NELSON v INSPECTOR-GENERAL IN BANKRUPTCY

Judges:
Finn J

Court:
Federal Court

Judgment date: 25 March 1997

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Finn J

This is an appeal from a decision of the Administrative Appeals Tribunal (``the Tribunal'') setting aside a decision of the Inspector-General in Bankruptcy following the original decision of the applicant's trustee in bankruptcy.

The question of law said to be raised falls within a very narrow compass. It is whether such facts as were found by the Tribunal fall within the provisions of s 136(1) of the Fringe Benefits Tax Assessment Act 1986 (Cth) on their proper construction and hence constituted income for the purposes of s 139W of the Bankruptcy Act 1966 (Cth). Before turning to that question I will refer briefly to the factual background of this matter. Mr Nelson was, and is now again, a practising barrister and solicitor in the Australian Capital Territory. He and his wife of over thirty years took up residence in a house she acquired in 1985. Mrs Nelson was admitted to legal practice in 1988 and the couple entered into partnership in June 1990. In August of the same year Mr Nelson's estate was sequestrated. He then became a consultant to his wife's practice at a salary of $600 per week. In December 1991 he was removed from the roll of barristers and solicitors.

Thereafter he attempted unsuccessfully to obtain work in the legal profession. He applied to the Council of the Law Society to be permitted to work for his wife as a clerk. This was refused in February 1992, but on appeal to the Supreme Court that decision was reversed and he took up that employment on a salary of $300 per week.

In March 1995 he was readmitted to practice. As at July 1995 his salary was $510 for 30 hours per week.

As already noted, in 1985 Mrs Nelson acquired the house in Deakin in which the couple have lived thereafter. Mr Nelson in evidence before the Tribunal indicated that, prior to his bankruptcy, he contributed to outgoings on the property. Since his estate was sequestered he has not made any further such payments.

A car was leased in his name in 1988. The Tribunal accepted, for the purposes of the matter before it, that the car belonged to his

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wife and that he was allowed to use it. It is also clear on the evidence accepted by the Tribunal that the car was used, in part at least, for the purposes of Mrs Nelson's legal practice. In fact the Tribunal designated it the ``office car'' in its reasons.

Put somewhat inexactly the question before the Tribunal was whether the assessment made by the trustee of Mr Nelson's income under s 139W of the Bankruptcy Act 1966 properly included as fringe benefits (cf Bankruptcy Act 1966, s 139L and the Fringe Benefits Tax Assessment Act 1986, s 136(1) (the ``Act'')) the benefits derived from his ``free use of accommodation'' in his wife's house and his ``free unlimited private use'' of his wife's ``office car''. The Tribunal found that it did on both accounts.

This conclusion, which is only challenged in this appeal in relation to the accommodation, necessarily involved two steps. The first related to the proper construction of the definition of ``fringe benefit'' in s 136(1) of the Act; the second, whether the facts ``fully found'' - cf
Collector of Customs v Pozzolanic Enterprises Ltd (1993) 43 FCR 280 at 287 - fell within the statutory provisions.

As became clear during the hearing before me, the applicant has challenged the Tribunal's decision in respect of each of these steps. Lest there be any misunderstanding on this, I should indicate that in relation to the legislation in question here I am of the view that these two steps raise, if not separately then together, a question of law. My jurisdiction to consider them is, of course, premised upon such a question being raised.

I should add that there clearly are cases where the second of the two steps I have mentioned is properly regarded as raising only a question of fact: see Pozzolanic's case, above at 288; see also
Collector of Customs v Agfa- Gevaert Ltd 96 ATC 5240 at 5243; (1996) 141 ALR 59 at 63. Nonetheless the legislative language with which I am here concerned is, relevantly, closely analogous to that found in s 26(e) of the Income Tax Assessment Act 1936 (Cth) 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
FC of T v Holmes 95 ATC 4476 at 4477; (1995) 138 ALR 59 at 60. I consider the issue in the present case to be sufficiently similar in type to that in Holmes for me to conclude that the second step to which I have referred involves - or is part of - a question of law.

1. The construction question

The Act, s 136(1) defines a ``fringe benefit'' (relevantly) as:

``a benefit-

• (a) provided at any time during the year of tax; or
• (b) provided in respect of the year of tax;

being a benefit provided to the employee... by:

• (c) the employer;
• ...

in respect of the employment of the employee...''

The same section further provides that:

```in respect of', in relation to the employment of an employee, includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.''

Both parties accept that it is insufficient to prove a benefit received is a fringe benefit, to show the mere coincidence of the two factual phenomenon of (i) a benefit from an employer, and (ii) the existence of an employer-employee relationship. The benefit itself must be provided ``in respect of the employment of the employee'': see
Bond v Trustee of Property of Bond (a Bankrupt) (1994) 125 ALR 399. Again the parties agree that for this condition to be satisfied it must be shown that the employment relationship provided, in whole or in part, the reason or occasion for the benefit given or, to put the matter the other way around, the benefit was a consequence of the relationship. I was taken to some number of decisions on s 26(e) of the Income Tax Assessment Act 1936 which, it was submitted, provide analogical support for this construction: see eg
FC of T v Dixon (1952) 10 ATD 82; (1952) 86 CLR 540;
Smith v FC of T 87 ATC 4883; (1987) 164 CLR 513;
McCardle v FC of T 88 ATC 4222; (1988) 79 ALR 637;
FC of T v Rowe 95 ATC 4691 esp at 4710; (1995) 131 ALR 622 esp at 643. Given the concurrence of the parties in the proper construction of a fringe benefit I need not refer further to the above decisions.

The first question, then, for me is whether that was the actual construction adopted by the Tribunal. Its reasoning in this is contained in

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paragraphs 30 and 31 of the Reasons for Decision. They are as follows.

``30. The nexus between the benefit and the employment is clearly extended by the definition of `in respect of'. It is not necessary to show that the benefits were directly and immediately regarded as rewards for work done. It is not even necessary to show that they were regarded as directly related to the work done. So long as some connection can be discerned, then the definitions require one to find that the employment and the benefit are connected to the requisite extent.

31. It may well be that the applicant is not entitled to live in the house with his wife only because he is employed by her, or that he is entitled to drive the vehicle which he claims to hold in trust for her solely because he is employed by her. However, it is by no means necessary to show that but for the employment, he would not be entitled to the benefits. So long as there is a rational connection pointing to an indirect association between the benefit and the employment, the requirements of the statute will be met. In my view, the circumstances of the present case point to that having been amply demonstrated. He has free unlimited private use of the `office car', whether or not he takes advantage of this. He has free use of accommodation provided by his employer at no expense to him. These provide a sufficient nexus to his employment.''

Focussing particularly on the final sentence of para 30 and the third sentence of para 31, the appellant has submitted that the ``connection'', ``rational connection'' or ``indirect association'' referred to is the mere factual coincidence of benefit from the employer and an employment relationship.

The respondent, in contrast, has submitted that the Tribunal correctly addressed the construction question; that when the word ``connection'' was used in para 30, it was in that context being used in the sense of ``connection to the work done'' and as such was unobjectionable. And when used in para 31, in referring in turn to ``an indirect association between the benefit and the employment'' it was stating, albeit inelegantly, a test consonant with that the parties accept as the correct one to be applied.

The appellant's response to this is that when one looks to the manner in which the Tribunal applied its own ``test'' it could not be said that it was applying the accepted test - hence the appellant's original submission.

For reasons which I will later mention I do not regard this division of view as of great consequence. Bearing in mind (i) that the reasons of the Tribunal should not be challenged merely on the ground of ``some doubt, some ambiguity or some parsimony'' in them - cf
Comcare v Parker Federal Court, unreported, 2 August 1996, Finn J - and (ii) that the reasoning of the Tribunal should be examined in context, I am prepared to conclude that, having adverted to Bond's case in para 29 and to the definition of ``in respect of'' (though without expressly acknowledging this), the Tribunal, in paras 30 and 31, was attempting, probably in infelicitous language, to express the test the parties have accepted is appropriate.

However, when one gets to the question whether the facts as found necessarily resulted in the conclusion that a fringe benefit had been received, a problem presents itself. Apart from the Tribunal's reference in para 31 to Mr Nelson's free use of the car and of the accommodation, I am left in no little doubt as to what were the ``circumstances of the present case'' that amply demonstrated ``that the requirements of the statute [had] been met''. Indeed this doubt is compounded by the Tribunal's incorporation by reference into its reasons of the earlier decision - or at least of parts of that decision - in
Re Nelson and Inspector-General in Bankruptcy (1994) 35 ALD 113: see Reasons for Decision paras 3 and 6.

Counsel for the respondent has asked me to infer from the Tribunal's reasons that it in turn was inferring that the salaries paid by Mrs Nelson to Mr Nelson were artificially deflated because of the benefits and that this was what satisfied the accepted test. This inference seems fundamental to the respondent's submissions. I can only say that the reasons do not betray that inference. More importantly they do not reveal why the facts ``fully found'' fall within the definition of ``fringe benefit'' properly construed notwithstanding the Tribunal's conclusion that this was ``amply demonstrated''.

While inadequacy of reasons is not a ground of appeal as such, I nonetheless am in no

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position to answer the question of law raised. It is not clear what were the facts found by the Tribunal. It likewise is not clear why they demonstrated that the test of a fringe benefit had been satisfied.

This is not a case in which I consider it would be appropriate to allow the appeal and to declare that Mr Nelson had not been in receipt of income for the purposes of s 139L of the Bankruptcy Act on account of his accommodation in his wife's residence. Regrettable it may be, but it is necessary to set aside the decision and to remit it to the Tribunal for rehearing and redetermination. I will make orders accordingly.

I should add finally that neither party has sought to argue that an employee-spouse's residence (without payment or contribution) in the house of an employer-spouse and with that spouse, cannot in any circumstances constitute a fringe benefit. I refrain from comment on that matter.

I order that the decision of the Tribunal be set aside and that the case be remitted to it to be heard and decided again.

The Court orders that:

1. the decision of the Tribunal be set aside; and

2. the case be remitted to it to be heard and decided again.