THE TRIBUNAL'S DECISION
20 The Tribunal confirmed the Commissioner's assessments.
21 It held that Kumagai was an "employer" in that it was a current employer. Each of the executives received amounts which fell literally within the definition of "salary and wages" unless the amounts were exempt income. Whether the payments were exempt income was a question which depended on it being shown both that the executives were, at the time of payment, not residents of Australia and that the source of the payments was outside Australia. The learned Deputy President was of the view that the source of the payments was in Australia. He said:
"All the factors relating to the payment of income tax of the various employees are, with one or two exceptions, located in Australia. The income was earned in this country. The tax liability arose in this country. The payment of tax was made in this country. The payment was made as a condition of the employee agreeing to work in this country. The immediate source of the payments was an Australian bank account in the name of the applicant company. The applicant carried on (and still carries on) business in Australia and the payments were made in the course of, or incidentally to, the carrying on of that business. In my view, the primacy of these factors far outweighs the fact that the agreement may have been entered into in Japan, even though on some occasions it was entered into many years before the employee came to this country. These facts underline the essentiallyAustralian characteristics of the whole series of transactions."
22 Although it was unnecessary to his decision, the learned Deputy President found that Kumagai had not satisfied the onus of proof of showing that in each case the executives were, at the time of payment, not residents of Australia. In part this conclusion was prompted by the fact that one executive had commenced a business in Australia before the payment was made to him and had retired from the employment of Kumagai. Although this executive had given a Japanese address the Tribunal concluded that he had in fact returned to reside in Australia before payment was made to him. The Tribunal found that the evidence adduced in respect of the other executives, which was in the form of schedules containing, inter alia, the date of return to Japan, the Japanese address and the dates of payment, raised many questions and was thus incomplete.
23 Since the statement of the second submission assumed that, if the payments were exempt income at the time they were made, the payments would fall within par (f) of the definition of "fringe benefits", it was presumably decided in favour of the Commissioner for the reason that the payments were not exempt income.
24 The Tribunal rejected the Commissioner's argument that the payments were expense payment benefits within s 20 of the Act. This being so it found that they fell within the catch-all category of residual benefits. However, the Tribunal found it unnecessary to consider whether the valuation formula for external, non-period, residual fringe benefits to be found in s 50 applied. Instead it found it possible to quantify the value of the benefit based upon general principles as being the value of the benefit provided, ie that which was paid.
25 It was from this decision that Kumagai appealed. The Commissioner, for his part, filed a notice of contention, raising the issue that the payments made were, as he submitted, expense payment fringe benefits to which s 20 applied.
THE SUBMISSIONS ON APPEAL
26 In essence, counsel for Kumagai made the same submissions in this Court as he made to the Tribunal. He placed particular emphasis upon a submission that the definitional section should be read down so as not to give the legislation an extraterritorial effect. From this it followed, it was said, that a construction of the legislation should not be adopted so as to tax a company resident outside Australia on payments made to nonresidents of Australia at the time of payment. He also challenged both the conclusion of the Tribunal that the payments had a source in Australia, as well as its findings that Kumagai had not satisfied the burden of proof in showing that the executives were, at the time of payment, not residents of Australia.
27 For the Commissioner it was submitted that the issues of residence and source, determined by the Tribunal, although determined in its favour, did not really arise. This was because the payments were fringe benefits not subject to the exclusion in the definition of that expression in s 136(1) par (f). They were paid by a person who was a former employer (when the executives had been paid salary and wages which on any view did not constitute exempt income). Although it was submitted that the payments in question fell within s 20 as expense payment fringe benefits, this was, it was said, of little importance because they were residual fringe benefits to which the valuation formula in s 50, particularly par (c) of that section, applied. In the alternative the Commissioner submitted that the Tribunal was correct in concluding both that the source of the payments was in Australia and that Kumagai had not satisfied the onus of proof.
THE REAL ISSUE
28 Although the Tribunal dealt with the submissions of Kumagai and rejected them it did not directly deal with the submissions of the Commissioner. Yet, with respect, it is these submissions which provide the correct analysis to dispose of the issues between the parties.
29 Since the tax is imposed in respect of "fringe benefits tax amounts", the starting point is to determine whether there are, in the present case, fringe benefits tax amounts which the legislation quantifies. Having regard to the definition of that section there will only be a fringe benefits tax amount if there are "fringe benefits" which have taxable values.
30 When one turns to the definition of "fringe benefit" in s 136(1) it can be seen that there are both inclusory and exclusory tests. Provided Kumagai is an employer in the defined sense the inclusory test will be satisfied. In the year of tax, and subject to territoriality which will be shortly considered, there was a benefit provided to an employee in respect of that employee's employment. The payments in question would not be salary or wages (that is not in issue) and whether or not they are exempt income is irrelevant in determining whether the tax payments are fringe benefits.
31 The next step is whether the benefit was provided by the employer of the employee. As already noted that word includes not only a current employer, but as well a former employer as well. A former employer is a person who in the past has been a current employer. There is no doubt that Kumagai literally fulfils this description. It had, while the executives worked in Australia, paid salary and wages in the ordinary and defined sense of that expression in Division 2 of Part VI of the Income Assessment Tax Act. While it did so there is no dispute that the executives were residents of Australia or indeed that the source of their salaries was in Australia. For this purpose, therefore, the question whether the payments received were exempt income (par p) will have no relevance - the payments received at that time were clearly assessable income. That this is so is apparent from the assessments received by the executives which Kumagai paid.
32 It follows, subject to the argument as to territoriality, that there was no need for the Tribunal to determine whether Kumagai was a current employer at the time it paid the executives' tax assessments. It was only if this question arose that there became an issue between the parties whether the amounts paid at that time were sourced in Australia, or indeed whether the executives were, at the time, residents of Australia.
33 Once this is accepted it then becomes relevant to look to the value of the benefits. There is clearly a problem in bringing the payments within the terms of s 20 as expense payment fringe benefits. That requires characterising income tax imposed upon the executives but paid by Kumagai as being expenditure incurred by the recipient. While it is not quite as difficult as the learned Deputy President suggests, to see income tax as a liability incurred by a person who is assessed to it (or perhaps then to characterise it as "expenditure incurred"),I do not need to consider this question because it is apparent that the payments will fall in any case, within the category of residual fringe benefits. It is not in dispute that the payment in question will, if not an expense payment fringe benefit, be an external non-period residual fringe benefit. What is submitted is that it falls outside the valuation formula in s 50.
34 There is admittedly a difficulty in referring to the payment of the executives' income tax as being a benefit purchased by the employer under an arm's length transaction. It is not, perhaps, wholly impossible. An analogy can be drawn from the cases decided under now repealed death duty legislation where the statutory issue was whether an interest, say in a superannuation fund, was purchased or provided by a deceased person. In Re J Bibby & Sons Ltd [1952] 2 All ER 483 the deceased was a member of a non-contributing fund. The issue was whether, if there was a relevant interest, that interest was purchased by the deceased. Although on the facts it was not, the Court of Appeal said, at 487:
"Certainly it is not purchased, because he did nothing to purchase it. He made no bargain, and he did not come into the company's employment under the promise, express or implied, of a pension. He had, as I say, satisfied all the conditions of the pension deed before the deed was ever in existence, and there is no evidence that he ever changed his position thereafter or stayed longer or did more work or got less pay because of the existence of the deed …" (emphasis added)
35 In New Zealand, it was noted that there may be occasions where the contract of employment was such as to enable it to be said that the rendering of services amounted to the purchase or provision of a relevant benefit. That this was so formed the basis of the decision in Commissioner of Inland Revenue v Taylor [1961] NZLR 923. For s 50(a) to apply, however, the converse of this issue has to apply, that is to say that the benefit has to be one purchased "by" the provider of it, that is to say the employer. While it may more easily be said that the benefit was purchased by the employee, it is, to say the least difficult to see how it was purchased by the employer.
36 However, it is unnecessary to consider this issue, any more than it was necessary to consider the question whether s 20(a) had application. For s 50(c) operates to deal with all cases not falling within paragraphs (a) and (b) of the section, that is to say with "any other case". On that basis the relevant taxable value is the 'notional value of the benefit', or in other words, what the executives would have had to pay to the employer to have their tax paid by the employer: s 136(1). For practical purposes that is the same as the amount the employer in fact paid.
37 I should say that, in my view, it was incorrect to find, as the learned Deputy President did, that a taxable value of a fringe benefit could be arrived at where the legislation provided no valuation formula. With respect there is nothing in what was said by Gibbs CJ in State of Queensland v Commonwealth (1987) 87 ATC 4029 which required that conclusion. The passage cited from his Honour's decision is a general statement of the nature of fringe benefits tax. So his Honour in that passage said at 4032:
"The subject of the tax is the value of the benefits provided by the employer, and not the value of the benefits received by the employee; a benefit to the employee within the meaning of the Assessment Act will have been provided notwithstanding that the benefit was surplus to the needs or wants of that employee and notwithstanding that the benefit is offset by some inconvenience or disadvantage."
38 While it is generally true that the statutory valuation formulae arrive at a figure which is more or less the cost to the employer, it is simply incorrect to say that it is irrelevant whether a benefit falls within a particular valuation formula. There can be no fringe benefits taxable amount (that being the amount upon which tax is payable) unless there is a taxable value. (see definition s 136(1)). There are 12, and presently only 12 categories of benefits which are fringe benefits, including the catch-all category of residual fringe benefits. Because of the catch-all category, the 12 categories exhaust the range of benefits which are fringe benefits in the defined sense. Each has it own valuation rule. Such valuation rules often differ from cost to the employer: cf the rules for calculating the value of loan fringe benefits in s 18. Given both the scheme and language of the legislation there is no scope for some general, non-legislative system of valuation by reference to cost to the employer.
39 But while the learned Deputy President erred in law, that error was immaterial. The result would be the same under s 50.
40 It follows, subject to the question of extraterritoriality that the issues of residence and source which the learned Deputy President considered do not arise at all.