STARRIM PTY LTD v FC of T

Judges:
Lindgren J

Court:
Federal Court

MEDIA NEUTRAL CITATION: [2000] FCA 952

Judgment date: 14 July 2000

Lindgren J

Introduction

1. This case involves the questions whether certain benefits provided by a company to a husband and wife who were its only shareholders and directors, but who also stood in other relationships to the company, were fringe benefits as defined in subs 136(1) of the Fringe Benefits Tax Assessment Act 1986 (Cth) (``the Act'').

2. The applicant (``Starrim'') appeals, and the respondent (``the Commissioner'') cross- appeals, from different parts of a decision of the Administrative Appeals Tribunal (``the AAT'') given on 31 August 1999. The decision was as follows [reported at Case 11/99,
99 ATC 191]:

``The objection decisions in NT 98/43, 47 and 48 (Fringe Benefits Tax) are set aside in respect of the loan benefits and affirmed in respect of the expense payment benefits.''

3. The contest between the parties relates to the Fringe Benefits Tax (``FBT'') years ended 31 March 1994, 31 March 1995 and 31 March 1996. The Commissioner assessed Starrim to FBT in respect of each of those years. On 13

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November 1996 the Commissioner issued three notices of amended FBT assessments (the preceding day he had issued three notices of assessments for nil amounts). Starrim objected by objections dated 24 February 1997. The Commissioner disallowed the objections by objection decisions dated 17 December 1997.

4. On Starrim's application to the AAT for review, the AAT affirmed the objection decisions in so far as they related to expense payment benefits and set them aside in so far as they related to loan benefits. Accordingly, Starrim's appeal relates to the assessment to FBT of expense payment benefits and the Commissioner's cross-appeal relates to the AAT's decision that the loan benefits were not assessable to FBT.

5. Section 44 of the Administrative Appeals Tribunal Act 1975 (Cth) provides that a party to a proceeding before the AAT may appeal to this Court on a question of law from any decision of the AAT in the proceeding. Notwithstanding the use of the word ``appeal'' in the section, the proceeding is heard and determined in the original jurisdiction of the Court.

Background facts

6. In 1992 Peter John Walkom and his wife Rhonda Joy Lang sold their family home at Baulkam Hills and moved to Dubbo, where they lived in rented accomodation. They became the only shareholders in and directors of Starrim and it commenced a business called ``Timber Logs and Lattice'' in rented premises in Dubbo.

7. In early 1993, Aondi Pty Limited (``Aondi''), a company owned and controlled by William John O'Neill and Josephine Amelia O'Neill, carried on a nursery business on land known as ``Old Ganarrin'' near Dubbo (``the Property''). The Property comprised approximately 12.99 hectares or 32.1 acres. The Property consisted, for present purposes, of three areas as follows:

The Property was on a single unsubdivided title. It will be convenient if I refer to the Property as comprising of a dwelling house area of one acre and a business area of 31 acres.

8. In 1993, Mr Walkom and Ms Lang learned that Mr and Mrs O'Neill wished to sell the Property and the Business. A total price of $500,000 for the Property and the Business was agreed to, of which $100,000 was to be allowed by way of vendor finance, leaving $400,000 to be found by the purchaser. The National Australia Bank (``NAB'') agreed to lend $300,000, leaving $100,000 to be provided by the purchaser. Mr Walkom and Ms Lang had money from the proceeds of the sale of their home available.

9. The way in which the acquisition was structured is important for present purposes. Originally it was intended that Starrim would be the purchaser. Indeed, Starrim applied to NAB seeking finance of $300,000 and its application showed that it would be purchasing both the Property and the Business. But on professional advice that idea was abandoned in favour of a purchase of the Property by Mr Walkom and Ms Lang from Mr and Mrs O'Neill, and of the Business by Starrim from Aondi.

10. The contracts for the sale of the Property and the Business were both dated 19 May 1993 and completion took place on 11 June 1993. The transaction was structured as follows:

11. There were, of course, transaction expenses, such as stamp duty and legal fees. Apparently Mr Walkom and Ms Lang funded some of these amounts and NAB provided to Starrim overdraft accommodation to the extent of $10,000. There was detailed evidence before the AAT of the precise derivation and movement of funds but for present purposes I need not go beyond the above outline.

12. On completion on 11 June 1993 the sum of $300,000 borrowed by Starrim from NAB was applied as to $56,700 in payment of the outstanding 90 per cent of the purchase price of $63,000 for the Business and as to the remaining $243,300, towards enabling Mr Walkom and Ms Lang to complete their purchase of the Property from Mr and Mrs O'Neill.

13. After completion Mr Walkom and Ms Lang resided in the residence and Starrim carried on the Business on and from the remainder of the Property. It was not contemplated that Starrim would pay rent to Mr Walkom and Ms Lang and it did not do so. There was no document regulating the relationship between Mr Walkom and Ms Lang as proprietors and Starrim as occupant of the 31 acres.

14. In the financial accounts of Starrim for the years ended 30 June 1993, 30 June 1994 and 30 June 1995, the Property was incorrectly treated as a fixed asset of Starrim and all monies borrowed to purchase the Property were treated as liabilities of Starrim. The error had other effects. Starrim paid the following expenses that Mr Walkom and Ms Lang, as owners of the Property, were in fact liable to pay:

15. Starrim also paid all interest on its borrowing of $300,000 from NAB. Starrim's accounts for the years ended 30 June 1993, 30 June 1994 and 30 June 1995 incorrectly showed the vendor finance as a liability of Starrim. There were inaccuracies in relation to the loan accounts of Mr Walkom and Ms Lang with Starrim as a consequence of the Property being treated as an asset of Starrim's and all liabilities associated with it being treated as liabilities of Starrim's.

16. For the first twelve to eighteen months, Starrim did not make a profit and Mr Walkom and Ms Lang received minimal wages. The precise amounts paid to them were as follows: 

        

+------------------------------------------------------+
|                      | Period to | Year to | Year to |
|                      |  30.6.93  | 30.6.94 | 30.6.95 |
|                      |     $     |    $    |    $    |
|------------------------------------------------------|
| Mr Walkom            |           |         |         |
|------------------------------------------------------|
| Gross Wages          |     0     |  10,000 |  10,400 |
|------------------------------------------------------|
| Less Tax Instalments |     0     |   1,045 |   1,040 |
|------------------------------------------------------|
| Net Wages Received   |     0     |   8,955 |   9,360 |
|------------------------------------------------------|
| Ms Lang              |           |         |         |
|------------------------------------------------------|
| Gross Wages          |     0     |  10,000 |  10,400 |
|------------------------------------------------------|
| Less Tax Instalments |     0     |   1,045 |   1,040 |
|------------------------------------------------------|
| Net Wages Received   |     0     |   8,955 |   9,360 |
+------------------------------------------------------+

17. Mr Walkom and Ms Lang had funded Starrim's business of ``Timber, Logs and Lattice'' until the transaction of 11 June 1993. By the time of the completion of purchase on 11 June 1993, Starrim had become indebted to Mr Walkom and Ms Lang in a sum of $90,886.54, including, for example, $6,300 representing the deposit on the purchase of the Business. After completion of the purchase, the erroneous course of accounting continued. For example, in May 1995 the proceeds of lucerne sales by Starrim were deposited into Mr Walkom's bank account.

18. Before the AAT the parties were in agreement that certain exhibits correctly represented the loan accounts as reconstructed in the light of, inter alia, the true facts as to ownership of the Property and the correct allocation of liabilities and that any FBT payable would have to be calculated on the basis of the reconstructed accounts. A result, according to the AAT, was that the Commissioner would be required to allow ``credits or set-offs'' for the original credit balance in favour of Mr Walkom and Ms Lang and for monies introduced by them subsequently.

19. Subject to any question arising under s 19 of the Act, there is no longer any issue between the parties about the taxable values of the relevant benefits which, in the light of, inter alia, the areas of one acre used by Mr Walkom and Ms Lang and 31 acres used by Starrim for its business purposes, are as follows: 

+-------------------------------------------------------------------+
|                            | Year ended | Year ended | Year ended |
|                            |  30.3.94   |  31.3.95   |  31.3.96   |
|                            |     $      |     $      |     $      |
|-------------------------------------------------------------------|
| Expense payment benefits   |            |            |            |
|-------------------------------------------------------------------|
| Electricity                |      433   |      557   |       43   |
|-------------------------------------------------------------------|
| Telephone                  |      352   |      511   |       13   |
|-------------------------------------------------------------------|
| Rates                      |    1,213   |    1,089   |      516   |
|-------------------------------------------------------------------|
| Interest on vendor finance |    5,999   |    7,999   |    1,666   |
|-------------------------------------------------------------------|
| Loan benefits              |            |            |            |
|-------------------------------------------------------------------|
|                            |    7,868   |   11,674   |    3,623   |
+-------------------------------------------------------------------+

20. Starrim did not register for FBT purposes and did not furnish any FBT return to the Commissioner. In each of the FBT years under review, the Commissioner issued notices of amended assessment to Starrim notifying not only amounts of FBT but also an amount of ``additional tax for an incorrect return'' under s 115 of the Act. But in fact the case was one of ``no return'' rather than ``incorrect return'', and it is common ground that s 114 rather than s 115 was the applicable section.

The legislation

21. Subsection 66(1) of the Act provides that subject to the Act, tax imposed in respect of the ``fringe benefits taxable amount'' of an

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employer is payable by the employer. The expression ``fringe benefits taxable amount'' is defined in subs 136(1) and s 136AA as turning on the notion of ``fringe benefit''. Subsection 136(1) defines ``fringe benefit'' as including:

``A benefit provided to the employee... by... the employer... in respect of the employment of the employee....''

22. The word ``employee'' was defined in subs 136(1) to mean, among other things, a ``current employee''. The expression ``current employee'' was defined in the same subsection to mean an employee within the meaning of Division 2 of Part VI of the Income Tax Assessment Act 1936 (Cth) (``ITAA36''). Section 221A of that Act, which occurred in Division 2 of Part VI, defined ``employee'' as:

``a person who receives, or is entitled to receive, salary or wages.''

The expression ``salary or wages'' was defined in subs 221A(1) to include payments by ``a company by way of remuneration to a person who is, or performs the duties of, a director of that company.'' The word ``employment'' was defined in subs 136(1) of the Act to mean, in relation to a person:

``the holding of any office or appointment, the performance of any functions or duties, [ and] the engaging in of any work, or the doing of any acts or things that results, will result or has resulted in the person being treated as an employee.''

23. It was never in dispute that Mr Walkom and Ms Lang were employees of Starrim: as noted above, it paid them both wages. There was evidence before the AAT that they both worked long hours for the company.

24. The expression ``in respect of'', in relation to the employment of an employee, was defined in subs 136(1) to include:

``by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.''

Subsection 148(1) of the Act provided, in part:

``A reference in this Act to the provision of a benefit to a person in respect of the employment of an employee is a reference to the provision of such a benefit:

  • (a) whether or not the benefit is also provided in respect of, by reason of, by virtue of, or for or in relation directly or indirectly to, any other matter or thing;
  • ...
  • (d) whether or not the benefit is also provided to another person;
  • ...
  • (f) whether or not the benefit is provided or used, or required to be provided or used, in connection with that employment;
  • ...
  • (h) whether or not the benefit is provided as a reward for services rendered, or to be rendered, by the employee.''

Subsection 16(1) of the Act was headed ``Loan Benefits'' and provided:

``Where a person (in this subsection referred to as the `provider' ) makes a loan to another person (in this subsection referred to as the `recipient' ), the making of the loan shall be taken to constitute a benefit provided by the provider to the recipient and that benefit shall be taken to be provided in respect of each year of tax during the whole or a part of which the recipient is under an obligation to repay the whole or any part of the loan.''

I set out the definition of ``loan'' in subs 136(1) in par [80] later.

25. Section 18 of the Act was headed ``Taxable Value of Loan Fringe Benefits'' and provided:

``... the taxable value, in relation to a year of tax, of a loan fringe benefit provided in respect of the year of tax is the amount (if any) by which the notional amount of interest in relation to the loan in respect of the year of tax exceeds the amount of interest that has accrued on the loan in respect of the year of tax.''

Section 19 provided for a reduction in the amount of taxable value of Loan Fringe Benefits under what is known as the ``otherwise deductible'' rule. For reasons that will appear later, I do not find it necessary to outline the nature of this rule.

26. Section 20 of the Act is headed ``Expense Payment Benefits'' and provided, relevantly:

``Where a person (in this section referred to as the `provider' ):

  • (a) makes a payment in discharge, in whole or in part, of an obligation of

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    another person (in this section referred to as the `recipient' ) to pay an amount to a third person in respect of expenditure incurred by the recipient; or
  • (b)...

the making of the payment referred to in paragraph (a),... shall be taken to constitute the provision of a benefit by the provider to the recipient.''

27. Part VIII of the Act is headed ``Penalty Tax''. Section 114 within that Part provided:

``Where an employer... refuses or fails to furnish, when and as required under or pursuant to this Act to do so, a return, or any information, relating to a year of tax, being a return relevant to or information relevant to ascertaining the employer's liability under this Act, the employer is liable to pay, by way of penalty, additional tax equal to double the amount of tax payable by the employer in respect of the year of tax.''

28. Section 115, also within Part VIII, imposed the same penalty (double the amount of tax avoided) for, relevantly, the making of false or misleading statements to a taxation officer.

Reasons for decision of the AAT

29. In addition to the FBT objection decisions to which I have referred, there was before the AAT an application by Starrim for review of an objection decision in relation to income tax. The first part of the AAT's Reasons was devoted to issues touching that matter, of which I need say nothing further.

30. The AAT noted that Mr Walkom and Ms Lang had apparently treated Starrim as if they were all the one entity. It said that while, in economic terms, this was not surprising [at 199],

``... it does not excuse the fact that records were incorrectly or inadequately maintained, that the Company claimed for expenses which were expenses of [Mr Walkom and Ms Lang] and that sales proceeds were banked to [Mr Walkom's and Ms Lang's] own account instead of that of the Company. However, that they did not contemplate charging the Company rent and also the fact that their wages in the first years were minimal is not surprising having regard to the financial position of the Company at the time. In the first year after the business was acquired, they received $20,000 in aggregate as salary and the aggregate amount received in the second year was not much more.''

31. The AAT referred to the definition of ``fringe benefit'' in subs 136(1) as ``expanded'' (to use the AAT's word) by subs 148(1) of the Act and to decisions of Senior Member Pascoe in
J & G Knowles & Associates Pty Ltd v FC of T 98 ATC 2205, and on appeal at first instance in this Court before Sundberg J (99 ATC 4788; [ 1999] FCA 1060),
Curtain World Pty Ltd v DFC of T 99 ATC 2020 (``Curtin World''), and Taxation Ruling MT 2019. The AAT thought that the authorities recognised a prima facie distinction between benefits paid to director- employees who were also shareholders and benefits paid to those who were not, even if the latter had some form of ``quasi-ownership'' in relation to the company.

32. The AAT thought it important that Starrim was in difficult financial circumstances for some considerable time after the purchase of the Business, and, presumably, had little, if any, capacity to pay dividends or return capital. It also thought it was [at 206]:

``... critical to remember that the on-lending of so large an amount (in comparative terms) arose as a matter of accounting necessity.''

The AAT continued in respect of the loan benefit [at 206]:

``... [Mr Walkom and Ms Lang] became debtors of [Starrim] in consequence of the reversal of the property out of [Starrim's] accounts. That occurred on a one-off basis, and it arose (notwithstanding that it was implemented much later in time) as a necessary consequence of the decision... that [Mr Walkom and Ms Lang] and not [ Starrim] should purchase the property from [ Mr and Mrs O'Neill], but that [Starrim] would nevertheless remain the borrower from [NAB].''

The AAT stated [at 206]:

``... The loan by [Starrim] to [Mr Walkom and Ms Lang] arose not because the parties consciously agreed or even thought that such a loan should be provided, but because, and in relation to the accounts of [Starrim], the reversal out of the property led inevitably to a corresponding debit to [Mr Walkom and Ms Lang]. The loan is thus more aptly characterised as a `deemed' loan.... Indeed,

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it could (as occurred to me on reflection after the hearings) perhaps have been characterised also as an expense payment benefit; [Starrim] paid an expense of [Mr Walkom and Ms Lang], and being the balance of the purchase price of the property.''

33. The AAT thought this line of reasoning not applicable to the expense payment benefits on the basis that whereas in the case of the loan benefits, Mr Walkom, Ms Lang and Starrim acted on advice, the consequences of which were not considered in the required (or perhaps any) depth, in the case of the expense payment benefits Mr Walkom and Ms Lang ``regularly and on a systematic basis'' caused Starrim to pay expenses which were properly payable by them as if they were expenses of Starrim.

34. Starrim attacks the following passages in the AAT's Reasons relating to the expense payment benefits [at 206-207]:

``... [Mr Walkom] in his evidence before the Tribunal did not explain why he and his wife as directors of [Starrim] procured the payment by [Starrim] of the expenses assessed as the expense payment fringe benefits, and their motives are a matter of conjecture. It is conceivable, and perhaps even likely, that the payments were made as a matter of economic necessity and bearing in mind that their combined earnings were so low.... Their very periodicity gives rise to an inference that they constituted a substitute for additional remuneration.... This question can perhaps be tested by assuming hypothetically that [Mr Walkom and Ms Lang] were employees and shareholders but not directors of [Starrim]. Would independent directors acting legally and properly (and, in other words, not in breach of their fiduciary duty) have made those payments as expenses of the Company? The answer is, of course, no.... It is the fact that [Mr Walkom and Ms Lang] were the directors of [Starrim] which enabled them to procure the payment by [ Starrim] of the relevant expenses as expenses of [Starrim]. That fact, when considered in conjunction with the fact that the payments were made on a periodic basis, leads me to conclude that the capacity in which the benefits were received was that of employees and not as shareholders.

(i) My conclusion then is that the benefits referred to... [dwelling telephone bills, rates, electricity and vendor finance interest] were indeed expense payment fringe benefits and properly assessed as such. And it is not necessary for me for this purpose to differentiate between expenses referable to the dwelling (electricity, rates and telephone) and expenses referable to the property (vendor finance interest).''

35. It is convenient for me to interrupt my account of the AAT's reasons for decision by noting here that, in relation to the first of these five passages, there were before the AAT written witness statements by Mr Walkom and by Graham Ronald Flegg, the accountant and tax agent of both Starrim and Mr Walkom and Ms Lang, to the effect that the failure to apportion the expenses was due to oversight. They suggested that the oversight may itself have been attributable to various causes, including the fact that the proportion of the Property occupied by the residence was so small (one-thirtysecond) and that the value of the right of occupancy allowed to Starrim would have far exceeded the total amount of the expense payment benefits.

36. The Commissioner conceded that additional tax had been assessed under s 115 rather than s 114 but the AAT stated that the effect was the same under both sections and that the circumstances (and the culpability) were such that it was not appropriate to reduce the additional tax assessed. The learned presiding Senior Member noted, in particular, that it was only after an audit of Starrim that the relevant assessments were made.

37. Accordingly, the AAT affirmed the objection decisions in relation to the amounts assessed as expense payment fringe benefits.

38. In relation to the loan benefits (payment of the interest on the vendor finance of $100,000 provided by Mr and Mrs O'Neill to Mr Walkom and Ms Lang), the AAT noted Starrim's submission that those benefits were provided by Starrim to Mr Walkom and Ms Lang ``as landlords''. As noted earlier, in fact there was no lease. The AAT observed [at 207]:

``... The evidence was that [Starrim] could not afford to pay any consideration at all for its use of the property, and there was no evidence of any intention to charge rent in the future. It was suggested also, perhaps in passing, that the loan was made to [Mr

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Walkom and Ms Lang] as guarantors or security providers; this contention must fail because they became guarantors or security providers in order to enable [Starrim] to borrow from [NAB], and with the moneys so obtained to provide the benefit to [Mr Walkom and Ms Lang]; the borrowing from [ NAB] must have occurred in point of time first, even if all of the relevant transactions were completed at or about the same time.''

39. The learned Senior Member was inclined to the view that the on-loan (or, he said, ``perhaps more aptly, the `deemed on-loan'''), was consistent with the couple's ownership of Starrim, even though Starrim could not have provided the amount involved (or anything like it) by way of return of capital or distribution. He thought this was so because it occurred only once and it occurred as a matter of accounting necessity.

40. The learned Senior Member distinguished Curtain World, in which luxury cars were provided by a company to its directors, on the basis that in that case the cars were provided partially in order that the directors might perform their duties as employees. The learned Senior Member continued [at 208]:

``... It could perhaps be argued that [Mr Walkom and Ms Lang] could not have performed their duties in the business without the property, but that is not at all the same thing. There is a remote connection, but it does not seem to the Tribunal that that remote connection is sufficient to constitute the nexus required by the legislation. Indeed the fact that the cars provided to the Curtain World directors were utilised for both personal use and for business purposes, and in the performance of their employment duties, tends to reinforce my view that the provision of the property to [Starrim] wholly for the purpose of its [Starrim's] business did not constitute a nexus with their employment. The benefits in question were thus not loan fringe benefits, and the FBT decisions must, in respect of the amounts assessed as loan fringe benefits, be set aside.''

(my emphasis)

41. Having concluded that the on-lending did not result in a loan fringe benefit, the AAT did not need to consider the ``otherwise deductible'' rule. However, after noting the terms of pars 19(1)(a) and (b)(i) of the Act, the AAT expressed the opinion that by reason of the intervening step of the acquisition of the Property and the provision of it by Mr Walkom and Ms Lang free of consideration to Starrim, there would not have been an entitlement to a (notional) deduction for interest (notionally) incurred to purchase the Property, which was then provided free of consideration to Starrim for its use.

Issues on the appeal and cross appeal

42. The issues raised by the appeal and the cross appeal are as follows:

1. Starrim's appeal - expense payment benefits

2. The Commissioner's cross-appeal - loan benefits

I can deal with issues 2.1, 2.2 and 2.3 together.

My reasoning on the appeal and cross-appeal

43. Certain general propositions are relevant to both the appeal and the cross appeal, some of which go far towards determining them.

44. First, the expression ``in respect of'', like other relational expressions such as ``in connection with'' and ``in relation to'', have no fixed meaning and must be given a meaning that accords with the statutory context in which they are found: cf
Minister for Immigration and Multicultural Affairs v Singh [2000] FCA 845 (FC) at [28]-[29] (``in connection with the making of the decision'');
J & G Knowles & Associates Pty Ltd v FC of T 2000 ATC 4151; [2000] FCA 196 (FC) (``Knowles'') (``in respect of the employment'' in the provision the subject of present consideration), and
Smith v FC of T 87 ATC 4883; (1987) 164 CLR 513 (``in respect of, or in relation directly or indirectly to, any employment of or services rendered by...'' in s 26(e) of the ITAA36).

45. In Smith v FC of T, above, tests suggested in the context of s 26(e) of the ITAA36 were:

Perhaps it is some indication of the difficulty inherent in an issue of the present kind that the High Court decided the case (against the taxpayer) by a three to two majority.

46. Unrestricted by authority I would have understood that the expression bears in the present context a generally similar meaning to that which it bears in the provision that was under consideration in the High Court. That it should do so is consistent with the purpose of the Act as described by the then Treasurer, the Hon Paul Keating, in his Second Reading Speech on the bill for the Act, as being to ``ensure that all forms of remuneration paid to employees bear a fair measure of tax...'' (Parl Debs, HR, 2 May 1986 at 3020). Such a meaning is, moreover, consistent with the expressions ``by reason of'' and ``by virtue of'' in the definition of ``in respect of'' itself in subs 136(1) of the Act set out earlier. The concluding words of that definition (``for or in relation directly or indirectly to, that employment'') are more general. But the same words occurred in the expression ``in respect of, or in relation directly or indirectly to any employment'' in s 26(e) of the ITAA36 that was considered by the High Court in Smith v FC of T. I think that they should be understood conformably with the expressions ``by reason of'' and ``by virtue of'' in the definition in subs 136(1) of the Act.

47. In Knowles a Full Court of this Court concluded its consideration of the meaning of ``in respect of'' in the present context as follows (at ATC 4158 [28]-[29]; FCA [28]-[ 29]):

``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

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employment. Without more, it is not a product or incident of that office.

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
FC of T v Rowe 95 ATC 4691 at 4703 and 4710; (1995) 60 FCR 99 at 114 and 123.''

48. Secondly, subs 148(1) of the Act signifies only that the factors referred to in it are not to be treated as inconsistent with the provision of a benefit being ``in respect of'' employment. In some instances, at least, the subsection refers to factors that might have been thought to suggest that a benefit was not provided in respect of the employment.

49. While it does not in terms purport to ``expand'' the meaning of the expression ``in respect of the employment'', subs 148(1) is intended to eliminate constrictive pre- conceptions. Accordingly, a notion that a benefit is in respect of employment only if it is a form of remuneration for services is negated by par (h) of subs 148(1) set out earlier. In sum, the subsection emphasises that the expression ``in respect of'' is intended to be of wide import and, I would add, highlights the potential difficulty of applying the provision in anything but the plainest of cases.

50. Thirdly, in the present case Mr Walkom and Ms Lang stood in several relationships to Starrim. They were employees, directors, shareholders, security providers (mortgagors), guarantors and indemnifiers, and landowners. (I will use the expression ``landowners'' in preference to ``landlords'', ``proprietors'' or ``licensors''.)

51. Mr Walkom and Ms Lang were paid wages for their services, not directors' fees. If the expense payment benefits or loan benefits were provided to them in respect of their employment, there will be a liability to FBT, notwithstanding that those benefits were also provided to them in respect of one or more of their other capacities: par 148(1)(a). But for liability to tax to be attracted, the benefits must have been provided in respect of their employment.

52. Fourthly, the decision of the Full Court in Knowles establishes that the required relationship between the provision of a benefit and the employment is not established merely by the existence of some or a causal relationship, and, in particular, that it is not established by nothing more that the fact that the employee has been able to cause the benefit to be provided to him or her by reason of his or her office as a director of the employer. There must be a ``sufficient'' or ``material'' relationship between the employment and the provision of the benefit.

53. Fifthly, it is useful to recall how Mr Walkom and Ms Lang came to stand in their various relationships to Starrim. Originally it was intended that Starrim be the purchaser of the Property as well as of the Business. If that plan had been implemented, Starrim would have been landowner and security provider (mortgagor) while Mr Walkom and Ms Lang would have still been employees, shareholders and directors, and, no doubt guarantors and indemnifiers. Starrim would not have on-lent purchase money to them, that is, provided them with the loan benefit. Moreover, since the vendor finance of $100,000 would have been allowed to Starrim, its payment of interest on that finance would not have been an expense payment benefit provided by it to Mr Walkom and Ms Lang. It, rather than Mr Walkom and Ms Lang, would have been liable for the rates. The electricity supplied to the Property was charged through a single meter and was all charged to Starrim in any event and that situation would have been no different if the original plan had been carried through. There were two telephone services to the Property - one to the residence and one to the Business. I presume that Starrim would have paid the accounts for both, as it did in the circumstance that in fact prevailed.

54. In sum, the FBT argument would have taken a different form and would have related to the payment of the rates in so far as they related to the residential one acre, a proportion of the electricity account, and the telephone bill for the residence, and, as well, it would have related to the provision of the accommodation in the residence.

55. Against the background of the five considerations described above, I will turn first to Starrim's appeal and later to the Commissioner's cross-appeal.

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Starrim's appeal - expense payment benefits

56. Starrim relies on the decision of the Full Court of this Court in Knowles which was given on 3 March 2000, after the AAT's decision in the present case. The AAT expressed agreement with the decision of Senior Member Pascoe in Knowles (98 ATC 2205 at pars 10, 11 and 12), and also referred to the decision of Sundberg J delivered on 6 August 1999 in the appeal to this Court in that case (99 ATC 4788 at 4795-4796 [ 19, 20 and 21]; [1999] FCA 1060 at pars 19, 20 and 21). But in its decision on 3 March 2000 the Full Court allowed the appeal by J & G Knowles Pty Ltd (``Knowles'') against Sundberg J's order dismissing Knowles' application for review of Senior Member Pascoe's decision.

57. Knowles concerned loan benefits made by Knowles to its four directors. Knowles was the trustee of the Knowles Investment Unit Trust (``KIUT'') which was part of the ``Knowles Group''. The units in the KIUT were owned by four family discretionary trusts. Each discretionary trust was established for the benefit of the family of one of the four directors of Knowles. The Knowles Group also included other companies, the shares in which were owned also by the four family discretionary trusts, and the four directors of Knowles were also the directors of each of those other companies. The Knowles Group's main activity was developing, marketing and managing retirement villages.

58. Prior to, and during, the relevant period, Knowles advanced amounts, interest free, to the four directors and their wives to meet their private expenditures. A director could sign cheques on Knowles' bank account and withdraw funds at any time without obtaining the approval of the other directors. The directors treated themselves as the effective owners of the Group and therefore as entitled to its profits and assets. Each drew money from the Group as he saw fit. Drawings by a director were not related to the work done by him. Knowles paid each director a salary. 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 the KIUT to loan accounts in the names of the family discretionary trusts, and were treated in the accounts of those trusts as loans to ``beneficiaries'' of them.

59. Sundberg J thought that it had been open to the AAT to conclude that there was a ``nexus'' or ``causal relationship'' or ``discernible rational link'' between the loan and the directors' employment.

60. On appeal, the Full Court made the following observations in relation to the expression ``in respect of'' as defined in subs 136 (1) of the Act for the purposes of the Act [ at 4156-4158]:

``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:... 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.''

(at [23] - my emphasis)

``... 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.''

(at [25])

``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

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employment.''

(at [26] - emphasis in original)

``... [T]he 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.''

(at [28])

61. Starrim submits that the AAT here erred by not considering, as mandated by Knowles, whether there was a ``sufficient or material relationship or connection'' between the expense payment benefits and the employment. Starrim refers to the passage from the AAT's Reasons for Decision commencing ``It is the fact that...'' set out in par [33] earlier as showing that it erred in this way.

62. The Commissioner, on the other hand, submits that that passage occurred in the context of the following four findings which themselves lead inexorably to the view that the expense payment benefits were ``fringe'' benefits:

For this reason, the Commissioner submits that the situation is distinguishable from that in Knowles.

63. The Commissioner emphasises that the question on appeal is whether the AAT was properly satisfied about something (cf
Minister for Immigration and Multicultural Affairs v Eshetu (1999) 162 ALR 577 at 589 per Gleeson CJ and McHugh J) and submits that the AAT's conclusion in relation to expense payment benefits was open to it on the basis of its findings taken as a whole. He submits that if, on the other hand, I should think that the AAT failed to consider adequately the ``sufficiency'' or ``materiality'' of the connection between the expense payment benefits and the employment, nonetheless the facts as found by the AAT are such that the Court itself must find in favour of the Commissioner. The Commissioner submits that the Court is bound so to find because the AAT's four findings set out above demonstrate a ``sufficient or material... causal relationship'' and Starrim has failed to discharge the onus of proof imposed on it by s 14ZZK of the Taxation Administration Act 1953 (Cth). The Commissioner submits that the present case differs from Knowles where the material before the AAT pointed in two directions and a further finding of fact was necessary.

64. It is important to attend closely to the course of the critical part of the AAT's reasoning which I summarise and on which I comment as follows:

Comment: I do not take the words ``regularly and on a systematic basis'' to mean ``at fixed intervals'', such as weekly, monthly, quarterly or annually. No doubt the bills for each of the categories, rates, electricity and telephone arrived at fixed intervals in accordance with the billing system of the particular billing authority and Starrim paid them promptly or otherwise. The terms of payment of the vendor finance of $100,000 were fixed in advance by agreement between Mr and Mrs O'Neill and Mr Walkom and Ms Lang (the principal of $100,000 was to be paid within two years and interest at 8 per cent per annum was to be paid quarterly). I do not understand the words ``regularly and on a systematic basis'' to suggest that Starrim itself chose to establish a system of regular payment. It paid in response to bills received and in performance of the contractual obligation undertaken by Mr Walkom and Ms Lang to Mr and Mrs O'Neill. By the words ``regularly and on a systematic basis'' the AAT was emphasising the sustained and repeated, as distinct from ``one-off'', manner of the payments.

Comment: This consideration is clearly relevant to the issue whether the expense payment benefits were in respect of the employment.

Comment: If Mr Walkom and Ms Lang in fact deliberately depressed their earnings to such levels that they could not afford to pay their rates, electricity and telephone liabilities or their interest liability of $8,000 per year on the vendor finance, leaving it to Starrim to pay those amounts, it would be easy to infer that the expense payment benefits were in respect of their employment. But the AAT says no more than that it is ``conceivable, and perhaps even likely'' that they were unable to afford to meet the expenses in question because their earnings were so low.

65. Starrim's first ground of appeal is relevant to the present question and is as follows:

``The Tribunal erred in law when it made the following statements in... its Reasons for Decision:

`[Walkom] in his evidence before the [ AAT] did not explain why he and his wife as directors of [Starrim] procured the payment by [Starrim] of the expenses assessed as the expense payment fringe benefits, and their motives are a matter of conjecture. It is conceivable, and perhaps even likely, that the payments were made as a matter of economic necessity and bearing in mind that their combined earnings were so low.'

In making the statement, the Tribunal-

  • (a) ignored the explanations given by Peter John Walkom (`Walkom') in... his Witness Statement... and by Graham Ronald Flegg (`Flegg') in... his Witness Statement...;
  • (b) overlooked the fact that the private proportion of electricity and telephone expenses comprised less than 0.12% of [ Starrim's] total expenditure incurred in the year to 30 June 1994 and less than 0.11% of [Starrim's] total expenditure incurred in the following year;
  • (c) ignored the facts that the Council Rates related to 32 acres of land 31 acres of which [Starrim] occupied and used exclusively for [Starrim's] business purposes and that a 1/32nd part of such rates amounted to only $38 in the year to 31.03.1994, $34 in the year to 31.03.1995, and $16 in the quarter to 30.06.1995; and
  • (d) ignored the fact that the 'vendor finance interest' paid to WJ & JA O'Neill related exclusively to financing the purchase by Walkom and his wife of those 31 acres which were provided otherwise free of charge by the Walkoms to [Starrim] for its business purposes.''

I do not read the passage in question from the AAT's Reasons as expressing a finding of fact. The words ``conceivable'' and ``perhaps'' indicate otherwise. Moreover, if the AAT had intended to make such a finding, it would probably have discussed the kinds of matters referred to in Starrim's first ground of appeal set out above and whether Mr Walkom and Ms Lang had other funds available for the purpose.

Comment: My first comment above applies.

Comment: The AAT's inference that Mr Walkom and Ms Lang were aware of the distinction between the corporate entity, Starrim, and themselves is clearly supportable. This does not, of course, necessarily mean that when, for example, they caused Starrim to provide the expense payment benefits it was actually present to their minds that Starrim was conferring a benefit on them.

Comment: In this passage, the AAT was, firstly, pursuing the question whether the knowing misapplication of Starrim's money was explicable by reference to the role of Mr Walkom and Ms Lang as directors, and thought that it must be for the reason that independent directors would never have done what they did. The AAT then reached the conclusion expressed in the last two sentences. In those two sentences, the AAT stated its reasons for concluding that the expense payment benefits were received by Mr Walkom and Ms Lang ``as employees and not as shareholders''. In my view, the reason can fairly be summarised as follows:

``it was their role as directors that enabled them knowingly to misappropriate Starrim funds in conferring on themselves expense payment benefits in a sustained and repeated manner.''

66. The Commissioner does not dispute that in light of the Full Court decision in Knowles, the AAT would have erred if it had relied only on the directorial capacity of Mr Walkom and Ms Lang to cause Starrim to make the payments. In relation to the periodicity of the payments, Starrim submits that, as a matter of logic, this cannot establish the required nexus. In support, it points out that in Knowles the Full Court did not refer to the fact that the loan benefits there in question arose out of the frequent payment of large amounts over a long period to cover the four directors' ``private needs'' as something that was relevant to the issue of the ``sufficiency'' or ``materiality'' of the required causal connection.

67. I stated earlier what I understood the AAT to mean by the expression ``regularly and on a systematic basis'' and the comments I made in that context are applicable to its reference to the ``periodic basis'' on which the payments were made. I accept Starrim's submission that the periodicity of the provision of the expense payment benefits is as consistent with their provision having been in respect of the positions of Mr Walkom and Ms Lang as shareholders, landowners or security providers, as it is with its having been in respect of their position as employees.

68. Of course, the two impermissible considerations (directorial capacity to procure the payments to be made and their periodicity) in combination provide no more sound a foundation for the AAT's decision than either one of them could do alone.

69. It is true that the AAT made other findings, such as the finding that Mr Walkom and Ms Lang received low levels of remuneration from Starrim, but I think that a fair reading of its Reasons shows that the critical considerations which moved it were the two mentioned. I do not think that its other findings lead inevitably to the result that the expense payment benefits were ``fringe'' expense payment benefits.

70. Putting to one side the directorial capacity of Mr Walkom and Ms Lang to cause the payments to be made and their periodicity, there remain issues to be explored by the AAT which could lead it to conclude either that the expense payment benefits were or were not made in respect of the employment of Mr Walkom and Ms Lang by Starrim. For this reason, the matter the subject of Starrim's appeal should be remitted to the AAT.

71. The conclusion which I have reached above makes it unnecessary for me to consider issues 1.2 and 1.3.

The Commissioner's cross appeal - loan benefits

72. The Commissioner submits that the AAT erred by failing to find that Starrim on-lent to Mr Walkom and Ms Lang in respect of their employment, and asks that the Court find that it did.

73. The Commissioner submits that the AAT erred in the following passage [at 206]:

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``... The loan by [Starrim] to [Mr Walkom and Ms Lang] arose not because the parties consciously agreed or even thought that such a loan should be provided, but because, and in relation to the accounts of [Starrim], the reversal out of the property led inevitably to a corresponding debit to [Mr Walkom and Ms Lang]. The loan is thus more aptly characterised as a `deemed' loan.''

74. The Commissioner further submits that it is hard to regard the AAT's ``inclination'' to the view that the obtaining of the on-loan was consistent with Mr Walkom's and Ms Lang's ownership of the Property as a finding of fact. Even if it was, the Commissioner submits as follows (at [40]):

``[I]t would not form a proper basis for concluding that the loan to the [Mr Walkom and Ms Lang] was not a fringe benefit because:

  • • The fact that the actions were consistent with ownership does not preclude them from also being consistent with the provision of benefits as employees of the Applicant.
  • • If the benefits were also provided as fringe benefits then paragraphs (a), (d), (f) and (h) of section 148(1) of the FBT Act would operate to ensure that the benefits remained liable to tax.
  • • The fact that the actions were consistent with ownership does not address the question of the purpose in providing them. Having regard to the finding [of the AAT] that the loan was made without the consequences being fully considered, it cannot be said that the loan was made to the Directors in their capacity as shareholders rather than employees.
  • • The initial loan transaction should be seen not as a `once only' transaction. Rather, it was the first step in a regular and systematic course of conduct involving the provision of fringe benefits to [Mr Walkom and Ms Lang]. Seen in this context that the [AAT] should have reached the conclusion that the provision of the loan was also a fringe benefit.''

75. The Commissioner contends that the AAT misunderstood the issue before it, and that the grant by Mr Walkom and Ms Lang to Starrim of a right to use the Property is not relevant to the question whether the loan to them by Starrim was a fringe benefit.

76. For its part, Starrim submits that the AAT, favourably to the Commissioner, relied on

``the more tenuous nexus of `a' causal link, rather than focusing on the `sufficiency' or `materiality' of the employment's causation of the benefit... [and] concluded that the NAB loan benefits were not provided in respect of the employment of [Mr Walkom and Ms Lang].''

77. Starrim submits as follows (at par 2.5.2):

``The provision of the loan to [Mr Walkom and Ms Lang] on 11 June 1993 was not `a product or incident' of [Mr Walkom's and Ms Lang's] employment on the Property... [ but] was `the product or incident' of [ Starrim's] need to obtain the use of 31 acres as the base for its business operations. The subsequent employment on the 31 acres was `the product or incident' of [Starrim's] having acquired the use of the land and business. Thus, although there was a connection between the loan on 11 June 1993 and the employment, the [AAT] was correct to characterise it as `too remote'.''

78. In my respectful opinion, the AAT's conclusion that the loan benefits were not in respect of the employment of Mr Walkom and Ms Lang is supportable although my reasons are not on all fours with those of the AAT.

79. As directors of Starrim, Mr Walkom and Ms Lang must be taken to have procured Starrim to pay on completion of the transaction on 11 June 1993 part of the purchase price for the Property which they, as purchasers, had contracted to pay (no doubt the solicitor for Starrim and Mr Walkom and Ms Lang more directly procured the NAB funds to be applied in that way). The fact that it was by reason of their office as directors that they had the capacity to do so could not alone establish the required connection between the benefit and their employment; cf Knowles, above.

80. The AAT said that the loan arose, not because the parties ``consciously agreed or even thought that such a loan should be provided'' and referred to it as a ``deemed loan.'' The

ATC 4476

word ``loan'' is defined in subs 136(1) of the Act to include:
  • ``(a) an advance of money;
  • (b) the provision of credit or any other form of financial accomodation;
  • (c) the payment of an amount for, on account of, on behalf of or at the request of a person where there is an obligation (whether expressed or implied) to repay the amount; and
  • (d) a transaction (whatever its terms or form) which in substance effects a loan of money.''

81. Accordingly, it is not suggested that there was an intention at the time that Starrim make a gift to Mr Walkom and Ms Lang of the funds in question, or that Starrim be the purchaser of the Property or a co-purchaser of it with them. In my opinion Starrim's making available or causing to be made available of part of the funds it borrowed on that day from NAB, in order to enable Mr Walkom and Ms Lang to perform their obligation under their contract for the purchase of the Property, falls within the definition of ``loan'' in subs 136(1). I therefore agree with counsel for the Commissioner that the AAT erred in thinking that the loan arose out of the later reversal made in the accounts of Starrim. (If contrary to my view, there was no obligation on Mr Walkom and Ms Lang to repay, the payment of part of the purchase price for the Property out of the funds borrowed by Starrim from NAB would have constituted the provision of an expense payment benefit by it to Mr Walkom and Ms Lang.)

82. But although the AAT said it was ``critical'' to remember that the on-lending arose ``as a matter of accounting necessity'' at that later time and I think that the reversal in the accounts was a mere recognition of the true facts as they had already existed since 11 June 1993, I think that the AAT's view that the on- loan was provided to Mr Walkom and Ms Lang in respect of their position as shareholders, that is, as the beneficial owners of Starrim, and not as its employees, was supportable. In support, the AAT appropriately referred to the largeness of the amount lent and the fact that the loan was a one-off event. (I do not accept the Commissioner's submission that the loan should simply be regarded as the commencement of a series of similar events.)

83. There are various ways of conceiving of the capacity in which Mr Walkom and Ms Lang received the loan benefit. As explained earlier, the original plan had been for Starrim to purchase the Property. Once it was decided that Mr Walkom and Ms Lang should do so instead, apparently the NAB loan should have been, but was not, split into two loans: one to Mr Walkom and Ms Lang and a smaller one to Starrim. This suggests that Starrim made the loan to them simply in their capacity as ``purchasers of the Property,'' that is, as persons who were in the process of becoming the landowners. This alternative understanding of the status of Mr Walkom and Ms Lang in respect of which the loan was made to them also supports the result arrived at by the AAT.

84. On any reckoning, the AAT was entitled to conclude that the provision of the loan benefit to Mr Walkom and Ms Lang was not in respect of their employment by Starrim.

85. I also think that the AAT was correct in thinking that it was too remote a connection that the Property (or at least 31 of the 32 acres) would have to be available for use by Starrim in order that Mr Walkom and Ms Lang should be able to be employed by it.

86. The above reasons require that the cross- appeal be dismissed and make it unnecessary for me to consider issues 2.2, 2.3 and 2.4, or a notice of contention filed by Starrim in respect of issue 2.4 and the ``otherwise deductable rule''. But it seems appropriate to add that I am not persuaded that the AAT erred in either of the ways referred to in issues 2.2 and 2.3.

Conclusion

87. For the above reasons, the appeal will be allowed with costs and the matter the subject of the appeal remitted to the AAT for determination in accordance with law, and the cross-appeal will be dismissed with costs.

THE COURT ORDERS THAT:

1. The appeal be allowed.

2. The decision dated 31 August 1999 of the Administrative Appeals Tribunal in NT98/43, 47 and 48 (Fringe Benefits Tax) affirming objection decisions of the respondent in respect of expense payment benefits be set aside.

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3. The matter the subject of the decision referred to in (2) be remitted to the Administrative Appeals Tribunal to be determined in accordance with law.

4. The cross-appeal be dismissed.

5. The respondent pay the applicant's costs of the proceeding.

 

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