Decision impact statement

Experienced Tours Australia Pty Ltd, Elly Liu and Heong Tee Teh v Commissioner of Taxation

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Court Citation(s):
[2006] AATA 517
2006 ATC 2232
(2006) 63 ATR 1147

Venue: Administrative Appeals Tribunal
Venue Reference No: VT2001/810-811, 996-997, 1115-1117
Judge Name: BH Pascoe (Senior Member)
Judgment date: 14 June 2006
Appeals on foot:
No

Impacted Advice

Relevant Rulings/Determinations:

• n/a

Subject References:
Income tax and fringe benefits tax
employee share plan
premiums paid by employer on employer shares credited to account of employee shareholders
whether premiums paid allowable deductions to employer
whether discount on employee shares represented by premiums paid by employer assessable income of employees
whether premiums paid by employer taxable fringe benefits

Appeal on foot:

No. The Commissioner's appeals against the income tax decisions and Experienced Tours Australia Pty Ltd's appeal against the fringe benefits tax decision were discontinued in the Federal Court when the parties settled their disputes prior to the matters being heard.

Brief summary of facts

Experienced Tours Australia Pty Ltd ('ETA') established an employee share plan company. During each of the 1996, 1997 and 1998 income years, two ETA employees, who were also the shareholders and directors of ETA, purchased a number of employee shares for $1 each. On the following day, ETA purchased the same number of employer shares for $5,001 per share representing a nominal value of $1 and a premium of $5,000. The share plan arrangement provided that the value of the premium paid on the purchase of the employer shares was transferred to the employee shares at the time that the employer shares were purchased. The arrangement was structured to avoid both income tax and fringe benefits tax, and the taxpayers' position was that:

•

ETA was entitled to deductions under section 51/section 8-1 for the amounts of premiums paid.

•

The value of the employee shares acquired by the employees for Division 13A purposes at the date of their acquisition was $1 per share notwithstanding that the share premium amount paid by ETA on its acquisition of employer shares on the following day would be allocated to the employee shares.

•

Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) applied to exclude the value of the premiums from fringe benefits tax.

The Commissioner did not accept that the arrangement delivered the supposed tax outcomes and assessed tax on the following bases:

•

Denial of section 51/section 8-1 deductions on the basis that the benefits provided to the employees were disguised distributions of profits paid to or for the benefit of the principals of ETA or otherwise represented non-deductible capital expenditure. Alternatively, Part IVA applied to deny any deductions otherwise allowable.

•

Alternatively, the value of the shares acquired by the employees for Division 13A purposes included the share premium amounts paid by the employer. Alternatively, Part IVA applied to include the share premium amounts in the assessable income of the employees.

•

Alternatively, payment of the share premium amounts or the allocation of the share premium amounts to the employee shares constituted a taxable fringe benefit and the value of the benefit provided included the share premium amounts.

The Tribunal proceedings involved all three bases of assessment.

Issues decided by the tribunal

1. ETA was entitled to deductions under section 51 or section 8-1 in each of the years ended 30 June 1996, 1997 and 1998 for the share premium amounts of $600,000, $300,000 and $300,000 respectively. The Tribunal did not consider the Commissioner's contention that Part IVA applied in the alternative.

2. The value of the employee shares for Division 13A purposes included the amount of the share premium paid by ETA, and section 139B applied to include the discount given to the employees in relation to their employee shares ($5,000 per share) in their assessable income subject to the application of section 23L.

3. The allocation of the premium amounts to the employee shares constituted taxable fringe benefits provided to employees of ETA.

4. Given that the benefit provided to the employees was both a taxable fringe benefit provided by the employer and income derived by the employees, section 23L applied to exempt the income derived by the employees from income tax.

Tax Office view of Decision

The Tribunal dealt first with the fringe benefits tax dispute and found that 'Liu and Teh were employees of ETA for the purpose of the FBT Act. ... I am satisfied ... that [the] benefits were provided by ETA as their employer and were provided in respect of the employment of them.' The Tribunal's acceptance that the employer/employee relationship (and not the company/shareholder relationship) was the occasion for the provision of the benefits was critical to the outcome of the cases.

FBT.

Aside from the application of paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1), the Tribunal's identification of the relevant taxable fringe benefits is consistent with the ATO view and Walstern.

Section 51 and section 8-1.

The Tribunal's acceptance of the employer/employee relationship seems to be the basis for the section 51/section 8-1 outcome.

The problem with the section 51/section 8-1 decision is that although concluding that 'the premiums contributed a benefit to Liu and Teh in their capacity as employees rather than as shareholders', the Tribunal failed to consider: (i) whether the relevant payments were non-deductible capital payments; and (ii) whether Part IVA applied.

In relation to (i), much of what the Tribunal said in paragraph 13 of its decision is consistent with and arguably requires a capital finding.

Division 13A of the ITAA36.

The Tribunal found that the share premium amounts were subject to Division 13A, but also found that as fringe benefits tax applied, section 23L operated to exclude the Division 13A amounts from the employees' assessable income. If the section 23L aspect is ignored the Division 13A outcome seems correct given the Tribunal's finding (paragraph 17) that 'The incorporation and operation of ETA ESP was clearly an employee share scheme and the acquisition of employee shares was directly related to employment.'

Whether relief from double taxation should have been given to the employee assessments under section 23L (as occurred here) or the fringe benefits tax assessments under paragraph (ha) of subsection 136(1) is unclear, and the Tribunal said nothing at all on this question apart from applying section 23L. It is possible that section 23L is the appropriate provision provided that the particular fringe benefits are not attributable to the acquisition of a share as was arguably the case here. However, the Commissioner has long taken the view that where benefits provided to employees are potentially subject to both income tax and fringe benefits tax, Division 13A properly assesses the whole amount of the value provided by the employer (as the Tribunal has found), that the CGT cost base of the shares acquired is the value assessed under Division 13A, and that fringe benefits tax doesn't apply because paragraph (ha) of the definition of fringe benefit in subsection 136(1) excludes benefits 'constituted by the acquisition' of Division 13A shares from fringe benefits tax assessment.

The Tribunal's conclusion that that Part IVA would not apply where Division 13A does apply is obviously correct.

Administrative Treatment Implications

This may be an area where further law clarification is required through an appropriate vehicle, although there are few, if any, outstanding cases involving similar issues. There is nothing in the decision that affects the Commissioner's ability to pursue appropriate section 51 and Division 13A arguments in appropriate cases.

The Tribunal dealt with an employee share plan structure designed to ensure that the value for Division 13A purposes of the employee shares acquired by employees did not reflect the real benefit that the employees were obtaining. The particular share plan structure appears not to have been used for a number of years, and the Tribunal has accepted that the structure does not deliver its intended results.

Whether deductions are properly allowable under section 51 or section 8-1, and whether Part IVA applies if deductions are allowable, may depend on the facts of a particular case.

Should any disputes relating to other employee share plan arrangements of the kind dealt with in these cases arise, the Commissioner's view is:

1. The contribution made by the employer is not an income tax deduction of the employer; alternatively Part IVA applies to disallow any allowable deduction.

2. Alternatively, the amount of the share premium paid by the employer is assessable income of the participating employees pursuant to Division 13A. Section 6-5 or paragraph 26(e) may also apply depending on the facts. Alternatively, Part IVA may apply to include the amount of the premium in the assessable income of the employees.

3. Alternatively, the benefit provided by the employer by way of the share premium amount is a taxable fringe benefit.

Where deductions are allowable under section 51 or section 8-1, and Part IVA does not apply to deny the deductions, the Commissioner will generally accept either a Division 13A or a fringe benefits tax outcome as requested by the participating taxpayers.

The Commissioner does not consider that this decision impacts upon Class Rulings in relation to any genuine employee share plans.

Implications on Law Administration Practice Statements

None

Legislative References:
Income Tax Assessment Act 1936 (ITAA36)
Div 13A
23L
26
51
139B
Part IVA
177D(b)

Income Tax Assessment Act 1997 (ITAA97)
6-5
8-1

Fringe Benefits Tax Assessment Act 1986 (FBTAA)
50(c)
136(1)

Case References:
Walstern Pty Ltd v FCT
2003 ATC 5076
54 ATR 423

Essenbourne Pty Ltd v FCT
2002 ATC 5201
51 ATR 629