The decision of the trial judge
18 On the question of whether the AAT had erred in law, the trial judge first considered what was meant by a benefit provided "in respect of the employment of an employee". His Honour said:
"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"."
19 The trial judge then summarised the findings of the AAT:
· The directors were not the owners of the applicant's business (Saul 450).
· They had no vested interest in or entitlement to income, profits or capital of the business (Saul 496; Unit Trust Deed 29, Family Trust Deeds 760, 791, 821).
· The loans were made to meet the directors' private expenses (J Knowles 466; Ball 479).
· Each director was a "sole cheque signatory" to the applicant's account (J Knowles 465; Saul 500).
· Each was authorised as a director to withdraw funds at any time for private needs without approval from the other directors (J Knowles 466; Ball 476; G Knowles 484, 485; Saul 500).
· The amounts withdrawn were determined entirely by the directors' individual needs and not by the needs of unitholders (Saul 451).
· The directors could not obtain access to the applicant's money as shareholders or as beneficiaries of the unit trust (Ball 479).
· The only way they could obtain money in the way they did was in their capacity as directors (Ball 476‑477, 479, 480).
· At the time the loans were made the applicant had insufficient funds to make returns of capital (Saul 447‑449, 452; Wardle 460; J Knowles 472).
· The capital distributed occurred well after the funds were borrowed (J Knowles 467, 737; Saul 502).
· The loans were not made in proportion to any ownership share (Saul 500, 510).
· There was no formal or enforceable entitlement to the loans other than the employment relationship."
The trial judge concluded that, on those facts, it was open to the AAT to determine that there was a causal relationship, or a discernible and rational link, between the loans and each director's employment and that no error of law had been demonstrated. In arriving at this conclusion his Honour rejected the appellant's submission that the AAT had misunderstood its "ownership" contention.
Contentions on the Appeal
20 The primary argument of the appellant was that the loans made to the directors were not "in respect of [their] employment". Following the argument that had been put below, it was said that the loans were to be explained by the ultimate beneficial ownership of the trust fund by the directors and their families, an "ownership" that could be traced through their respective family discretionary trusts. It was conceded by the appellant that the ability of the directors to sign cheques enabled the loans to be made and there was therefore a causal link between their holding of office and the provision of the loans. But it said that the link was not a sufficient or relevant link for the purposes of the Act. Accordingly, it was argued that the trial judge had erred in both the construction of the Act and in its application to the facts of the case.
21 The Commissioner argued that on the facts found by the AAT it was bound to conclude that the requisite connection between the loans and the employment of the directors had been established. In particular, the Commissioner contended that the directors' control of the unit trust, rather than their misconceived notion of their ownership of its assets, enabled the directors to obtain the loans. In substance, the Commissioner contended that it was only as a result of their employment as directors that they were able to, and did, withdraw the funds that made up the relevant loans and that the directors had no right or authority to do so in any other capacity. In those circumstances, so the argument went, the only conclusion that was open was that the loans were made as a consequence of the employment and were a product or an incident of that employment.
"In respect of the employment"
22 The words "in respect of" have no fixed meaning. They are capable of having a very wide meaning denoting a relationship or connection between two things or subject matters. However the words must, as with any other statutory expression, be given a meaning that depends on the context in which the words are found: State Government Insurance Office v Rees (1979) 144 CLR 549 at 553-554 and 560-561; Technical Products Pty Ltd v State Government Insurance Office (Queensland) (1988) 167 CLR 45 at 47, 51 and 54; Long Service Leave Board v Irving (1997) 74 FCR 587 at 595 and Commissioner of Taxation v Scully [2000] HCA 6 at [39] and [40].
23 The AAT was correct in stating that the phrase requires a "nexus, some discernible and rational link, between the benefit and employment". That, however, does not take the matter far enough. For what is required is a sufficient link for the purposes of the particular legislation: see Scully at [38] to [40]. 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.
24 It is instructive to consider Smith v Federal Commissioner of Taxation (1987) 164 CLR 513. Section 26(e) of the Income Tax Assessment Act provides that a taxpayer's assessable income shall include the value to the taxpayer of all "allowances, gratuities, benefits, bonuses and premiums allowed, given or granted to him in respect of, or in relation directly or indirectly to, any employment of or services rendered by him…". The appellant received $570 under an Encouragement to Study scheme that had been established by the Bank that employed him. The payment was made in accordance with the scale of allowances prescribed by general rules promulgated by the Bank for successfully completing an "approved course of study". The scheme, which was open to all of the Bank's staff, provided for reimbursement of costs and included special arrangements to facilitate study in accordance with the Bank's policy to encourage its employees to increase their knowledge in subjects relevant to banking. The question at issue was whether the $570 was caught by s 26(e).
25 Wilson, Brennan and Toohey JJ held that the receipt was assessable income because the benefit was provided as a consequence of the taxpayer's employment. Wilson J said (at 519) that a "necessary relation" to the employment of the taxpayer or a "requisite relationship" between the benefit received and the "employment" had to be established. In that connection his Honour said (at 519).
"It is tempting to strive to identify criteria which will assist in the process of characterisation. But, however helpful such criteria may be, it is unwise to expect any paraphrase to provide a final or overriding test. Ultimately, it is the words of the statute that must prevail. Toohey J. finds it helpful to ask whether the benefit allowed, given or granted is a consequence of the employment of the taxpayer. So do I. I also find it helpful to ask whether the benefit is a product or incident of the employment" (citations omitted)
Brennan J (at 525) stated that an allowance is paid in consequence of the employment "… if the payment of the allowance is made because of some aspect of the employment..." Accordingly, if some aspect of an employee's employment is a "substantial reason" for the allowance it cannot be said that the payment is made for reasons extraneous to the employment.
Toohey J said (at 533-534):
"There was an evident connexion between the appellant's employment and the sum he received. And in a very real sense the payment was a consequence of the existing relation of employer and employee. It was only as an employee that the appellant qualified for the benefits payable under the scheme."
Gaudron J (at 536-537), with whom Deane J agreed, characterised the subject payment as recompense or reward for undertaking and completing an approved course of study which, although approved by the Bank, was required neither as a condition of the relation of employer and employee nor as a qualification necessary for the rendering of services in that relationship. Thus, her Honour concluded that the payment was not made in consequence of the relation of employer and employee.
26 The differences in approach in Smith show how difficult it is to state a test to determine whether the requisite relationship or connection exists. In the case of s 26(e) the question was said to be resolved by asking any one of the following questions:
· is the benefit a "product or incident of the employment"? (Wilson J at 519);
· is some aspect of the employment a substantial reason for the benefit? (Brennan J at 526);
· is "in a very real sense the payment … a consequence of the existing relationship of employer and employee"? (Toohey J at 533); or
· is the employment one of the "proximate causes" of the payment? (Gaudron J at 537).
Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment. There is, in any event, a danger in placing too much emphasis on causation. As Lord Hoffman pointed out in Environment Agency v Empress Car Co Ltd [1999] 2 AC 22 at 29, an answer to the question of whether A has caused B will differ according to the purpose for which the question is asked.
27 Here the question whether there is a sufficient or material connection or relationship between a benefit and employment is assisted by having regard to the purpose or object of imposing FBT on employers. That purpose was stated by the then Treasurer, Mr Keating, in the Second Reading Speech (2 May 1986, Hansard, House of Representatives) at 3020 to be to "ensure that all forms of remuneration paid to employees bear a fair measure of tax…"
28 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.
29 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: see Commissioner of Taxation v Rowe (1995) 60 FCR 99 at 114 and 123. Although Brennan, Deane and Gaudron JJ observed in Technical Products (at 47), that the requisite connection will not exist unless there is "some discernible and rational link" between the two subject matters which the statute requires to be linked, as was pointed out by Dawson J (at 51), the connection must be "material".
Reasoning on the Appeal
30 The AAT said that the phrase "in respect of the employment of the employee" required "a nexus, some discernible and rational link between the benefit and the employment". It held that, on the facts found, there was "a clear nexus, causal relationship between the advances or loans or employment of the four directors" because it was in their capacity as directors that each director was "able and permitted" to make the relevant withdrawals from the bank account of the unit trust. In reality all that the AAT did was to establish that there was a causal relationship between the loans and the employment. The trial judge accepted that the AAT did not err in law in approaching the matter in that manner. In our view, however, the AAT failed to consider whether, notwithstanding that causal link, there was a sufficient or material relationship or connection between the loans and the employment.
31 By engaging in an inquiry that established that there was a causal relationship between the loans and the employment without inquiring whether there was a sufficient relationship between the two, the Tribunal erred in law. Accordingly, unless the facts found by the AAT obliged it to find in the Commissioner's favour in any event, the case must be remitted to the AAT for its reconsideration.
32 As matters presently stand, the evidence that was given by the directors was to the effect that the reason why the loans were provided was because the directors were, for all practical purposes, treating the assets of the unit trust as their own. The conclusion of the AAT, that the directors had no entitlement to the loans as "owners" of the trust fund did not resolve the matter.
33 Whether or not there is a sufficient connection between each director's employment and the loans to the unitholders to attract FBT was a question of fact for the Tribunal to determine. The material before the AAT pointed in two directions. The first was that the directors drew upon the assets of the unit trust because ultimately the trust was established, and its assets were to be held and applied, for their benefit and that of their families. The second is that it was agreed between the directors that, as an incident of their directorship, each of them were entitled to draw upon the appellant's funds by way of loans for their personal benefit. In the first case it is unlikely that there would be a sufficient connection with the employment, while in the second the loans are likely to be an incident or product of it.
34 Further, the AAT also found that while salaries paid to the directors were "equal" they were low and "that the availability of interest free funds for personal use may well have been seen as additional and useful recompense for such modest salaries". If in fact interest free funds were provided as "additional … recompense for … modest salaries" then that is likely to constitute a sufficient connection.
35 On a fair reading of the AAT's reasons it only decided that the employment of the directors was a cause of the loan. The fact that the four persons in question were directors of the appellant explains how, but not why, they were able to make the withdrawals. In those circumstances it was open to the AAT to conclude that the loans were not fringe benefits if it applied the correct legal test. Accordingly, it is appropriate to allow the appeal and to remit the matter back for further hearing before the AAT.
Conclusion
36 The appeal is to be allowed, the orders of the trial judge are to be set aside and, in lieu thereof, the decision of the AAT is to be set aside and the matter is to be remitted to it for its reconsideration in accordance with law. The appellant should have its costs of the appeal and the hearing below.
I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Heerey, Merkel and Finkelstein.