full-time period in that position at an ABC centre. The Commissioner said that therefore, it was arguable that the shares issued to the trustee of the CSP were shares provided in respect of the employment of particular employees.

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.

KEY QUESTION 1: Should this Court apply the interpretation of 'fringe benefit' as applied in Essenbourne, in particular that there will be no fringe benefit unless there is identification of particular employees in connection with the receipt of the benefit? 25 In answering this question, it is helpful to consider: · relevant legislative provisions under the FBTAA;

· the decisions and reasoning in Essenbourne and subsequent cases; and

Relevant legislative provisions 26 The application to the Commissioner for a private ruling, and the subsequent ruling by the Commissioner in response to that application, were in accordance with Pt IVAA TA Act. This Part was repealed by Sch 2 of Tax Laws Amendment (Improvements to Self Assessment) Act (No 2) 2005 (No 161 of 2005). The submissions of the parties in this case have been on the basis of this superseded legislation, and to the extent necessary I shall apply those provisions. In any event, the framework for private rulings delivered by the Commissioner (which continues now in Sch 1 Div 359 TA Act, legislation not relevant to this application) is well known. As Hill J noted in CTC Resources NL v Commissioner of Taxation (1994) 48 FCR 397 at 423, the legislation confers upon a person the right to apply to the Commissioner for a private ruling upon the way in which, in the Commissioner's opinion, a tax law would apply (cf s 14ZAF TA Act). 27 The key legislative provision for the purposes of this application is s 136(1) FBTAA, specifically the definition of 'fringe benefit'. So far as relevant, the definition reads as follows: 'fringe benefit, in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

being a benefit provided to the employee or to an associate of the employee by:

(e) a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) the employer or an associate of the employer; and

(ea) a person other than the employer or an associate of the employer, if the employer or an associate of the employer:

(i) participates in or facilitates the provision or receipt of the benefit; or

(ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employment of the employee, but does not include:

(ha) a benefit constituted by the acquisition by a person of a share or right under an employee share scheme (within the meaning of Division 13A of Part III of the Income Tax Assessment Act 1936);

28 As made clear by the definition, a benefit may be provided to the employee or to an associate of the employee, not only by the employer, but o by an associate of the employer; or

o by an unassociated third party who nonetheless has a connection with the employer or the employer's associate, described as the 'arranger', or

o by an unassociated third party in circumstances where the employer or the employer's associate nonetheless participates in or facilitates the provision or receipt of the benefit or promotes a scheme or plan involving the provision of the benefit.

'Employee' within the terms of the FBTAA is defined by s 136(1) FBTAA as:

29 It is useful to note that the CSP contemplates new staff being employed by the RMCs; the definition of 'employee' clearly contemplates staff not currently employed by the RMCs. 'Benefit' is defined broadly in s 136(1) FBTAA as are numerous types of benefits to which reference is made in that Act.

30 In the case before me the employers are clearly the RMCs. The nature of the benefit provided - the ABC Public shares provided to RMC employees - is not in dispute. Whether the benefit constitutes a 'fringe benefit' is in contention. 31 The Commissioner has submitted that the trustee of the CSP was the 'associate' of the employees as referred to in s 136(1) FBTAA. 'Associate' for FBTAA purposes is defined by section 159, with reference to provisions of the ITAA 1936 as follows:

'(1) For the purpose only of determining whether a person is an associate or relative of another person within the meaning of this Act, the Income Tax Assessment Act 1936 applies as if a reference in that Act to the spouse of a person included a reference to a person who is a spouse of the person for the purposes of this Act.

(4) For the purposes of this Act, the definition of associate in section 26AAB of the Income Tax Assessment Act 1936 has effect as if:

(a) subparagraph (a)(ii) of that definition were omitted and the following subparagraph were substituted:

"(ii) a partner of the taxpayer or a partnership in which the taxpayer is or was a partner (whether or not the partnership still exists);" and

(b) subparagraph (b)(i) of that definition were omitted and the following subparagraph were substituted:

"(i) a partner of the taxpayer or a partnership in which the taxpayer is or was a partner (whether or not the partnership still exists);"'.

32 In this case the employees of the RMCs are natural persons. Accordingly, for present purposes taking into account the specific cross-reference to the provisions of the Income Tax Assessment Act 1936 (Cth), 'associates' of the taxpayers for the purposes of the FBTAA can be more clearly restated in the context of s 26AAB(14) in the following terms: 'associate, in relation to a person (in this definition referred to as the taxpayer) means:

(a) where the taxpayer is a natural person, other than a taxpayer in the capacity of a trustee:

(ii) a partner of the taxpayer or a partnership in which the taxpayer is or was a partner (whether or not the partnership still exists);

(iii) if a person who is an associate of the taxpayer by virtue of subparagraph (ii) is a natural person - the spouse or a child of that person;

(iv) a trustee of a trust estate where the taxpayer or another person who is an associate of the taxpayer by virtue of another subparagraph of this paragraph benefits or is capable (whether by the exercise of a power of appointment or otherwise) of benefiting under the trust, either directly or through any interposed companies, partnerships or trusts…'

33 Whether the trustee in this case is an associate of the employees within the meaning of the legislation will be considered later in this judgment.

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. …

[56] The link between the benefit and the employment of the employee is required to be sufficient or material: J & G Knowles, 409, 410. It arises because of the words 'in respect of the employment'. A mere causal link with the employment of the employee will not be sufficient. Essenbourne submits that, at least until the issue of Bonus Units, there is not a sufficient connexion with the brothers' employment. It seems to me that the substantial link at this point is as between the payment and the deduction sought by Essenbourne. It is not necessary for me to further consider the point for, in my view, the payment by Essenbourne to the trustee does not qualify as a fringe benefit as it is defined.' 44 Accordingly, on the facts of the case, Kiefel J held that the benefits provided were not 'fringe benefits'. Walstern, Spotlight Stores and Caelli Constructions

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).

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.

Conclusion 53 Notwithstanding powerful submissions by the Commissioner, I am not satisfied that the principle articulated by Kiefel J in Essenbourne is clearly wrong. With respect, there is little to add to the reasons provided by Kiefel J in Essenbourne or Hill J in Walstern which have been repeated in this judgment. I agree with the four judges in Essenbourne, Walstern, Spotlight Stores and Caelli Constructions that the identification of particular employees is a requisite element in the application of the definition of 'fringe benefit' under the FBTAA. Like the judges in Walstern, Spotlight Stores and Caelli Constructions I propose to follow the Essenbourne decision and, to the extent it is applicable to the facts of the case before me, apply it. 54 Accordingly, in relation to Key Question 1 'Should this Court apply the interpretation of "fringe benefit" as applied in Essenbourne, in particular that there will be no fringe benefit unless there is identification of particular employees in connection with the receipt of the benefit?' the answer is 'yes'.

KEY QUESTION 2: If the Court should apply that interpretation was a fringe benefit provided within the meaning of section 136(1) FBTAA in the case before me? 55 As I take the view that I should apply the interpretation of 'fringe benefit' as applied in Essenbourne, it is necessary to consider whether the facts of the case before me are distinguishable in such a fashion that the principle is not applicable. So far as is relevant in the context of this case, the question is whether the ABC Public shares, which are the benefits in question, have been provided in respect of the employment of a particular employee or employees. 56 The words 'in respect of the employment' in the context of the definition of 'fringe benefit' were explained by the Full Court of the Federal Court in J & G Knowles and Associates Pty Ltd v Commissioner of Taxation (2000) 96 FCR 402. Their Honours pointed out that what needs to be established is whether there is a sufficient or material causal connection or relationship between the benefit and the employment. Considering in individual circumstances whether the benefit is a product or incident of the employment is useful - if it is not, then the benefit is likely to be extraneous to the employment and not bear fringe benefits tax, notwithstanding that the employment might have been a causal factor (at 410). 57 In the case before me there is clearly some connection between a beneficiary of the CSP receiving the ABC Public shares, and a beneficiary being an employee of an RMC who has satisfied nominated criteria. Further, on the facts of this case the trustee of the CSP appears to be an associate of the employees as defined by s 159 FBTAA. Accordingly, the question in the case before me becomes: (a) whether employees are identified with sufficient particularity to come within the definition of 'fringe benefit' in s 136(1) FBTAA; and if so,

(b) whether there is a sufficient or material causal connection or relationship between the benefit and the employment of the employees to satisfy the definition of 'fringe benefit' in s 136(1) FBTAA.

58 If, as the applicant contends, the employees are not identified with sufficient particularity, in my view the question of the benefit being 'in respect of' their employment does not arise. As Kiefel J pointed out in Essenbourne, 'It is their employment which, after all, provides the necessary "link" to the benefit: see J & G Knowles & Associates Pty Ltd v Commissioner of Taxation (2000) 96 FCR 402.'

Were the employees identified? 59 The Commissioner has submitted that the facts of this case are distinguishable from those in Essenbourne, and that if it was necessary to establish that the provision of benefits was in respect of particular employees, this was the case. The Commissioner has submitted in summary: · beneficiaries were identifiable precisely from the terms of the CSP Deed, in particular clause 1.1 which states:

'Beneficiary' means, at any time, any employee of an Employer RMC who:

(a) is registered as a party to an Australian Workplace Agreement with an Employer RMC; and

(b) holds the position of assistant, group leader, director or regional manager with an Employer RMC;

· the employment plainly is the explanation for the provision of the benefit in the form of the ABC Public shares in respect of employees who are beneficiaries under the CSP Deed - this was clearly described in the application for the private ruling;

· the selection criteria are incorporated into the terms of the CSP Deed, and the CSP Deed requires the trustee to have regard to those criteria in exercising its power of appointment;

· the benefit is provided by ABC Public as 'the arranger' within the meaning of par (e) of the definition of 'fringe benefit' in s 136(1) FBTAA. The Commissioner submits that 'arrangement' is defined in very broad terms by s 136(1) FBTAA, and the context for the proposed plan as outlined in the ruling application evidences that the issue of the shares is made under an 'arrangement' between ABC Public and the relevant RMCs, notwithstanding the particular facts relied on by the applicant; and

· in the alternative, the benefit is provided by ABC Public within the meaning of subpara (ea), on the basis that there is participation and/or facilitation by the RMCs in the provision of the share issue to their employees, and knowledge by the RMCs (or they ought reasonably to know) that they are doing so.

60 In my view the issue of whether a benefit has been provided by ABC Public as 'the arranger' within subpara (e) of the definition of 'fringe benefit' in s 136(1) FBTAA, or provided by ABC Public within the meaning of subpara (ea) of that definition, does not arise, because in my view the benefits provided in this case were not 'in respect of the employment of the employee'. 61 It is instructive to compare the proposal before me, the rights of the employees who are potential beneficiaries under the CSP Deed, and the extent to which they are identified, with the facts in Essenbourne. Indeed, the interpretation of 'fringe benefit' articulated by Kiefel J in Essenbourne appears even more relevant to the facts in this case before me than it was in Essenbourne. In my view the applicant's case before me is stronger than it was before her Honour. 62 Relevant aspects of the arrangement in this case include: · the benefits in question, namely the shares in ABC Public, were provided by ABC Public, which, notwithstanding that was the holding company of the statutory licensee, was not in any relationship with the employees who would receive the shares which are alleged to constitute the fringe benefit. The provider of the benefits was therefore more remote from the employees than was the case in Essenbourne, where the entity which contributed some of the capital to the fund was the employer of potential beneficiaries;

· the trustee of the CSP under the CSP Deed was an independent professional trustee. This can be compared with, for example, the trustee in Essenbourne where the trustee was a corporate entity of which potential beneficiaries were directors;

· in the case before me the potential beneficiaries were defined in the CSP Deed as RMC employees who satisfied various criteria. The relationship between the provider of the shares, ABC Public, the regional managers and the RMCs was within the framework of a franchise structure. Importantly, any future employees of existing RMCs, or of future RMCs which later came into existence and entered an arrangement with ABC Public, could also potentially qualify as beneficiaries of the CSP. The arrangement in this case did not involve potential provision for family members associated with the employer company as was the case in Essenbourne;

· the CSP was a discretionary trust, with the trustee vested with powers to appoint income and capital of the trust fund among the beneficiaries on such terms and in such proportions as it saw fit. This is clear from cl 3.3 and cl 4.4 of the CSP Deed. Although the trustee was required by cl 3.4 and cl 4.5 of the CSP Deed to act reasonably and to have regard to the selection criteria provided in the CSP Deed, in my view this did not override the discretionary powers of the trustee. The position of the trustee was reinforced by cl 8.7 of the CSP Deed, which provided that every trust, power, authority and discretion of the trustee was absolute and uncontrolled.

This was similar to Essenbourne where the Trust Deed provided for the employer to make contributions for the benefit of 'its employees generally' and employees were entitled to subscribe for Employee Units, however distributions of income to employee unit holders was determined from time to time by the trustee. Further, in Essenbourne employees were not entitled to receive Bonus Units unless certain conditions had been satisfied including periods of time as full time employees of Essenbourne Pty Ltd;

· although the calculation of the initial issue of shares by ABC Public to the trustee of the CSP may have been by reference to the total number of employees of the applicant and the other RMCs at that time:

· clearly no immediate benefit could be provided in respect of future employees of the RMCs, who were nonetheless future potential beneficiaries;

· the identification by the trustee of employees who satisfied the selection criteria - to the extent that the trustee was required to distribute trust property to those employees, as already discussed - was an event to take place after initial issue, which meant that at the time the contribution was to be made to the trustee no identified RMC employees were beneficiaries of the CSP;

· it is also feasible that additional RMC employees could become parties to new AWAs without further shares necessarily being issued by ABC Public to the trustee; and

· on the facts it would also be possible for shares to be issued to the trustee in batches for employees generally, without reference to particular employees.

63 As counsel for the applicant submitted, a far stronger connection existed between the contributions made for the employees and each employee's employment in Essenbourne, than existed between the proposed share issue by ABC Public and any particular RMC employee's employment. 64 The circumstances before me are in some ways comparable with those in Spotlight Stores. There Merkel J found that when the $15 million contribution which was the benefit was provided, it was not provided, either to the employee or to the trustee 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. Although the fringe benefits tax assessment issue did not require full exploration by his Honour, relevant facts in that case were: · the employer contributed sums to a fund established to reward employees;

· the frequency and amount of the contributions would be determined by the employer in its absolute discretion;

· a separate trustee was incorporated, the directors of which were also directors of the employer;

· the discretion of the trustee was absolute and uncontrolled, although in making determinations as to amounts to be paid as benefits, it was required to consult with the employer, and it could have regard to the criteria in clause 10 of the trust deed; and

· beneficiaries were defined as 'persons who immediately prior to the date on which an amount is proposed to be paid by the Trustee…has been or is an Employee of [Spotlight] and, in the opinion of the Trustee, fulfils the criteria set out in Clause 10'. Clause 10 criteria included the contribution made by the beneficiary to the revenues or profits of the employer and the business or operation of the employer, the extent to which the beneficiary had attracted new clients to the employer, the length of service with the employer, and the seniority of the beneficiary.

65 Similar facts existed in the case before me, although again I note that the contributor of the capital to the trust fund was not the employer RMCs, but ABC Public, and the trustee in the case before me was an independent professional trustee. 66 On the other hand, the facts of the case before me may be contrasted with those in Walstern and Caelli Constructions, where the Courts found against the respective applicants. In Walstern, Hill J found that a fringe benefit had been provided to each of two employees at the time allocation was made by the trustee of the contribution made by the employer, in circumstances where: · the trustee was clearly an 'arranger' within the meaning of par (e) of the definition of 'fringe benefit'; and

· the arrangement in question was one which involved the employer making the contribution on the understanding that all relevant steps would be taken culminating in the trustee ultimately allocating the employer's contribution equally to each of the two employees.

67 In this respect, as his Honour noted, the two employees who were the beneficiaries under the trust in Walstern were clearly identified by the arrangement in place. The arrangement was for their benefit. This may be contrasted with the circumstances in the case before me, where, despite guidelines provided in the CSP Deed, several steps involving satisfaction of criteria and the exercise by the trustee of its discretion required completion, before a selection of potential beneficiaries could be made from the large group of existing (and future) employees of the RMCs. 68 In Caelli Constructions, Kenny J found that contributions to a trustee had been made 'in respect of the employment of the employee' for the purposes of the definition of 'fringe benefit' in s 136(1) FBTAA in circumstances where: · the trust deed required that payments made by the employer and others to the trustee be made in respect of identified employees;

· the quantum of the payment to be made by the employer was specifically fixed by reference to the actual employment of each employee, in the sense that the employer made a weekly contribution for any week in which an employee was entitled to be paid wages in respect of their work, and if an employee ceased work during a relevant period the amount of the employer's payment was correspondingly reduced;

· payments in respect of a particular worker were credited towards the individual worker's Worker's Account maintained by the trustee; and

· when the employee became entitled to a benefit, the trust deed specified that the amount of benefit was calculated directly by reference to the contribution made to the worker's own Worker's Account at the relevant time.

69 Again, it is clear in this case that the nature of the scheme created both by the trust deed and the arrangement in place in Caelli was such that contributions to the trustee were made in respect of the employment of particular employees, to the extent that weekly contributions were made and varied depending on the circumstances of particular employees, and the fund operated accordingly. In no way were similar circumstances replicated in the case before me.

Vested interest 70 In the alternative, the Commissioner has submitted that the trust in favour of the beneficiaries took immediate effect as a vested interest in equal shares. This issue may be quickly dealt with. In my view the trust in favour of the beneficiaries in the case before me did not take immediate effect as a vested interest in equal shares. The beneficiaries are not implied takers in default. This is evident from consideration of clauses in the CSP Deed including: · clause 1.1 definition of 'Termination Date', namely the earliest to occur of the date a liquidator is appointed to ABC, the date a liquidator is appointed to ABC Public, and the date 80 years from the date of the Deed; read in conjunction with Clause 3.1, which provides that the trustee holds the Trust Fund for the Beneficiaries and must, inter alia, appoint all of the Trust Fund to the Beneficiaries (who must be living at the time of the appointment) on or before the Termination Date;

· clause 2.7, which provides that if the Trust Fund has not been effectively or validly disposed of by a trust declared by the deed, the trustee holds that part of the Trust Fund affected on a resulting trust for the Settlor (ABC Public);

· clause 3.3, which vests the trustee with broad powers to appoint capital; read with clause 3.4 which requires the trustee to act reasonably and have regard to the Selection Criteria for Capital in Schedule 2;

· clause 3.6, which vests the trustee with absolute discretion to exclude any person from benefiting under the deed. The trustee is required to act reasonably and must have regards to the Exclusionary Criteria in Schedule 3; and

'Every trust, power, authority and discretion of the Trustee:

(b) may be exercised in the same way as the Trustee could exercise it if the Trustee were the absolute and beneficial owner of the Trust Fund.'

71 The nature of a discretionary trust is such that, although the beneficiaries have an interest in the trust, it is in the nature of a right to be considered as a potential recipient of benefit by the trustees, and a right to have their interests protected by a court of equity: Gartside v Inland Revenue Commissioners [1968] AC 553 at 617. As Lord Wilberforce said in Gartside: '(W)hen it is said that he has a right to have the trustees exercise their discretion "fairly" or "reasonably" or properly that indicates clearly enough that some objective consideration (not stated explicitly in declaring the discretionary trust, but latent in it) must be applied by the trustees and that the right is more than a mere spes. But that does not mean that he has an interest which is capable of being taxed by reference to its extent in the trust find's income.' (at 617-618) 72 While the trustee is to have regard to specified criteria in appointing capital and income under the CSP Deed, this does not derogate from what in the final analysis is an absolute discretion of the trustee as defined in cl 8.7.

Conclusion 73 Accordingly, in relation to Key Question 2, namely 'If the Court should apply that interpretation, was a fringe benefit provided within the meaning of s 136(1) FBTAA in the case before me?'

the answer is that no fringe benefit was provided in the case before me within the meaning of s 136(1) FBTAA.

74 In light of these findings it follows that the appeal is allowed. 75 The applicant has also submitted that the Commissioner was wrong to decide that he was not bound by previous decisions of the Federal Court following and including Essenbourne. On the facts of the case before me, it is unnecessary for me to consider this issue.

THE COURT ORDERS THAT: 1. The appeal against the appealable objection decision made by the Commissioner of Taxation under s 14ZY of the Taxation Administration Act 1953 (Cth) to disallow in full the applicant's taxation objection against the private ruling issued to the applicant for the FBT years ended 31 March 2006 to 31 March 2011 be allowed.

2. The Commissioner's decision be set aside, and substituted with the decision that the applicant's taxation objection be allowed in full.

3. The objection decision should have been as follows:

a. the correct response to Question 1 of the ruling application is that the proposed issue of shares by ABC Learning Centres Limited to the trustee of the Carers Share Plan will not give rise to a fringe benefit in relation to the rulee RMCs (including the applicant); and

4. The respondent pay the applicant's costs on the basis provided for in the Test Case Funding Deed.

5. In the event of a dispute between the parties as to the amount of the costs payable under the Test Case Funding Deed, then the applicant shall, pursuant to the Federal Court Rules, be entitled to costs ascertained in accordance with the Test Case Funding Deed, and such costs can be taxed accordingly.

I certify that the preceding seventy-five (75) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Collier.

Associate: Dated: 13 June 2006 Counsel for the Applicant: Mr David Russell QC

Solicitor for the Respondent: Australian Government Solicitor