PE Hack DP

PM McDermott SM
RG Kenny M

Administrative Appeals Tribunal


Decision date: 17 November 2006

PE Hack SC, PM McDermott RFD, RG Kenny


1. In each of its income tax returns for the 1997, 1998 and 1999 income years the applicant, then known as Mika Engineering Holdings Pty Ltd, claimed deductions in the order of $200,000 said to represent contributions made by it to a trust fund set up, it is said, for the benefit of its employees.

2. In April 2002 the respondent, the Commissioner of Taxation, issued notices of amended assessments for each of the three years disallowing the claimed deductions and imposing penalties of 40% upon the applicant. In addition, but in the alternative, the

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Commissioner made amended assessments of fringe benefits tax for the 1998, 1999 and 2000 fringe benefits tax years on the footing that the contributions said to have been made amounted to fringe benefits.

3. The applicant objected to these amended assessments but the objections were disallowed. The applicant seeks a review of the respondent's objection decisions.

Factual background

4. There appears to be no great dispute about the underlying facts and what follows seems to be common ground.

5. The applicant is an engineering company based in Gladstone. It was formed very many years ago and by 1997 it employed approximately 80 people. Its directors and members at all material times were (and remain) Mr John Beale and Mrs Halina Beale. Some idea may be gained of the size of the applicant by noting that in the year ended 30 June 1997 it had sales of $6.88m. and made a gross profit of $1.89m.

6. Mr Beale was employed by the applicant as its General Manager. Mrs Beale was also employed by the applicant.

7. In early 1997 Mr Beale became aware, through the applicant's accountants, of an employee welfare fund arrangement promoted by Cleary Hoare Corporate Pty Ltd. Mr Beale said of this arrangement that he understood that the fund would be used by the applicant to pay benefits to its employees. He also said that he:

"... understood that the income generated by the fund would be available for the benefit of key personnel if and when the need arose, while the capital of the fund would be available to benefit me, my wife and other family members employed by the applicant, once the applicant had ceased trading."

8. Having been provided with the "employee welfare fund guidelines" Mr and Mrs Beale, in their capacity as directors of the applicant, determined to establish an employee welfare fund "for the benefit of the applicant's employees and their dependants".

9. Xenabead Pty Ltd was incorporated on 23 June 1997. Mr and Mrs Beale became its directors and members on 26 June 1997 and remain so. The applicant expended $935 in acquiring Xenabead.

10. The Mika Engineering Employee Welfare Fund ( the Fund ) was established by deed dated 27 June 1997. Xenabead was appointed to be the trustee of the Fund. By virtue of clause 6.3 of the trust deed the trustee had an absolute discretion to determine whether any benefits would be paid to any beneficiary and, if so, the amount and nature of the benefits. Benefits were defined as meaning the reimbursement of medical, pharmaceutical, chiropractic, physiotherapy, dental, optical, funeral or education expenses and included the provision of group medical and life insurance or individual life insurance cover, the payment of a gratuity in the event that a Member was temporarily unable to perform normal duties of employment and payment to a Member (or dependant) in the event of termination of employment with the applicant because of redundancy.

11. By virtue of clause 7.1 the trustee could pay benefits from the assets of the Fund:

"... to or for the benefit of or in respect of Members, deceased Members and Dependants of Members and deceased Members ..."

The term "Member" is defined as meaning an Employee who has become a Member of the Fund under clause 4.1 and who had not ceased to be a Member under clause 4.2.

12. Clause 4.1 provided;

"All Employees are Members of the Fund unless a particular Employee or a class of Employees is, by notice from the Employer to the Trustee, excluded from Membership, whether generally or for a particular period or for a particular purpose."

In turn, "Employee" was defined as meaning:

"... a person who is in continuous or part time employment or in apprenticeship with the Employer. A director of the Employer shall be deemed to be an Employee. In the event of doubt as to whether a person is an Employee, the decision of the Trustee shall be final."

13. The Employer was the applicant.

14. By virtue of clause 7.7 no Member was entitled to any benefit from the Fund unless that

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Member had been an Employee of the applicant for more than one year from the date of the deed. This restriction was capable of being removed but there is no evidence that it was.

15. Thus, as we read the deed, all employees (including directors) of the applicant as at 27 June 1997 became Members of the Fund on that date although none could be considered for benefits until 27 June 1998 and then their rights were limited to compelling the trustee to consider whether or not to make a distribution in their favour and ensuring the proper administration of the trust.[1] See Parkinson P and Wright D, ‘Equity and Property’ in Parkinson P (ed) The Principles of Equity , Law Book Co, 2003 at p 60.

16. On 28 June 1997 Mr and Mrs Beale, as directors of the applicant, resolved to make a contribution of $200,000 to the Fund. In circumstances that were not explained, that sum was paid by the applicant to the Fund, and deposited to the Fund's bank account, on the preceding day, 27 June 1997, although it is not suggested that anything turns upon that curiosity.

17. Subsequently, but in the year ended 30 June 1997, the applicant paid a fee of $10,000 to Cleary Hoare Corporate Pty Ltd and the further sum of $935 to set up corporate structure.

18. In November 1997 Xenabead entered into a contract to acquire real property[2] Xenabead had express power as trustee to deal with real estate. comprising land and a commercial building at 33 Goondoon Street Gladstone. The contract price was $260,000. The contract was completed on 12 December 1997. On the same day the applicant resolved to make a contribution to the Fund of $100,000. Without that contribution Xenabead would not have been able to complete the purchase.

19. In its income tax return for the 1997 income year the applicant claimed deductions totalling $210,935 representing the contribution to the Fund of $200,000, the $10,000consultancy fee paid to Cleary Hoare Corporate Pty Ltd and $935 to establish Xenabead's corporate structure. Its taxable income after these deductions was $330,844.

20. Having acquired the commercial building Xenabead then set about refurbishing the premises. That appears to have taken place in the first half of 1998. On or about 30 June 1998 the applicant resolved to contribute an amount of $100,000 to the Fund. That contribution was immediately repaid to the applicant to reimburse it for expenditure occurred in refurbishing the commercial building for Xenabead.

21. At some time during the year ended 30 June 1998 Xenabead invested $10,920 in acquiring shares in listed corporations.

22. At some stage in about July 1998 the applicant's accountants prepared a document described as "investment and employee benefits strategy". The document purports to be a document of the Fund and it has been executed by Mr and Mrs Beale in their capacity as directors of Xenabead although Mr Beale says that he did not give instructions for its preparation.

23. It has a number of curious features including the fact that it purports to record the matters that the trustee considered when determining the initial contribution. Given that it was prepared by the applicant's accountants without instructions from Mr Beale and that it was not adopted by Xenabead we would not propose to attribute to Xenabead any of the sentiments expressed in it. It appears with respect, to be puffery prepared by the accountants to create an impression.

24. It is material to note at this juncture that the vast majority of the applicant's employees were never told (and presumably never found out) that they were potential beneficiaries of the fund. There were, apparently, only 7 employees who ever became aware of the existence of the fund. They were:

  • • Mr Beale,
  • • Mrs Beale,
  • • Mr Gary Molloy, chief estimator and workshop manager,
  • • Ms Kara Beale-Murphy, daughter of Mr and Mrs Beale and receptionist/telephonist,
  • • Ms Wendy Adams, receptionist/telephonist,
  • • Mr Dale Murphy, son-in-law of Mr and Mrs Beale and workshop foreman, and,
  • • Mr Clive Kiernan, office manager.

Each of these "key employees" submitted a written application (prepared in blank by the applicant's accountants) stating that they wished to be considered by the trustee as an eligible employee. It is not at all clear to us what purpose these applications served and in

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some respects the documents were not completed.

25. On 22 February 1999 the applicant made a further contribution of $200,000 to the Fund. On that day Xenabead paid $210,000 to the applicant to reimburse further construction costs carried out on its behalf. In about February 1999 the applicant lodged its income tax return for the 1998 year claiming as a deduction an amount of $200,230 comprising the contributions to the Fund and some incidental expenses.

26. No subsequent contributions were made by the applicant to the Fund.

27. In its tax return for the 1999 income year the applicant claimed a deduction for the contribution of $200,000 leaving it with a taxable income of $175,626. During the 1999 and 2000 income years further amounts of $7,560 and $25,199 respectively were invested by Xenabead in shares in quoted corporations.

28. After the renovation of the commercial property it was let out. The Fund derived no income in the 1997 year, it suffered a loss of $2,067.00 in the 1998 year and thereafter has made substantial profits in each year following.

29. In December 2000 the applicant lost a major contract that was employing the bulk of its employees on a full time basis. According to Mr Beale from that point on the applicant's business was no longer viable and it determined to cease trading. Its premises, owned by an associated company, were let out and all of its employees were made redundant between December 2000 and November/December 2001.

30. In each of the years up to and including the 2003 year of income Xenabead resolved to accumulate the net income of the trust and made no distributions to beneficiaries. In each of the 2004, 2005 and 2006 years Xenabead distributed an amount of $25,000 to Mrs Beale with the balance to be accumulated. Thus Mrs Beale was the only employee of the applicant who has ever benefited from the fund.

31. The submissions of Mr Robertson, who appeared with Mr Matthews for the applicant, advanced the proposition that the distributions to Mrs Beale were justified on the basis that Mr and Mrs Beale had been made redundant no differently from any other employee. There was not, at that stage, any evidence of that and, over the objections of Mr Davies QC who led Ms Brennan for the respondent, we permitted Mr Beale to be recalled to give further evidence which was to the effect that his employment with the applicant ceased in July 2005 and that of Mrs Beale had ceased some 6 to 12 months prior to that. We should say that we do not regard that evidence as making good the submission advanced by Mr Robertson especially when the minutes of Xenabead do not draw that distinction.

32. By virtue of s 166A of Income Tax Assessment Act 1936 ( ITAA 1936 ) deemed assessments to income tax issued to the applicant in respect of each income year as follows:

  • • 1997 - 9 March 1998,
  • • 1998 - 5 March 1999,
  • • 1999 - 13 January 2000.

33. The respondent undertook an investigation into arrangements of this nature and first corresponded with the applicant in February 2000. That investigation led to the issue of determinations pursuant to s 177F(1)(b) of ITAA 1936 on 22 March 2002 disallowing the deductions claimed by the applicant in the 1997, 1998 and 1999 income years.

34. On 9 April 2002, 12 April 2002 and 19 April 2002 notices of amended assessments in respect of the 1997, 1998 and 1999 income years were issued increasing the taxable income of the applicant by the amounts disallowed as deductions and imposing on the applicant additional tax for understatement pursuant to s 226 of ITAA 1936 at the rate of 50 per cent, reduced to 40 per cent pursuant to s 226D of ITAA 1936.

35. Additionally, on 21 May 2002 the respondent issued notices of amended fringe benefits tax assessments, and imposed a penalty at the rate of 40 per cent, increasing the fringe benefit tax amount by $200,000 in each of the three fringe benefit tax years ended 31 March 1998, 31 March 1999 and 31 March 2000.

36. On 10 May 2002 the applicant objected to the amended income tax assessments and 4 July 2002 it objected to the amended fringe benefit tax assessments.

37. By letters dated 18 November 2004 the respondent disallowed both the income tax

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objections and the fringe benefit tax objections. These proceedings were commenced on 20 December 2004 when applications were lodged in the Tribunal seeking a review of the respondent's income tax objection decisions and fringe benefit tax objection decisions.

The issues

38. The issues that fall to be determined are these:

Income Tax

  • (a) is the amended assessment for the year ended 30 June 1997 authorised by s 170(2) of ITAA 1936 Act;
  • (b) is the applicant entitled to a deduction under the second limb of s 51(1) of ITAA 1936 Act (in respect of the 1997 income year) and s 8-1(1)(b) of the Income Tax Assessment Act 1997 (Cth) ( ITAA 1997 ) (in respect of the 1998 and 1999 income years) for the contributions made to the Fund;
  • (c) if the applicant is otherwise entitled to deductions in respect of the contributions are the contributions capital;
  • (d) does Part IVA of the ITAA 1936 operate so as to deny the deductions;
  • (e) were penalties correctly imposed under s 226 and s 226D of ITAA 1936 at the rate of 40% of the tax shortfall
  • (f) should any remaining penalties be remitted under s 227(3) of ITAA 1936.

Fringe Benefits Tax

  • (a) do the contributions made by the applicant to the Fund constitute a "fringe benefit" as defined in s 136(1) of the Fringe Benefits Tax Assessment Act 1986 (Cth.) ( the FBT Act );
  • (b) if the answer to (a) is "no", does s 67 of the FBT Act allow the Commissioner to impose FBT anyway.
  • (c) if FBT is payable, should penalties be imposed under the FBT Act.

The 1997 amended assessment

39. The first issue goes by concession. The respondent accepts that if we hold that the amount claimed as deductions in this year are not deductible then the objection decision must be set aside and the objection decision allowed in full. That is so because s 166A of ITAA 1936 deems the 1997 assessment to have been made on the date that the return was furnished viz. 9 March 1998. At the time when the amended 1997 assessment was made s 170(2)(b) of ITAA 1936 had the effect that, absent fraud or evasion, the respondent could not amend an assessment more than 4 years after the day on which the assessment was taken to have been made.

40. Here the amendment to the 1997 assessment was made on 9 April 2002, outside that period. The respondent does not allege fraud or evasion and as we are of the view that the amount claimed were not allowable deductions under s 51(1) of ITAA 1936, Part IVA of that Act cannot apply.[3] See Vincent v. Commissioner of Taxation 2002 ATC 4742 ; (2002) 124 FCR 350 , 373 at par. [95].

41. It follows that the applicant must succeed in relation to the 1997 year as the respondent was not authorised to amend the original 1997 assessment.


42. Section 51(1) of ITAA 1936 and s 8-1 of ITAA 1997 are not materially different and it will suffice for present purposes to set out the relevant terms of s 8-1. It provides:

  • (1) You can deduct from your assessable income any loss or outgoing to the extent that:
    • (a) it is incurred in gaining or producing assessable income; or
    • (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

43. Here the applicant eschewed reliance upon the first limb of s 8-1. It was, Mr Robertson submitted, a case where only the second limb applied. And, he submitted, the test for deductibility under the second limb of s 8-1 was to be found in this passage from the judgement of Deane and Fisher JJ in
Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation[4] 80 ATC 4542; (1980) 49 FLR 183, 208. :

The controlling factor is that, viewed objectively, the outgoing must, in the circumstances, be reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business being carried on for the purpose of earning assessable income. Provided it comes within that wide ambit, it will, for the purposes of s 51(1), be

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necessarily incurred in carrying on that business if those responsible for carrying on the business so saw it.

44. While there was a somewhat spirited debate between counsel about the extent to which subjective motivation is relevant to the question posed in the second limb that seems to us, with respect, to be a matter of emphasis rather than substance. We propose to consider the question of deductibility under the second limb of s 8-1 by reference to the questions as formulated in Magna Alloys[5] Supra n. 4 at p 210. :

  • (1) were the payments to the Fund reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the applicant
  • (2) did Mr and Mrs Beale see the payments in this light.

45. In general, it is not open to doubt that the creation of a fund capable of providing benefit to employees could be seen objectively as benefiting a business purpose. An employee welfare fund might ordinarily be expected to produce, for the benefit of the employer, the types of advantages spoken of by Merkel J at first instance in
Spotlight Stores Pty Ltd v Federal Commissioner of Taxation[6] 2004 ATC 4674; (2004) 55 ATR 745, 764 at par [53]. where his Honour said:

The advantage sought by the contribution was securing the pre-payment of bonuses so as to obtain the trust and confidence of Spotlight's employees from year to year in the post -a 1997 scheme, which was expected to yield improved staff retention rates, lower staff turnover and improved staff morale, efficiency' productivity and loyalty.

46. Whilst the arrangement in issue here was not quite as sophisticated as that in fSpotlight the point of all arrangements must be similar - employees are provided a reward, something above and beyond strict entitlements, on the expectation that they will be more favourably disposed to the employer and be more loyal, more productive and more efficient. But the critical feature is that the creation of a welfare fund, a bonus scheme or the like is not the mere dispensing of charity to employees. Pure altruism is not, we think, a business purpose. Rather the business purpose arises because the generosity is motivated, in part at least, by the expectation that it will yield benefits to the employer.

47. That this is so is acknowledged by the applicant in clause 3 of the various notices of objection to the amended income tax assessments. It reads:

"The Fund was established to create and maintain employee goodwill by providing access in appropriate circumstances to the range of benefits set out in the deed to employees of the Taxpayer and also to reimburse optical, dental and some medical costs."

That goodwill in employees could not possibly be created unless the employees to be benefited were aware, not only of the existence of the Fund, but also of the potential of receiving a benefit from it. Put another way, no goodwill could be created in an employee who knew nothing of the Fund or who had no realistic expectation of ever receiving a benefit.

48. This feature seems to us to be important in the present case where the evidence is that the majority of employees were not aware even of being the objects of the applicant's generosity. Thus they would hardly be expected to be more favourably disposed to the applicant because of the creation of the Fund when they were ignorant of its existence and of the applicant's apparent generosity. So, in our view, the objective element could not be satisfied in relation to employees unaware of the existence of the Fund.

49. On this analysis, it could only be in relation to the seven employees who ultimately applied to the Fund "to be considered by the trustee as an eligible employee" that there could be any creation or maintenance of goodwill. That group of seven includes Mr and Mrs Beale. It could not be thought necessary for the applicant to seek to obtain improved morale, efficiency, productivity, loyalty or goodwill from employees who were the sole directors and members of the applicant.

50. This then leave five employees, described by Mr Beale as key employees, whose work performance would possibly be regarded as being in issue. We would be prepared to accept that the establishment of a Fund to benefit these five employees (amongst

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others) could be regarded as desirable or appropriate to serve the business ends of the applicant if there was any evidence that these employees were aware of the fact that they were beneficiaries of the Fund and if there was any evidence of any expectation on their part of obtaining a benefit.

51. But the evidence in this case is no more than that at some point that is not made clear on the evidence (but which seems to be after July 1998) the five employees executed the applications indicating that they wished to be considered as an eligible employee by the trustee. We have no evidence of the explanations, if any, given to them of that document nor of the expectations (if any) that they may have had as a consequence of signing the applications. Certainly the evidence of Mr Beale was that the trustee did not even give effect to the applications, that is, it never considered whether they should be made eligible employees as requested although, as we read the trust deed, that was not a requirement for eligibility.

52. In a case such as the present where there is no evidence that the employees said to be benefited were aware of the potential for benefit and no evidence of any expectation on their part of the receipt of benefit we find ourselves not satisfied that the expenditure was desirable or appropriate from the point of view of the pursuit of the business ends of the applicant.

53. Moreover we are not satisfied that Mr and Mrs Beale saw the expenditure as desirable or appropriate from that point of view.

54. We have no evidence from Mrs Beale but Mr Beale's evidence on the point has been set out in paragraph 7 above.

55. Were it necessary for us to reach a view on the motive of the payments we would have concluded that the payments were made for the purpose of extracting tax-free profits from the applicant for the benefit of Mr and Mrs Beale. But we do not need to go that far. It is sufficient for us to say that we are not satisfied that Mr and Mrs Beale, as the controlling minds of the applicant, saw the creation of the Fund and the making of the payments as being desirable or appropriate expenditure from the point of view of the pursuit of business ends.

56. We accept that Mr Beale swore to an understanding that the income from the Fund would be available to key employees if and when the need arose. As it seems to us Mr Beale could have had such an understanding but no intention ever to confer benefits upon employees. That there never was any intention to benefit employees seems to be the only inference reasonably open from the fact that, in the period from June 1997 when the Fund was set up to November or December 2001 when the last of the applicant's employees left its employment, not a single payment was made to any employee.

57. The Fund was certainly profitable during this time. After a modest loss of $2,067 in 1998 the Fund recorded profits of $28,783 in 1999, $68,155 in 2000, $89,851 in 2001, $76,582 in 2002, $76,681 in 2003 and $89,125 in 2004.

58. In the 12 months or so after December 2000 all 80 of the applicant's employees, including the five "key personnel" were made redundant. The trust deed permitted payments to members "in the event of termination of the Member's employment because of redundancy". Contrary to Mr Beale's denials, funds were available at this time to benefit members made redundant. We conclude that there never was any intention that employees would benefit and that Mr and Mrs Beale did not see the Fund and the payments as desirable or appropriate from the point of view of the pursuit of the business ends of the applicant. The fact that Mrs Beale may still have been an employee when distributions were made to her does not alter our view.

59. It follows that the applicant's case for the 1998 and 1999 years, based on the second limb of s 8-1, must fail and the objection decisions in those years should be affirmed.

60. Given this conclusion it is not strictly necessary for us to go on and consider the respondent's second basis for denying deductibility - that the payments were of a capital nature - however we shall deal with that argument against the possibility that our earlier conclusion might be held to be erroneous.

61. The parties were in substantial agreement about the legal principles to be applied. Particular reliance was placed by the applicant on the decision of Merkel J in Spotlight Stores [7] 2004 ATC 4674 ; (2004) 55 ATR 745. and, in particular, his Honour's treatment of the "enduring benefit" test formulated by the Lord Chancellor,

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Viscount Cave in
British Insulated and Helsby Cables Ltd v Atherton[8] [1926] AC 205. . The respondent relied on the decision of Kiefel J in
Essenbourne Pty Ltd v Commissioner of Taxation[9] (2002) ATC 5201 and of Hill J in
Walstern Pty Ltd v Commissioner of Taxation[10] 2003 ATC 5076; (2003) 138 FCR 1. .

62. In Atherton the House of Lords was concerned with an initial contribution to a superannuation fund to benefit employees. It was held by the majority to be a capital payment. Viscount Cave spoke of "an asset or an advantage for the enduring benefit of a trade". Subsequently Dixon J relied upon the "enduring benefit" concept in his Honour's oft-recited formulation of the test for capital in Sun Newspapers[11] Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation [1938] 61 CLR 337 at p 363. where his Honour said:

"There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with payment or by making a final provision or payment so as to secure future use or enjoyment."

63. In Spotlight Stores Merkel J was concerned with a payment of $15m. made as part of a restructure of the employees' bonus scheme by a pre-payment of the bonuses expected to become payable over the succeeding five years. His Honour readily concluded that the purpose of the payment was transient and connected with "the ever recurring question of personnel".

64. Essenbourne involved a single contribution of $225,000 to an Employee Share Plan. Kiefel J concluded that the proper character of the payment was as a sharing of profits in a tax effective way and that, accordingly, s 51(1) was not made out. On the question of whether the payment was on the capital account her Honour said[12] Supra n.4 at p 637, par. [36]. :

"[36] In the present case the payment in question is of the surplus profits out of the company. The payment is not referrable to the conduct of its income-producing business. The advantage or benefit sought to be secured from it, from Essenbourne's point of view, is the improvement of the position of the 3 principals in the business. It has produced a benefit to be derived by them at some point in the future and the intangible benefit of job satisfaction in the interim. The payment is not made in such a way as to be seen as an operating expense. The fact that in most years Essenbourne made superannuation contributions does not assist in characterising this payment. In my view the payment is of a capital nature and, for that reason, not deductible."

65. Finally, in Walstern, Hill J was concerned with two contributions of $1m., one made in June 1997 and the other in May 1998, to a superannuation fund for the benefit of two brothers who were the sole shareholders, directors and employees of the company. His Honour concluded that the payments were incurred within either the first or second limb of s 51(1). His Honour said[13] Supra.10 at p 20, par. [77]. :

"However, it cannot be said that the question whether a payment is a one-off payment or whether it is a recurrent payment is a matter irrelevant to whether the outgoing is capital. In a case such as the present where the payment operates to create the capital of a trust fund the outlay will ordinarily be seen as capital both because of the lasting qualities enjoyed and the fact that what is being made is a final payment to secure future benefits. However, if a contribution is one of a number of "recurrent" contributions for employees, so that it can be seen to be part of the ordinary flow of business expenditure of a taxpayer, the character of the outlay will take on a different complexion."

66. Mr Robertson placed considerable reliance upon what he described as the recurrent nature of the payments here and on the evidence of Mr Beale, elicited in cross-examination, that the applicant intended to make regular contributions for as long as it was possible to do so.

67. For his part, Mr Davies QC submitted that the payments amounted to a provision of the capital constituting the members of the fund. The contributions, it was said, were one-off payments designed to create the capital of the trust fund which was invested in real property.


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In considering this issue it is as well to record again the dates of contributions and the use to which the contribution was put. The payments were:
  • • 27 June 1997 - $200.000;
  • • 12 December 1997 - $100,000. On this date some $260,000[14] We include in this the deposit of $26,000 paid some days earlier. was used to acquire real property;
  • • 30 June 1998 - $100,000. This sum was used to pay for renovations to the real property;
  • • 22 February 1999 - $200,000. This sum was used to pay $210,000 for renovations.

Thus, of a total of $600,000 in contributions made over a period of 20 months, some $570,000 was spent in acquiring, and then renovating, a rental property.

69. There is, here, a "recurrence" in the sense that four separate payments were made. But despite that we regard this matter as one warranting the conclusion of a one-off payment (in four instalments) establishing a fund. We do not accept the evidence of Mr Beale that the applicant intended to make regular contributions to the extent that it was financially able to do so. Rather we conclude that the applicant intended to create a capital fund and made payments subsequent to the initial contribution at the times, and in the amounts, necessary to acquire and renovate the rental property. The contributions were four instalments of a once and for all contribution which was not defined at the outset in terms of an amount but was instead defined in terms of the intended outcome, that is, the acquisition of a renovated rental property.

70. There are a number of reasons that we do not accept Mr Beale's evidence on this aspect. First, the evidence is inconsistent with the dates and amounts of payment. The fact that $200,000 was contributed in each of three successive financial years was merely coincidental. Next, we take into account that the notion of the applicant making regular payments for as long as it was possible to do so seems to have been first raised in the course of Mr Beale's cross-examination. It was not referred to in the notice of objection, the applicant's statement of facts, issues and contentions lodged in the Tribunal on 9 December 2005 nor in Mr Beale's affidavit. Had that, in truth, been the applicant's intention we would have thought that intention would have been raised earlier than in cross-examination.

71. In addition we must say of Mr Beale that he left us with the distinct impression that he really had no appreciation of the detail of the arrangement. He was vague about the steps that Xenabead had taken, he seemed to have no real appreciation of the distinction between the capital of the Fund and its income, and he seemed to be of the view that the Fund was unable to afford to pay benefits at times when it had significant profits.

72. We are, in the result, not satisfied by his evidence that the payments were intended to be recurrent in the way that he described. In our view the payments are on the capital account and for that additional reason are non deductible.

Part IVA

73. It is unnecessary for us to consider the application of Part IVA and we do not propose to do so. We would be required to assume a state of facts contrary to those we have already found because Part IVA can operate only where a deduction would be allowable but for Part IVA.


74. The respondent determined penalties on the basis that s 226L operated to impose penalties of 50 per cent which was reduced by operation of s 226Y (or s 226D) that is, to 40 per cent on the basis of voluntary disclosure.

75. On the view we take of the matter s 226L (which deals with cases where Part IVA applies) has no present application and we are required to consider the matter afresh.

76. There is, of course, no question of penalties being imposed in relation to 1997 year. But in relation to the remaining years it is our view that the present case falls to be considered as one where s 226H applies, that is, as one where the tax shortfall has been brought about be recklessness on the part of the applicant.

77. On the view we take of the matter it was plainly reckless for the applicant to claim deductions in respect of amounts that were intended to be a mechanism for taking otherwise taxable profit out of the applicant and

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making it available to those who control the applicant. It might even be thought that the conduct in this case verged upon intentional disregard however the respondent did not invite us to consider the matter on this basis and we do not do so.

78. We are, however, satisfied that it is proper to apply s 226H and to reduce the penalty percentage to 40 per cent on the basis of s 226Y.

Fringe benefits tax

79. The respondent issued amended assessments to fringe benefits tax in each year and those amended assessments are the subject of the applications in QT2004/248 to 250.

80. It was accepted by the respondent that on the present state of the law that binds the Tribunal[15] Essenbourne (supra) and the cases that follow it. the definition of fringe benefit in s 136(1) of the FBT Act requires a particular employee to be identified in relation to the provision of the benefit. And the respondent also accepts that the present state of the law that binds us[16] Cameron Brae Pty Ltd v Commissioner of Taxation 2006 ATC 4433 ; [2006] FCA 918 . is that s 67 of that Act, the anti - avoidance provision, operates similarly.

81. Whilst the respondent submitted formally that these cases were wrongly decided it was accepted that we were bound to follow them and, in consequence, allow the applicant's fringe benefits tax objections. It was submitted, somewhat faintly, that we should defer consideration of the application of the fringe benefits tax legislation pending the outcome of the Commissioner's appeals to the Full Federal Court from the decisions in
Indooroopilly Children Services (Qld) Pty Ltd v Commissioner of Taxation[17] 2006 ATC 4303; [2006] FCA 734 and
Cameron Brae Pty Ltd v Commissioner of Taxation[18] Supra n. 16 .

82. We do not regard that as a proper course for us to adopt. The applicant is entitled to a decision on the law as it presently stands. The respondent may, if he is so advised, appeal the present decision and may succeed if he can in the meantime persuade the Full Federal Court that Essenbourne (and the cases following it) was wrongly decided.

83. Thus, we conclude that the respondent's fringe benefit tax objection decisions should be set aside and the objections allowed in full.


84. It follows from the forgoing that we would:

  • (a) set aside the objection decision in relation to the applicant's 1997 income tax objection and, in lieu thereof, allow the objection in full;
  • (b) affirm the objection decisions in relation to the applicant's 1998 and 1999 income tax objections;
  • (c) set aside the objection decisions in relation to the applicant's 1998, 1999 and 2000 fringe benefits tax objection and, in lieu thereof, allow the objection decisions in full.


[1] See Parkinson P and Wright D, ‘Equity and Property’ in Parkinson P (ed) The Principles of Equity , Law Book Co, 2003 at p 60.
[2] Xenabead had express power as trustee to deal with real estate.
[3] See Vincent v. Commissioner of Taxation 2002 ATC 4742 ; (2002) 124 FCR 350 , 373 at par. [95].
[4] 80 ATC 4542; (1980) 49 FLR 183, 208.
[5] Supra n. 4 at p 210.
[6] 2004 ATC 4674; (2004) 55 ATR 745, 764 at par [53].
[7] 2004 ATC 4674 ; (2004) 55 ATR 745.
[8] [1926] AC 205.
[9] (2002) ATC 5201
[10] 2003 ATC 5076; (2003) 138 FCR 1.
[11] Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation [1938] 61 CLR 337 at p 363.
[12] Supra n.4 at p 637, par. [36].
[13] Supra.10 at p 20, par. [77].
[14] We include in this the deposit of $26,000 paid some days earlier.
[15] Essenbourne (supra) and the cases that follow it.
[16] Cameron Brae Pty Ltd v Commissioner of Taxation 2006 ATC 4433 ; [2006] FCA 918 .
[17] 2006 ATC 4303; [2006] FCA 734
[18] Supra n. 16

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