CURTAIN WORLD PTY LTD v DFC of T

Members:
Barnett DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 14 January 1999

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Deputy President Barnett OBE

On 1 April 1997 the applicant lodged objections against assessments of fringe benefits tax for the years ended 31 March 1993, 1994, and 1995. The assessments related to certain motor vehicles. In so far as the objection related to cars provided to employee/directors it was disallowed on 15 October 1997.

2. On 20 November 1997, the applicant applied to the Tribunal for a review of that decision in relation to each tax year. During the course of the hearing the parties agreed to proceed with regard to the years 1994 and 1995 only (AAT applications WT1997/93 and WT1997/94), and that the application in so far as it related to the 1993 year (AAT application WT1997/92) should be remitted for further consideration.

3. Many of the relevant facts have been agreed by the parties and were presented in the form of a Statement of Agreed Facts (Exhibit A1). The Tribunal adopts that statement reproduced below as part of its findings of facts:

• ``1. The shareholder of Curtain World Pty Ltd (ACN 009 428 568) was Maranka Pty Ltd as trustee for the Piccadilly Trust. Pursuant to a deed made 26 February 1998 Woolf Investment Nominees Pty Ltd (ACN 008 984 512) was appointed trustee of the Piccadilly Trust in lieu of Maranka Pty Ltd and legal title to the assets was transferred

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  ATC 2021

  from Maranka Pty Ltd to Woolf Investment Nominees Pty Ltd in its capacity as trustee.
• 2. The Piccadilly trust is a discretionary trust the primary beneficiaries of which are the children of Dennis Howard Woolf (DHW) and Pearl Woolf (PW).
• 3. The additional income beneficiaries of the Piccadilly Trust include:
  • (a) the parents, grandparents, brothers, sisters, brothers-in-law, sisters-in-law, nieces, nephews, cousins, second cousins, uncles and aunts of DHW and of PW other than the Settlor, Simon Holman
• 4. The additional members of the class of general beneficiaries of the Piccadilly trust are:
  • (a) DHW and PW
• 5. Marlene Ann Woolf (MAW) is a general beneficiary in accordance with sub-clause 1.1(b)(iii) because she is married to a primary beneficiary, namely BNW.
• 6. The vehicles the subject of this appeal are as per the attached schedule.
• 7. The applicant carries on the business as a manufacturer and retailer of curtains and blinds.
• 8. For the years 1993, 1994 and 1995 the applicant's external accountants included the motor vehicles provided to BNW, DHW and MAW in its fringe benefits tax returns. The applicant also claimed expenditure and depreciation on the vehicles as a deduction from its taxable income. The applicant has requested that the Deputy Commissioner of Taxation amend the income tax returns for the applicant for the years in which the full amount of the costs of running the cars were claimed. The Deputy Commissioner of Taxation has yet to process the amendment request. The Deputy Commissioner of Taxation is awaiting upon the outcome of these proceedings before processing the amendment request.
• 9. The applicant has provided motor vehicles to BNW, DHW and MAW during each of the relevant fringe benefit tax years.
• 10. BNW, DHW, MAW and PW were current employees of the applicant in the relevant fringe benefits tax years (see s. 136(1) of the Act and s. 221A(i) [sic] of the Income Tax Assessment Act 1936). They received the following wages and superannuation contributions in the income tax years ended 30 June 1994 and 1995:

                  +----------------------------+---------------------------+
                  |    Year ended 30.06.1994   |   Year ended 30.06.1995   |
                  |--------+---------+---------|--------+--------+---------|
                  |  Wage  |  Super  |  Total  |  Wage  |  Super |  Total  |
  +---------------|--------|---------|---------|--------|--------|---------|
  | Bruce Woolf   | 83,650 | 120,000 | 203,650 | 80,600 | 25,000 | 105,600 |
  |---------------|--------|---------|---------|--------|--------|---------|
  | Dennis Woolf  | 25,000 | 117,250 | 142,250 | 25,000 |  5,830 |  30,830 |
  |---------------|--------|---------|---------|--------|--------|---------|
  | Marlene Woolf | 39,900 |  46,000 |  85,900 | 33,600 | 25,000 |  58,600 |
  |---------------|--------|---------|---------|--------|--------|---------|
  | Pearl Woolf   | 10,000 | 266,750 | 276,750 | 10,000 |  5,830 |  15,830 |
  +---------------+--------+---------+---------+--------+--------+---------+
            

11. For the fringe benefits tax years ended 31 March 1993 to 31 March 1995 inclusive the vehicles provided by the applicant to BNW, DHW and MAW were used by them for private purposes and when performing their duties for the applicant. The vehicles were used privately and while performing their duties for the applicant in the following proportions:

                +------------+-----------+
                | Business % | Private % |
+---------------+------------+-----------|
| Bruce Woolf   |    90%     |    10%    |
|---------------|------------|-----------|
| Dennis Woolf  |    10%     |    90%    |
|---------------|------------|-----------|
| Marlene Woolf |    30%     |    70%"   |
+---------------+------------+-----------+
      

4. The cars provided to the directors during the Fringe Benefits
Tax years and immediately before and after, and the cost of those cars can
be conveniently set out in tabular form:

+------------------+--------------+---------------+----------+---------+---------+
| Car              | Registration | Driver        | Date     | Cost    | Date     |
|                  | number       |               | acquired |         | sold     |
|------------------+--------------+---------------+----------+---------+----------|
| Nissan EXA       | 7OO 900      | Bruce Woolf   | 29/9/90  | $26,700 | 28/3/94  |
|------------------+--------------+---------------+----------+---------+----------|
| Nissan Patrol    | 8EZ 055      | Marlene Woolf |  6/5/91  | $42,391 |  1/11/94 |
|------------------+--------------+---------------+----------+---------+----------|
| Holden Commodore | 8CH 041      | Dennis Woolf  |  1/7/90  | $22,639 | 21/7/94  |
|------------------+--------------+---------------+----------+---------+----------|
| SAAB             | 8XZ 417      | Bruce Woolf   | 28/3/94  | $47,000 | 20/1/98  |
|------------------+--------------+---------------+----------+---------+----------|
| Toyota Tarago    | 9AE 992      | Marlene Woolf | 25/11/94 | $58,594 |          |
|------------------+--------------+---------------+----------+---------+----------|
| Holden Commodore | 8MX 690      | Dennis Woolf  | 21/7/94  | $31,186 | 11/2/98  |
|------------------+--------------+---------------+----------+---------+----------|
| Lexus GS300      | 1ADA 194     | Bruce Woolf   | 20/1/98  | $94,450 |          |
|------------------+--------------+---------------+----------+---------+----------|
| Holden Commodore | 1ADM 054     | Dennis Woolf  | 11/2/98  | $35,500 |          |
|------------------+--------------+---------------+----------+---------+----------|
      

5. It was agreed in evidence that Dennis Howard Woolf (DHW), though partly retired during 1994 and 1995, was still employed as a consultant to the company and still participated as a director, as did Pearl Woolf (PW). Throughout that period the active Managing Director was Bruce Neville Woolf (BNW). His wife Marlene Ann Woolf (MAW) was employed as Office Manager/Book-Keeper approximately half time and she was also a director. It was also agreed that their total remuneration package was excessive in comparison with ``arm's length'' employee/ directors with similar sized firms and was very excessive if the large superannuation contributions in 1994 were taken into account.

6. There was also evidence from MAW that she and her husband were in the habit of drawing extra payments from a company loan account, to maintain their luxurious lifestyle beyond the level affordable upon their formal salaries and directors' fees. She said they treated the company as if they were its owners despite the fact that it was a corporate entity of which the sole share was owned (at that time) by Maranka Pty Ltd, as trustee for the Piccadilly Trust, the beneficiaries of which included themselves and a wider range of relatives.

7. The relevant legislation is set out in the Fringe Benefits Tax Assessment Act 1986 the relevant provisions of which are s. 136(1) and s. 148(1). Section 136(1) provides the definitions of ``fringe benefit'' and associated terms as follows:

``136 (1) ...

`fringe benefit' , in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

• (a) provided at any time during the year of tax; or
• (b)... [not relevant];

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

• (c) the employer;
• (d)... [not relevant]; or
• (e)... [not relevant];

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

8. It is agreed that the people to whom cars were provided were ``employees'' and that the use of the cars was a benefit provided by their ``employer'', the applicant. What remains in dispute is whether, within the meaning of these sections, the cars were a benefit provided to DHW, BNW and MAW ``in respect of the employment'' by the applicant company.

9. This phrase is further defined in s.136(1) as follows:

```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''

(emphasis added).

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ATC 2023

The words ``in relation directly or indirectly to'' are especially wide. The intended breadth of this phrase is further expanded by s. 148(1):

``148(1) [Meaning of provision of benefit to person] 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;
• (b) whether the employment will occur, is occurring, or has occurred;
• (c) whether or not the benefit is surplus to the needs or wants of the recipient;
• (d)... [not relevant];
• (e)... [not relevant];
• (f) whether or not the benefit is provided or used, or required to be provided or used in connection with that employ- ment;
• (g)... [not relevant];
• (h) whether or not the benefit is provided as a reward for services rendered, or to be rendered, by the employee.''

(Subsections 148(2)-(5) are not relevant in this case.)

10. It is obvious that the words ``in respect of'' import a causal connection between the employment and the provision of the benefit. The benefit must be in some way provided as a consequence of the employment (see, for example, Smith's case:
Smith v FC of T 87 ATC 4883; (1988) 164 CLR 513 per Brennan J at ATC 4887; CLR 520-521 and Toohey J at ATC 4892; CLR 530). In the words of Toohey J in that case:

``There can be no doubt that, in formulating sec. 26(e), the legislature chose words of wide import: `in respect of', `for or in relation to', `directly or indirectly'. It remains true, however, that, notwithstanding the breadth of the language used, there must be a connection between the benefit received and the employment of the taxpayer''

It is only where there is no such connection that the applicant will succeed. The Tribunal respectfully agrees with Senior Member Pascoe in Knowles' case (
J & G Knowles & Associates Pty Ltd v FC of T 98 ATC2205) that the mere existence of a benefit and an employee- employer relationship does not provide that causal connection.

Mr Healey, representing the applicant, submitted that the benefit was provided in respect of their assumed ownership of the applicant and for DHW in respect of his previous ownership of and/or services to the company. He submitted that they were being remunerated far more generously than similar ``arm's length'' employees because of their ownership status and family relationships. He pointed out that the salary levels fully remunerated them without reference to the vehicles, adding on the extremely high superannuation contributions as well, resulted in excessive remuneration. In his submission, the expensive cars being provided for their sole use and frequently replaced, must be in respect of something other than employment - they related to the presumed or quasi-ownership of the business by the Woolfs. He also pointed out that MAW had received a car at an earlier period before she had been employed by the applicant company. He said that the company is extremely profitable and they are now in the process of restructuring, so they can get their money out or expand their personal investment in the company in some way.

12. As pointed out by Mr Corboy for the Respondent there are several flaws in these submissions. Firstly they are not actually the owners of the company, even if they considered themselves, as such. Secondly the phrase ``in respect of employment'' is so wide that it clearly applies to the provision of motor vehicles, in this case. In relation to the submission that Mrs Woolf was provided with a car prior to her commencement as an employee, the Tribunal notes the provisions of s. 148(1)(f) which indicates that the mere fact that the benefit was provided in circumstances where the employment ``will occur'' rather than current or past employment is not sufficient to deny the causal connection.

13. During his submissions in reply Mr Healey raised some new propositions, namely: while the applicant must show that the cars were not provided at all in respect of employment, as interpreted by the Chief Justice in Dixon's case (
FC of T v Dixon (1952) 10 ATD 82 at 83-84; (1952) 86 CLR 540 at 553-554), this was not the same as showing that those provided with the cars were direct owners of the fringe benefit taxpayer. This it had done

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ATC 2024

by showing that (inter alia) Mrs Woolf received a car years before she was employed, and by showing that the remuneration was excessive. The motor vehicles could have been provided in respect of directorship, as suggested by the respondent, or by way of reduction of loan accounts of the motor vehicle recipients or Maranka, as Trustee. He pointed out that although conventional accounting practice would refer to an unpaid distribution as a loan account, it is in fact a vested entitlement in the assets of the Trust. The Woolfs, as individuals, had presently vested entitlements.

14. Mr Healey went on to say that the cars were not appropriate cars for use in the business, being luxury vehicles rather than vehicles similar to those provided to the sales representatives and second in charge. The vehicles could properly have been accounted for against one of the loan accounts or the sub- trust created by unpaid distributions, but not in respect of employment. The intention of Parliament in relation to the fringe benefits tax legislation was to prevent the salary packaging of otherwise commercial salaries by providing non-salary benefits. It was not Parliament's intention to begin to tax what should have been a reduction of a loan account. Knowles' case was distinguishable on the basis that the company there was making a loss and the benefits could therefore not have been in respect of undistributed profits. The pattern of the use of the cars for business purposes was not relevant and in any event was negligible. However wide the definition of ``in respect of employment'' the provision of these motor vehicles was not within its ambit.

15. Mr Corboy responded that according to a letter contained in the T Documents, the loan accounts were in debit at the relevant time, and Mrs Woolf had been unable to clarify this. Her evidence was that there was never any journal entry made to offset the value of the motor vehicles against the loan accounts. There was no evidence to support the submission in relation to a sub-trust of some description created by unpaid distributions. To view the motor vehicles as in some way in anticipation of the distribution of profits would be to reconstruct the reality which was that they were actually assets for which deductions for the expenses of running were made and depreciation claimed.

16. The Tribunal finds that the three directors were actually employed by the applicant during the fringe benefit tax years and that they actually used the vehicles for varying proportions of total usage for the purpose of that employment (see table of usage in the Statement of Agreed Facts). Clearly this falls within the words that the vehicles were provided ``in relation directly or indirectly to that employment''.

17. If there was lingering doubt it is dispelled by reference to s. 148(1) which includes a benefit which ``is also provided in respect of... etc any other matter...'' such as ownership or family relationships. In relation to DHW if the vehicle was provided in respect of employment which has already occurred or as a reward for services rendered it would be caught by para (b) and (h).

18. The Tribunal finds little merit in those of the applicant's submissions for which there is no sufficient factual basis. In particular, the Tribunal rejects the submission that because an employee receives adequate remuneration by way of salary - that is, remuneration which reflects the benefits normally afforded to employees in arm's length employment contracts - then any benefit to them beyond this amount could not be said to be in respect of their employment. In some cases, this may afford evidence which indicates some other reason is the sole reason for the benefit being provided, but in this case it is insufficient to dispel employment as being a causal factor in the provision of the motor vehicles.

Decision

19. In so far as it relates to the fringe benefits tax years ending in 1994 and 1995 (WT1997/93 and WT1997/94), the decision under review is affirmed.

20. In so far as it relates to the fringe benefits tax year ending in 1993 (WT1997/92) it is remitted to the respondent for further consideration as agreed between the parties at the hearing.