J & G Knowles & Associates Pty Ltd v Commissioner of Taxation

J & G Knowles & Associates Pty Ltd v Commissioner of Taxation - [1999] FCA 1060 - FCA 1999 case summary — Zoe

[6]

2 The basic facts were not in dispute. The applicant is and has been since 1976 the trustee of the Knowles Investment Unit Trust ("KIUT"). KIUT is part of the Knowles Group. The units in the unit trusts and the shares in the companies within the Group are owned by four family discretionary trusts. Each discretionary trust was established for the benefit of the family of one of the four directors of the applicant - Graham Knowles, John Knowles, Russell Knowles and Ian Bell. They were the directors of each of the companies in the Group, including the applicant. The Group's main activity was developing, marketing and managing retirement villages. The Group had what was said to be a unique method of selling and repurchasing retirement units. The initial sale of a unit was at or near cost. When the purchaser left the unit the Group would repurchase it at or near market value, with payment to be made at the end of a period equal to the time the former occupier had lived at the unit, but not exceeding eight years from the vacation of the unit. The Group would immediately resell the unit. All receipts and payments by members of the Group were dealt with through one bank account in the applicant's name, with one centralised accounting system. The Group's building construction business was funded by borrowings. The bank account was in overdraft during the whole of the relevant period. 3 Prior to and during the relevant period the applicant advanced amounts to the four directors and their wives to meet private expenditure. A director could sign cheques and withdraw funds at any time without obtaining the approval of the other directors. John Knowles gave evidence of the rationale behind the advances. The directors treated themselves as the effective owners of the Group and thus entitled to its profits and assets. Each drew money from the Group as he saw fit "with the general concern to ensure that there was equality between us". Drawings were not related to the work done by each of them. Money was taken from the business even by a director who was not at the time working for the Group. At the end of each accounting period the advances were transferred in the books of KIUT to loan accounts in the names of the family discretionary trusts, and in the accounts of the trusts were treated as loans to beneficiaries. On 1 August 1988 the loans to the family trusts were extinguished by a capital distribution of $7 million. A further amount of $921,367 was distributed equally between the family trusts by another unit trust of which the applicant was trustee. The trustee of each family trust distributed $1,980,342 equally between the relevant director and his wife. The capital distributions were treated in the books of the family trusts as being lent back to KIUT. 4 The loan account balances varied significantly between directors. The following table shows the balances at various dates. 30.06.86 30.06.87 30.06.88 31.07.88

[30]

10 The first issue before the Tribunal was the proper construction of the expression "benefit provided … to the employee … by … the employer … in respect of the employment of the employee". That is clearly a question of law. For the applicant it was argued that there is a need for caution in the construction of the words "in respect of the employment". Despite observations in many cases about the expansive nature of the words "in respect of", they involve more than a mere connection between two things. The connection must be a relevant one, and whether the connection is relevant is to be determined by the context in which the words appear. Thus in State Government Insurance Office (Q) v Rees (1979) 144 CLR 549 at 561 Mason J, after referring to cases in which the words "in respect of" were said to have the widest possible meaning of any expression intended to convey some connection or relation between two matters, observed that "as with other words and expressions, the meaning to be ascribed to 'in respect of' depends very much on the context in which it is found". See also Workers' Compensation Board (Q) v Technical Products Pty Ltd (1988) 165 CLR 642 at 646‑647, 653‑653; Technical Products Pty Ltd v State Government Insurance Office (Q) (1989) 167 CLR 45 at 47, 51 and 55; Tooheys Ltd v Commissioner of Stamp Duties (NSW) (1960) 105 CLR 602 at 620. In reliance on this contextual approach, it was submitted that the purpose and object of the Act is to bring to tax non‑cash benefits that are part of an employee's reward for service to an employer. Thus, it was said, in order for a benefit to be provided "in respect of the employment", it must be part of the employment package; a sacrifice of money for some other reward. If the benefit in question does not flow from the work done by the employee, but has some other explanation behind it, it is not "provided in respect of the employment". 11 Section 26(e) of the Income Tax Assessment Act included in a taxpayer's assessable income the value to the taxpayer of all "allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him …". The similarity between this provision and the definition of "in respect of" in s 136(1) of the Act is obvious. In Smith v Federal Commissioner of Taxation (1987) 164 CLR 513 a bank employee received $570 under the bank's scheme to encourage its employees to complete approved courses of study. The purpose of the scheme was to encourage the employees to increase their knowledge in subjects relevant to banking. It was held that the payment was within s 26(e). Wilson J said (at 519):

[35]

12 A submission to the same effect as that advanced by the applicant was rejected in Smith. There it was argued that the payment was not within s 26(e) because it was not directly or indirectly a "reward for services to the bank". It was said that the relevant distinction was "between receipts and advantages that are truly rewards of employment or the product of income‑earning capacity and receipts of which employment or the rendering of services is a condition but not the operative cause". 13 Because the meaning of "in respect of the employment" depends upon the context, it is important to observe that a benefit is provided in respect of employment "whether or not it is provided as a reward for services": s 148(1)(h), and whether or not it is also provided in respect of some other matter or thing: s 148(1)(a). Thus the reward argument that was rejected in Smith must a fortiori be rejected here. A benefit is provided to an employee "in respect of the employment of the employee" for the purposes of the definition of "fringe benefit" if it is granted as a consequence of the existence of the employment relationship, or if the relationship is a reason why the benefit is provided, or is a cause of its provision. It does not matter that there is as well some other reason or cause for the grant, or that the grant is a consequence not only of the employment but of something else. The benefit does not have to be a reward for services rendered. 14 The Tribunal asked whether there was a "causal relationship" between the advances and the employment of the directors, and whether the employment was a "causal factor in the benefit". On another occasion it asked whether there was a "discernible and rational link between the benefit and the employment". Although the Tribunal did not refer to Technical Products Pty Ltd v State Government Insurance Office (Q) (1989) 167 CLR 45, that case, which concerned the words "damages in respect of such motor vehicle", is doubtless the source of the expression "discernible and rational link". See at 47, 48. The language the Tribunal used to describe the required relationship between the loans and the employment does not involve any misconstruction of the words "in respect of the employment".

[39]

17 The present case falls within the "exception to the exception". The words "a benefit … in respect of the employment", like the words "operations … connected with … the rearing of livestock", can describe a broad range of relationships. In determining whether a particular benefit is given "in respect of employment" it is necessary to make a value judgment as to whether the Act is intended to cover the particular relationship between the benefit and the employment. Accordingly, in applying the law to the facts the Tribunal was deciding a question of law, and the claim that it erred in so doing is a claim that it made an error of law. 18 In Nelson v Inspector-General in Bankruptcy (1997) ATC 4338 Finn J held that whether a benefit is "in respect of employment" is a question of law. His Honour came to this conclusion on the ground that the language of the definition of "fringe benefit" is "closely analogous to that found in s 26(e) of the Income Tax Assessment Act … and there is powerful authority holding it to be a question of law whether the facts found had, of necessity, to result in the conclusion that a payment was income because of s 26(e): see Federal Commissioner of Taxation v Holmes 95 ATC 4476 at 4477". A long line of cases establishes that whether undisputed facts of necessity lead to a particular conclusion is a question of law. See particularly Lombardo v Federal Commissioner of Taxation (1979) 40 FLR 208 and Commissioner of Taxation v Cooper (1991) 29 FCR 177. Holmes was such a case. However, the proposition for which these cases are authority is limited to the situation where the facts clearly fall within or outside the statute, that is to say, where "nobody could arrive at any other conclusion". Whether a particular benefit is "in respect of employment" will often not fall into this category - it is a question to which different answers could be given. On the reasoning in Lombardo, which is the leading case on the "necessity" principle, the question raised in the present case would be one of fact. When in Nelson Finn J came to ask whether the facts as found necessarily resulted in the conclusion that a fringe benefit had been received, he was unable to answer it because the Tribunal's reasons did not disclose why it had determined that a fringe benefit had been received. Because I do not regard the present case (or Nelson) as a necessity case, I have identified the question of law by application of Pozzolanic.

At a glance

Court

Decision date

Before

Source

Judgment (65 paragraphs)

Parties

Cases Cited (9)

Cited By (1)