KUMAGAI GUMI CO LTD v FC of T

Judges:
Hill J

Court:
Federal Court

Judgment date: 19 March 1999

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Hill J

The Applicant, Kumagai Gumi Co Ltd (``Kumagai''), appeals to the Court from a decision of the Administrative Appeals Tribunal, constituted by a Deputy President, dismissing its application to review objection decisions relating to assessments of fringe benefits tax issued to it in respect of the years ended 31 March 1992 and 1993 [reported at Case 13/98,
98 ATC 190]. The appeal, in the original jurisdiction of the Court, is an appeal on, that is to say limited to, a question of law: s 44(1) of the Administrative Appeals Tribunal Act 1975.

2. Kumagai was, at all relevant times, a public company incorporated in Japan. It carried on a construction business in that and other countries, including Australia. It employed a number of Japanese nationals under service contracts which were entered into in Japan. These contracts permitted Kumagai to order an employee to be transferred or sent on secondment, an order which the contract provided could not be refused. Where an employee worked overseas the contract provided:

``1. The company will bear the total cost of local taxes and public imposts.

2. In the case that any refunds arise from the company bearing the cost of the taxes and public imposts described in the item above, such monies will be returned to the company.

3. When the salary is paid, an amount equivalent to the income tax and resident's tax in the home country will be deducted from the salary.''

1. Pursuant to these contracts various Japanese executives, presumably formerly residents of Japan, came to Australia to work for the Australian branch of Kumagai in executive positions. They were paid amounts of salaries and wages in respect of which tax instalments were deducted and remitted to the Commissioner. For whatever reason the tax instalments deducted were inadequate and in the result these employees were, in due course assessed to additional income tax in Australia. In the fringe benefit tax year ended 31 March 1992 (as stated by the Tribunal, although some of the evidence suggests they returned in 1991) five of these executives returned to Japan. In the next fringe benefit tax year seventeen (or perhaps 14, the number is not presently material) returned to that country. After they had returned they were assessed to Australian income tax and these assessments were paid by Kumagai direct to the Commissioner from an Australian bank account pursuant to the contractual arrangements set out above. In the 1992 year the amounts paid by Kumagai on this account totalled $291,476.50. In the following year the total was, it seems, $515,244.39. (There is a discrepancy noted by the learned Deputy President in that the Commissioner seems to have proceeded on the basis that in the 1993 year the income tax in fact paid by Kumagai was $537,834. However, nothing turned on this discrepancy, either before the Deputy President, or before me.) The respondent Commissioner assessed Kumagai for fringe benefits tax on the amount of these payments.

Kumagai objected against each assessment. The objections were disallowed and Kumagai applied to the Tribunal to review these objection decisions.

The statutory background

3. Fringe benefits tax was introduced into Australia in 1986. It was designed to overcome perceived inadequacies in the income tax law (particularly s 26(e) of the Income Tax Assessment Act 1936 (``the Income Tax Act'') when applied to non-cash benefits provided by an employer or associate to an employee in respect of the employment. Despite what may appear to be a perverse approach of taxing the person who provided the benefit, rather than the employee who received it, and at the top marginal rate, rather than the rate applicable to the recipient, it can be seen in substance to be a final withholding tax imposed upon the provider of the benefits, albeit at the top marginal rate.

4. Liability to fringe benefits tax arises under s 66(1) of the Fringe Benefits Tax Assessment Act 1986 (``the Act''). That sub-section provides:

``Subject to this Act, tax imposed in respect of the fringe benefits taxable amount of an

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employer of a year of tax is payable by the employer.''

5. The imposition of the tax is to be found in virtually identical terms in s 5 of the Fringe Benefits Tax Act 1986.

6. The definitional section of the Act, s 136 defines ``employer'', subject to a contrary intention, and to certain immaterial exceptions, to mean either ``a current employer'', ``a future employer'' or ``a former employer''. The former expression is then defined to mean:

``an employer within the meaning of Division 2 of Part VI of the Income Tax Assessment Act 1936.''

7. A ``former employer'' is then defined in the same section to mean ``a person who has been a current employer''.

8. It is unnecessary to set out in detail the provisions of Division 2 of Part VI of the Income Tax Act to which reference has been made. It suffices for present purposes to note that an employer is relevantly a person who pays ``salary or wages'' as defined in the Income Tax Act to, inter alia, an employee as such. However payments which are exempt income are excluded from the definition under par (p).

9. The expression ``fringe benefits taxable amount'' is defined in s 136(1) relevantly to mean:

``the sum of the taxable values, in relation to the current year of tax, of all the fringe benefits... in relation to the employer in relation to the current year of tax...''

10. A ``fringe benefit'' is defined also in s 136(1) of the Act. Relevantly the definition reads:

``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) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

• (c) the employer;
• (d) an associate of the employer; or...
• (e)...

in respect of the employment of the employee, but does not include:

• (f) a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936;
• ...''

The word ``benefit'' is broadly defined to include, inter alia, any benefit provided under an arrangement for, or in relation to the performance of work. It is not in issue that the payments by Kumagai to the Commissioner on account of income tax assessed to their former expatriate employees constituted a benefit in the defined sense.

The taxable value attributable to a fringe benefit depends upon the way the fringe benefit is categorised in the legislation. There are, for example, different rules for the calculation of the taxable value of each category of fringe benefits with which the legislation deals. So, for example, there are: ``car fringe benefits''; ``loan fringe benefits''; ``expense payment fringe benefits''; ``housing fringe benefits''; ``living-away-from-home fringe benefits'' etc. Relevant to the present argument (for the assessment appears to have been made on the basis that the payment of the executives' Australian income tax liability constituted expense payment fringe benefits) is the definition of ``expense payment fringe benefit'', in s 136(1) which refers back to s 20. Section 20 is in the following terms:

``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 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) reimburses another person (in this section also referred to as the ` recipient '), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

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

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The valuation rules applicable to expense payment fringe benefits are to be found in Subdivision B of Division 5 of Part III of the Act. It is unnecessary here to detail them.

If a benefit is not one specified in Subdivision A of Divisions 2 to 11 of the Act it becomes a residual benefit: s 45. While the category of residual benefits is no doubt a catch all category, it itself is subdivided into different kinds of residual fringe benefits. One of the subdivided categories of residual fringe benefits is ``external non-period residual fringe benefits''. To such benefits the provisions of s 50 of the Act apply. That section provides:

``Subject to this Part, the taxable value of an external non-period residual fringe benefit in relation to an employer in relation to a year of tax is:

• (a) where the provider was the employer or an associate of the employer and the benefit was purchased by the provider under an arm's length transaction - the amount paid or payable by the provider for the benefit;
• (b) where the provider was not the employer or an associate of the employer and the employer, or an associate of the employer, incurred expenditure to the provider under an arm's length transaction in respect of the provision of the benefit - the amount of that expenditure; or
• (c) in any other case - the notional value of the benefit at the comparison time;

reduced by the amount of the recipients contribution.''

Notional value, as defined in s 136(1), is the amount the recipient could reasonably be expected to have been required to pay to obtain the benefit from the provider under an arm's length transaction. ``Comparison time'' is the time the benefit is provided.

2 Finally it may be noted, although no submission is made on the matter, that the obligation of a Japanese employer to pay fringe benefits tax may be effected by the provisions of the Australia-Japan Double Tax Treaty. That treaty, which is part of Australian municipal law by virtue of the provisions of the Income Tax (International Agreements) Act 1953 (``the International Act''), operates, inter alia, to assign the right to levy taxes as between Japan and Australia. The Treaty is expressed to apply to Commonwealth income taxes in Australia or ``any identical or substantially similar taxes which may be subsequently imposed by the Commonwealth... in addition to'' income tax. While it is clear that since 1995 the definition of ``Australian tax'' in s 3(1) of the International Act and the incorporation of the Act into the International Act (see s 4AA) that the treaty is concerned not only with income tax, but also with fringe benefits tax, that was not the case in the years of tax with which the present appeal is concerned. Between 1983 and 1995 the International Act defined ``Australian tax'' to mean:

``income tax or income tax and social services contribution imposed as such by any Act.''

The Kumagai submissions before the Tribunal

As noted in the reasons of the learned Deputy President, counsel for Kumagai made a number of submissions to it. Relevant to the matters submitted on appeal these were:

• 1. Kumagai was not an employer, in that it was neither a current employer, a future employer or a former employer. This was because the payment of the employee's taxation liabilities could not fall within the definition of salaries and wages as they were exempt income pursuant to s 23(r) of the Income Tax Act; the employees being in the year of payment not residents of Australia and the payments not having a source within Australia.
• 2. Alternatively it was said that the payments made by Kumagai did not amount to a fringe benefit, as defined having regard to the provisions of par (f) of the definition of ``fringe benefits'' in s 136(1), for the same reason, namely that they constituted exempt income of the employees.
• 3. Then it was submitted that the payments did not constitute ``expense payment fringe benefits'' as defined by s 20(a) because no expenditure had been incurred by the employee who had been reimbursed.
• 4. Finally it was argued that if contrary to the submissions noted above the payments did constitute a fringe benefit, they fell outside the valuation formula applicable to external non-period residual fringe benefits contained in s 50 of the Act.

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The Tribunal's decision

The Tribunal confirmed the Commissioner's assessments.

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 [at 199]:

``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 essentially Australian characteristics of the whole series of transactions.''

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.

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.

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.

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

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 non-residents 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.

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

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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

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.

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.

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.

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 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.

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.

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.

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

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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)

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
Commr of IR 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.

11. 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 par (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.

12. 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 of Australia 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...''

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.

But while the learned Deputy President erred in law, that error was immaterial. The result would be the same under s 50.

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.

Extraterritoriality

There can be no doubt that, subject to the Constitution itself, the Commonwealth Parliament is sovereign. It is not a subordinate legislature as the States which united in the Commonwealth were, and in one sense (that being subordination to the exclusive law making power of the Commonwealth in the Constitution), still are. Subject to a law being one in respect of which legislative power is conferred upon the Commonwealth Parliament under the Constitution, that parliament may

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enact, should it wish, legislation which is extraterritorial in operation. An example in the taxation area can be found in
Trustees Executors and Agency Co Ltd & Anor v FC of T (1933) 2 ATD 330; (1933) 49 CLR 220 which, in 1933, even before the Statute of Westminster came to apply to the Commonwealth, expressly stated the power the legislate extraterritorially. Evatt J noted in that case at ATD 334; CLR 230 that it was ``curious'' that questions still arose as to the competence of the Commonwealth Parliament in relation to ``extraterritorial matters''.

It is not suggested here, nor could it be, that the Commonwealth Parliament lacks power to legislate to impose a tax in respect of fringe benefits provided by a nonresident to a nonresident, albeit relating to employment in the past when salary and wages were paid in a form which would then have been taxable income in Australia. There could be no suggestion that such a law would not be a law for the peace, order and good government of Australia with respect to taxation. What is suggested here is another matter. It is, that as a matter of interpretation, laws of a sovereign legislature should be interpreted, where possible, so as not to give them an extraterritorial operation. More precisely, it may be said that legislation, be it of the United Kingdom Parliament, the Commonwealth Parliament or a State, where expressed in general words, will be construed so as to confine those general words to operate in accordance with the generally accepted principles of nations, and not so as to operate extraterritorially: Barcelo v Electrolytic Zinc Co of Australasia Ltd (1932) 48 CLR 391 and cf Pearce and Geddes: Statutory Interpretation in Australia (4th ed at 130-132).

That there is such a rule of interpretation may for present purposes be accepted. The application of it must however, depend upon the context of the legislation, the legislative purpose and the construction of the statute as a whole. It is said that the principle requires s 163 of the Act to be read down so that it is taken not to apply to foreigners and foreign matters outside Australia and external territories to which it extends. That section relevantly provides that the Act is to extend, subject to a contrary intention, to acts matters and things outside Australia and whether or not in a foreign country. It is not clear to me that s 163 should be read down in accordance with some principle of interpretation. Section 163 is not expressed in general language in the sense that those words are used above in describing the principle. But the submission would do violence, not merely to the context of the legislation, but the legislative scheme itself.

Once a person pays salary and wages which are taxable in Australia to an employee, it would be strange if, the mere fact that the same person was a nonresident and provided fringe benefits after the employment terminated, (those benefits being provided outside Australia), that a liability to fringe benefits would be removed, notwithstanding that the tax would operate if the person were a resident of Australia. Likewise the fact that the employee at the time the benefit is given is not a resident of Australia would seem irrelevant to the imposition of fringe benefits tax, at least in respect of a relevant Australian employment - the fact here. It may be, I do not need to decide it, that a question might arise, where a fringe benefit was provided outside Australia by a nonresident who had been a former employer but in circumstances where that fringe benefit had no connection to an Australian employment, that the words ``in respect of the employment of the employee'' in the definition of ``fringe benefit'' in s 136(1) might be construed as meaning the Australian employment of the employer. But whether or not that is a permissible interpretation, it is not the case here.

Residence and source

Having regard to the above discussion I need not consider in any detail the matters of residence and source which are discussed by the learned Deputy President. However, having regard to the submissions which were made some comments may be useful.

First, it was submitted on behalf of the Commissioner that, because residence and source were ultimately matters of fact this Court had no jurisdiction to consider them. The submission ignores the decision of a full Court of this Court dealing with source:
Thorpe Nominees Pty Ltd v FC of T 88 ATC 4886. In that case, Lockhart J, with whose reasoning on this point Burchett J agreed (Sheppard J dissented, although not in the result), pointed out that questions of source can only be determined by applying the relevant legal tests, so that the issue whether, when the primary

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facts are found or, as here, are not in dispute, a particular section applies, involves a question of law:
Lombardo v FC of T 79 ATC 4542 at 4543-4546 per Bowen CJ, at 4547 per Franki J and at 4549-4550 per Toohey J and see, generally, the discussion on the dichotomy between fact and law to be found in Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 115 ALR 1 at 9-10, particularly the fifth proposition.

Second, there would seem to be no error in principle involved in the Tribunal's finding that the source of the reimbursement payments was in Australia. It is true that these payments were made under contracts of employment initially entered into in Australia and that most, at least of the recipients of the reimbursement benefit were resident outside Australia. These are matters which must be weighed in the scale with other factors in determining what is generally referred to in the resolution of such problems as involving a ``practical, hard matter of fact'': Nathan v FC of T (1918) 25 CLR 183 at 190. The question is one which falls to be determined ``in accordance with the practical realities of the situation without giving undue weight to matters of form'':
Esquire Nominees Ltd v FC of T 72 ATC 4076 at 4087; (1971-1973) 129 CLR 177 at 192, per Gibbs J. Although the judgment of Gibbs J was reversed on appeal in that case [reported at 73 ATC 4113], the analysis of source was expressly approved: see per Barwick CJ at 73 ATC 4118; CLR 213 and per Menzies J at 73 ATC 4123; CLR 221.

Against the circumstances which occurred outside Australia two in particular stand out. First, the benefit did not arise out of any Japanese services being performed. Indeed, it would seem that one of the recipients of the benefit had left the service before the reimbursement took place. The benefit arose out of the Australian employment. Second, the benefit consisted of payment of an Australian liability of the recipient from an Australian bank account by Kumagai. Although a different conclusion was reached in Case X78,
90 ATC 571 in a slightly different context, that case, if correctly decided may be distinguished on the basis not only that the tax equalisation scheme there on foot differed from the satisfaction of final liability scheme apparently involved here, but also on the basis that the Australian employment was with a subsidiary of the company which had entered into the employment agreement and the payment was pursuant to an inter-company arrangement between the parent contracting party and the subsidiary.

The matter of residency causes me some concern. I put to one side errors of fact said to be made by the learned Deputy President. I have not for reasons which will appear found it necessary to determine whether there were in truth such errors. My concern lies in another direction. Nothing in the material before the Tribunal, or put before me, suggests that the parties saw residence as a material matter. The statements of facts, issues and contentions, filed by the Commissioner as part of the pre-trial procedures which the Tribunal adopted would hardly have suggested to me that the residence of the recipient executives was contested. It is true that the Commissioner states in that document that he has no direct knowledge of the facts and has dealt with the matter throughout on the basis of information supplied, but that formulation of words does not suggest any real issue arising on the facts. Indeed it is apparent from reading the Tribunal file that the Commissioner acted throughout, correctly as I have found, on the basis that the executives were residents of Japan at the time the tax liabilities were paid, but that this was an irrelevant matter.

13. It is true that during the course of the hearing and in cross examination of a Japanese witness called by Kumagai, senior counsel for the Commissioner raised a question concerning Mr Mitani, an executive who had, before the payment was made, left the services of Kumagai and established a company in Australia. The witness was unable to say whether Mr Mitani presently lived in Australia. This material would properly found a submission that in his case he either was a resident of Australia, or, that if relevant, Kumagai had failed to satisfy the onus of showing that he was not a resident of Australia.

14. As far as appears, and as I understand what was said by counsel from the bar table in the course of proceedings before me, there was no submission that the Tribunal should find that Kumagai had failed to satisfy the onus of showing residency of the remaining executives. If it be the case that the matter was not in issue between the parties (and that seems clear on the materials in the appeal book, although that

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material may have been incomplete) and if nothing emerged in evidence or submission on the point, there would be a problem of denial of procedural fairness for the Tribunal to find that the taxpayer had not satisfied the onus of proof: cf
Fletcher & Ors v FC of T 88 ATC 4834 at 4846-4848; (1988) 19 FCR 442 at 454-456. If the matter had been material it would have been necessary to consider it further and if procedural fairness had been denied to remit the matter to the Tribunal for reconsideration.

Other suggested errors of fact or law

In the course of submissions counsel for Kumagai pointed to various matters said to involve errors of fact, or perhaps law, committed by the Tribunal. For example, the Tribunal in stating the facts found that 17 employees had returned in one year of income to Japan, whereas it is said the evidence was that 14 employees did so in that year and the other three in earlier years. The Tribunal stated, also, for example, that Mr Mitani (identified by the Tribunal as employee 12, though he was not) had received the benefit of his tax being paid in the 1993 year, when in fact that was not the case. There is also a reference in the Tribunal's reasons to s 221A(2) when this should have been 221A(1).

No doubt, if the Tribunal finds facts for which there is no evidence its decision will be subject to error. A wrong statutory reference is likely to be a mere mistyping. But even if the errors alleged are made out, a matter which I have not found it necessary to explore, it is clear that the errors would not affect the outcome. Where the Tribunal has made an error of law, but the error is immaterial, its decision will not be set aside for that reason.

It follows in my view that the application must be dismissed and that Kumagai must pay the Commissioner's costs of it.

THE COURT ORDERS THAT:

The Application be dismissed.

The Applicant pay the Respondent's costs.