PIERCE v FC of T
Members:BJ McMahon DP
Tribunal:
Administrative Appeals Tribunal (sitting as the Small Taxation Claims Tribunal)
BJ McMahon (Deputy President)
This is an application to review an objection decision made on 1 April 1997 against a Notice of Private Ruling (``NPR'') which was issued on 11 March 1997. The ruling was sought in a letter dated 28 February 1995 when the following question was posed:
``That money reimbursed for work use of the leased vehicle is not taxable, or if it is taxable that a corresponding deduction be allowed, and that it would be proper for the employer either to exclude that payment from the group certificate or to include it under some category other than salary.''
2. The applicant is an unattached Magistrate employed by the Department of Courts Administration and is supplied by his employer with the use of a motor vehicle. Each Friday he is given instructions as to his court duties for the following week. The vehicle is used for travelling between courts, some of which are in the country. The applicant believes that the vehicle is supplied by way of salary sacrifice, a concept to which I will later return. The conditions under which the vehicle is made available to the applicant provide that he is responsible for the entire cost of the vehicle including lease payments, running costs, and fringe benefits tax. These liabilities are said to
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be commensurate with the amount of salary that has been sacrificed. The applicant was reimbursed by his employer for additional running costs at a rate calculated between 20 cents and 25 cents per kilometre of use. The actual cost was more than this. Mr Pierce estimated that the figure was approximately 58 cents per kilometre.3. That part of the actual cost of running the vehicle reimbursed to the applicant by the Department was treated by it as salary and tax was deducted. The applicant claimed in his request for ruling, that the reimbursement was either not taxable and should not have been included in his gross income, or that if it was taxable, then a corresponding deduction should have been allowed to him.
4. In dealing with the application for the NPR, the respondent embarked upon two impermissible courses. Firstly, it made its own enquiries as to the accuracy of the facts postulated by the applicant. Mr Pierce was under the impression that he had leased the vehicle from Macquarie Bank. Following enquiries which the Commissioner made, the respondent concluded that the vehicle was actually leased from Macquarie Bank by the Department of Courts Administration and that it was simply allocated to the applicant from the Department's fleet. He also concluded that the allocation of the vehicle formed part of the applicant's salary package, affecting fringe benefits tax as a car fringe benefit. This information was gleaned from correspondence between the Commissioner, the Bank and the Department. Whether these conclusions represent the true facts is not to the point. It is clear that the Commissioner was not entitled to go outside the facts as put by the applicant when carrying out his obligation of stating his findings as to the appropriate arrangement.
5. The Commissioner also appears to have followed an incorrect course after the ruling was issued by issuing an amended assessment. The opening paragraph of the statement provided pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 asserts that the disallowance of the objection ``resulted'' in the issue of the amended assessment. As the stated facts in a request for a NPR are not necessarily facts at the time the ruling is sought, it is not appropriate for the Commissioner to rely upon a request for a NPR which, in his view, is unsuccessful in order to base an amended assessment.
6. Once the NPR has been issued, the consideration of this Tribunal is confined to reviewing that document. Because of a combination of the effects of sections 14ZAZA and 14ZZK(b)(iii) of the Taxation Administration Act 1953, my function is simply to decide whether the ruling should not have been made or should have been made differently. In carrying out that function, I must take account only of the terms of the arrangement as stated in the NPR and determine whether, in my view, the law has been applied correctly to that arrangement as found.
7. Recent decisions of the Federal Court make this approach quite clear. In
FC of T v McMahon & Anor 97 ATC 4986 Lockhart J said at 4990:
``When making a private ruling the Commissioner does not make findings of fact. He simply identifies facts and then states his opinion about the way in which the relevant tax laws apply to the applicant in relation to those identified facts.
...
If a taxpayer seeks a review of the private ruling before the Tribunal, the subject matter of that review is the arrangement as identified by the Commissioner in his private ruling. That arrangement is constant throughout the process of the private ruling and any review or appellate process that ensues. The Tribunal may form its opinion as to how the tax law operated or would operate on the facts that constitute the arrangement; and it may disagree with [the] Commissioner and alter the objection decision. But the review is not a review in the usual sense that applies to the processes of administrative review when it is dealing with actual facts. These are hypothetical facts. They may turn out to be the real facts; but the whole notion of a private ruling is that the facts are not necessarily the facts that will underlie the making of any ultimate assessment. If the factual matrix as explained to the Commissioner in aid of a request for a private ruling are suspicious, the Commissioner has ample powers to decline to make a private ruling. Once the ruling is made, it is made with respect to the
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facts that are identified for the purposes of the private ruling itself.In my opinion on a process of review the Tribunal cannot redefine the arrangement. The Tribunal is limited to the facts that constitute the arrangement as identified by the Commissioner in his own ruling. I agree with the submission of counsel for the taxpayer that the arrangement is a `constant' and a ruling is about how a tax law applies to that arrangement The question for the Tribunal is whether the Commissioner's opinion as to the application of the law concerning the arrangement is correct. In considering the correctness or otherwise of the objection decision the Tribunal must be limited to the facts as identified by the Commissioner in his ruling as constituting the arrangement.''
8. At page 4996 Beaumont J said:
``It must follow, in my opinion, that the subject of any review of that taxation decision and of any review or appeal relating to the ruling will be that question, and no other or different question. In that sense, `the stream can rise no higher than its source' and that source is the construct constituted by the `arrangement', as nominated and identified by the applicant for the ruling. The Tribunal's jurisdiction is thus limited to a review of the Commissioner's opinion on that question, so that the Tribunal has no power to address any other question. In particular, neither the Commissioner nor the Tribunal on review, has jurisdiction or power to `redefine' the `arrangement' the subject of the Commissioner's ruling.
As has been seen, the `arrangement' will consist of an identified `scheme' etc. There is a conceptual element involved here, consisting of the proper attribution to be given to the relevant primary facts said to amount to an `arrangement'. This process of characterisation calls for findings or conclusions to be made by way of `secondary' facts in the definition of the subject arrangement. Any attempt to redefine the arrangement would likewise involve a conceptual aspect, that is, something more than findings of primary facts. It is by travelling beyond the primary facts into the realm of the secondary facts that the process of defining the `arrangement' occurs; that is, by way of a conclusion from the primary facts.''
9. On pages 5003 and 5004 Emmett J said:
``It follows that the Tribunal cannot, on the hearing of an application for review of a decision on an objection against a private ruling, redefine the arrangement. The Tribunal is limited to making a decision upon the basis of the arrangement, including assumptions, identified by the Comm- issioner in the ruling. The only question for the Tribunal is whether the Commissioner's view as to the application of the law to the arrangement so identified was correct: that is to say, should the decision on the objection by the Taxpayer to the ruling not have been made or should it have been made differently. The only material which need be before the Tribunal would be the ruling and particulars of the person, the tax law, the year of income and the arrangement identified in the ruling pursuant to section 14ZAS(1). In the present case, that is the notice sent to the Taxpayer's agent under cover of the Commissioner's letter of 19 April 1995. Accordingly, the only question for the Tribunal is whether, on the basis of the material identified in that Notice of Private Ruling and of no other material, the taxation decision constituted by that Notice should not have been made or should have been made differently.''
10. Since McMahon, these views have been followed by a differently constituted Full Court in a unanimous judgment in
Bellinz Pty Limited & Ors v FC of T 98 ATC 4634. At page 4639 their Honours said:
``The statutory provisions relating to private rulings have been the subject of a number of decisions in this Court:
CTC Resources NL v FC of T 94 ATC 4072; (1994) 48 FCR 397;
First Provincial Building Society Limited v FC of T 95 ATC 4145; (1995) 128 ALR 118;
United Energy Limited v FC of T 97 ATC 4796 and
FC of T v McMahon & Anor 97 ATC 4986; (1997) 149 ALR 159. It is unnecessary to canvass these cases. It suffices to say that, where a private ruling is sought in respect of an arrangement, it is imperative that an applicant give full details to the Commissioner either in the initial application or in response to requests by the Commissioner for additional facts: s
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14ZAM. The ruling itself must, inter alia, identify the arrangement to which the ruling relates: s 14ZAS(1), although it may do so by reference to matters set out in a document identified in the ruling and which, or a copy of which, is available to `the rulee': s 14ZAS(3).Both parties to the appeal proceeded on the basis that the arrangement the subject of the ruling, identified both in the application and the ruling itself, was described in a document which the parties prepared for the purposes of the appeal. Such an approach should not be encouraged. The Court can have regard only to the arrangement as described in the ruling itself, supplemented by any documentation referred to in it.''
11. The NPR itself, upon which this review must be based is in the following terms:
``THIS RULING APPLIES TO:
Name: William Pierce
Tax File Number: [stated]
TAX LAW:
Section 19 of the Income Tax Assessment Act
Section 25(1) of the Income Tax Assessment Act
Section 51 of the Income Tax Assessment Act
Section 7 of the Fringe Benefits Tax Assessment Act
Section 22A of the Fringe Benefits Tax Assessment Act
WHAT THIS RULING IS ABOUT:
Is the business use of a motor vehicle a deductible expense under Section 51 of the Income Tax Assessment Act (the Act) where the cost of the vehicle is paid by the taxpayer's employer and taxpayer's salary and the employer reimburses business travel by paying additional PAYE salary to the taxpayer.
THE SUBJECT OF THE RULING:
The material facts as set out in your application may be summarised as follows-
- 1. Mr Pierce is employed by the Department of Courts Administration as a Magistrate.
- 2. You have accepted a salary package whereby all expenses for motor vehicle use are being paid for by your employer by way of salary sacrifice.
- 3. Occasionally you are required to attend different courts and use your motor vehicle for transport.
- 4. The kilometre use for all trips are recorded and you are reimbursed by your employer for this business use of the vehicle.
- 5. The reimbursement is added to your gross salary and tax is deducted at marginal rates.
- 6. You wish to claim the business use of your motor vehicle as an allowable deduction under Section 51 of the Act.
RULING:
Your payment of some cost of the vehicle is reflected in the taxable value of the benefit upon which Fringe Benefits Tax is payable by your employer. Therefore indirectly a deduction has been allowed for some of the costs of the vehicle borne by you.
Consequently section 51AF of the Income Tax Assessment Act would deny any further deduction for these expenses. Therefore no deduction claim is available against the reimbursement received for the running cost of the vehicle.
Whether the reimbursement rate is reasonable is a matter for Mr Pierce and his employer. Obviously the costs applicable to business use would have been higher than the amount reimbursed at the specified rate, but sacrificing income is not incurring an expense.
Therefore in conclusion there has been no evidence provided to show that Mr Pierce has `paid or incurred' any expenditure in running the vehicle for the purposes of subsection 51(1) of the Act.
YEAR(S) OF INCOME TO WHICH THIS RULING APPLIES:
Year ending 30 June 1995
Mark Konza
Deputy Commissioner of Taxation
10 March 1997
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EXPLANATION (This does not form part of the Notice of Private Ruling):
Is the business use of a motor vehicle a deductible expense under Section 51 of the Income Tax Assessment Act (the Act) where the cost of the vehicle is paid by the taxpayer's employer and taxpayer's salary and the employer reimburses business travel by paying additional PAYE salary to the taxpayer.
An employee's assessable income may be reduced by a `salary sacrifice', ie where the gross salary entitlement is reduced in exchange for a lower salary together with a benefit from an employer. Further the benefit may not be assessable in the hands of the employee but is a taxable fringe benefit.
The acquisition of a vehicle for your use (including private use), from the fleet of the Department of Court Administration, fits the definition of a car benefit in Section 7 of the Fringe Benefits Tax Act. Hence a car is being provided for you, despite the fact that you are paying acquisition and running costs. Your payment of some cost of the vehicle is reflected in the taxable value of the benefit upon which Fringe Benefits Tax is payable by your employer. Therefore indirectly a deduction has been allowed for some of the costs of the vehicle borne by you.
Consequently section 51AF of the Income Tax Assessment Act would deny any further deduction for these expenses. Therefore no deduction claim is available against the reimbursement received for the running cost of the vehicle.
The document previously provided by Mr Pierce titled `Arrangements for the allocation of Fleet Motor Vehicles for Private and Business Use by Judicial Officers' suggests that the Department of Courts Administration pays for the costs in running the vehicle from amounts `salary sacrificed'. Under this arrangement amounts sacrificed that relate to business travel are resumed in cash form to Mr Pierce at a rate of 20-25 cents per kilometre. The reimbursement received is assessable in accordance with subsection 26(eaa) of the Act. Under this section a reimbursement of a car expense that constitutes an expense fringe benefit in accordance with section 20 of the Fringe Benefits Act, excepting for section 22 of that Act, is included in assessable income.
Whether the reimbursement rate is reasonable is a matter for Mr Pierce and his employer. Obviously the costs applicable to business use would have been higher than the amount reimbursed at the specified rate, but sacrificing income is not incurring an expense.
Therefore in conclusion there has been no evidence provided to show that Mr Pierce has `paid or incurred' any expenditure in running the vehicle for the purposes of subsection 51(1) of the Act.''
12. There is an inherent obscurity in the above document. Under the heading ``Explanation: (This does not form part of the Notice of Private Ruling):'' the author has included a passage starting ``Your payment of some costs of the vehicle...'' down to ``running cost of the vehicle'' in paragraphs 2 and 3. In paragraphs 5 and 6, the author has included further material starting ``Whether the reimbursement rate...'' and finishing ``subsection 51(1) of the Act''.
13. Each of those passages is also reproduced under the heading ``Ruling''. Thus, the same words are said to form part of the ruling above the Deputy Commissioner's signature and are said not to form part of the ruling in the appended so-called explanation. It is impossible to tell from the face of the document whether the words are in or out of the ruling.
14. Because the Commissioner carried out his own enquiries as to the true facts, because an amended assessment was issued as a result of the NPR and because the ruling itself is inherently obscure, the document is fatally flawed. Furthermore, the second sentence in the first paragraph of the ruling is also obscure and may be a non sequitur upon which the reasoning in the next paragraph is said to be based. I propose to set aside the decision under review and to decide in substitution therefor, that the taxation decision concerned should not have been made.
15. It may well be that the amended assessment ought not to have been issued, depending as it does upon a defective NPR. However, the structure of the proceedings before me precludes me from determining whether the assessment itself is valid.
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16. The parties conducted their cases on the basis that the NPR could be ignored and that what was really to be determined was the taxability or deductibility of the additional running costs. I am not empowered to adjudicate upon that issue, having regard to the way in which the matter arose. Because the arguments were carefully prepared on either side, I will offer some non-binding opinions which may be helpful. Although this application is brought before the Small Taxation Claims Tribunal constituted by Part IIIAA of the Administrative Appeals Tribunal Act 1975 and, therefore, should be dealt with as far as possible informally and quickly, I am however, bound by the law. An obligation to proceed with little formality and technicality is imposed by section 33(1)(b); nevertheless in its terms it preserves the requirements of every other relevant enactment and, I would add, of all judicial authority.
17. The applicant's case was that he incurred expenses by paying the additional running costs. The making of such a claim immediately enlivens the operation of section 51AF of the Income Tax Assessment Act 1936. That section is in the following terms:
``51AF(1) Where:
- (a) during a particular period, an employer provides a car for the exclusive use of a person who is, or of persons any of whom is, an employee of the employer or a relative of such an employee; and
- (b) at any time during that period, the employee or a relative of the employee is entitled to use the car for private purposes;
a deduction is not allowable under this Act in respect of a car expense that relates to the car and:
- (c) is incurred by the employee during that period; or
- (d) is incurred by the employee and is wholly or partly attributable to that period.
51AF(2) In this section:
- `car' has the meaning given by section 995-1 of the Income Tax Assessment Act 1997, but does not include a car covered by section 28-165 of that Act;
- `car expense' has the meaning given by section 28-13 of the Income Tax Assessment Act 1997, but does not include a car expense covered by section 28-165 of that Act;
- `employee' has the meaning given by section 221A;
- `employer' has the meaning given by section 221A.''
18. The applicant submitted that section 51AF had no application in his particular circumstances. He said that the fact that the car is provided as part of his salary package meant, in effect, that he had acquired an equitable interest in the car. As he was responsible for lease payments initially charged to the Department, he considered that he had, in effect, ``bought'' the car. He submitted that the section was intended only to apply to cases where a car was made available on loan from an employer's car pool. He gave reasons in his written submissions which, he said, made such an interpretation sensible and fair. He considered that the application of section 51AF to his circumstances would produce an unjust result.
19. If that section had no application, he claimed to be entitled to a deduction for the additional running costs on two further bases. Firstly, he submitted that the costs were deductible as they were incurred in the course of deriving assessable income. The car was used principally to go from court to court in accordance with directions given to him as a relieving Magistrate. The second basis upon which he claimed deductibility depended upon the fact that he was obliged to carry in his car bulky equipment, including law books and a laptop computer, which could not be conveniently carried on public transport. The applicant relied upon
FC of T v Vogt 75 ATC 4073; (1975) 5 ATR 274 and
FC of T v Ballesty 77 ATC 4181; (1977) 7 ATR 411.
20. The respondent's submissions did not address these. In fact, the two sets of submissions passed, as it were, like two ships which did not engage each other. The respondent also ignored the terms of the ruling by forsaking section 51AF in his defence of the objection decision. His basis for opposing the applicant's claims was, in some respects, quite different from the ruling.
21. The respondent started from the proposition that an amount of $12,777 was identified by the applicant as the difference
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between the salary to which he was otherwise entitled and the amount that he received as a salary sacrifice. The respondent took the view that there had been a genuine legal reduction in salary and that, consequently, the value of the salary so sacrificed was not income derived under section 25. It followed that if the applicant had not derived any income related to the car, he could not have paid or incurred any expenditure in relation to its running expenses. The respondent did not view the amount in dispute as a reimbursement as the applicant did not incur anything to be reimbursed. What the applicant received, according to the respondent, was salary. The additional amount paid to him by the Department was no more than a recalculation of the value of the benefit that he was receiving.22. The respondent was unable to refer me to any authority for the proposition that if an employee elects to take a smaller pecuniary sum on condition that his employer supplies him with the use of a motor vehicle, that the amount of the reduction was not assessable income. In my view, it could well be assessable because of the operation of section 19, which includes as income, any moneys dealt with by the employer at the direction of the employee (Case 1/97,
97 ATC 101). If an employee is entitled to be paid $X as a result, for example, of a determination of a Remuneration Tribunal, but elects to take $X less $Y and to direct his employer to apply the $Y towards the provision of a benefit, it seems to me more than likely that $Y would be assessable income.
23. The respondent's case primarily, however, was that there could not have been any expenses incurred because of the so-called salary sacrifice. The respondent contended that, accordingly, section 51AF had no application as it is enlivened only when car expenses were, in fact, incurred.
24. On the merits of these arguments, it seems to me, that the applicant could not succeed, no matter which conceptual approach was adopted. If the Commissioner's salary sacrifice argument is to be preferred, then the applicant did not incur the relevant expenditure. If the respondent's analysis of the salary sacrifice arrangements is incorrect, then the applicant's assessable income should be increased by $12,777.
25. If, however, the applicant did incur car expenses, as he claims, then he would be met with the clear and unequivocal terms of section 51AF. Whether or not he could justify the claim for deduction as an itinerant worker or as the carrier of bulky tools of trade, he would still be met with the terms of that section. The fact that it might lead to an unfair result in the applicant's opinion cannot affect its application.
26. In my view, there is no basis upon which the section can be read down to exclude the type of situation in which the applicant finds himself. The car is provided for his exclusive use by the employer. Without that arrangement, there would be no lease from Macquarie Bank, no lease payments, no fringe benefits tax, and no partial reimbursement for running costs. The fact that the applicant views his salary sacrifice as in some way giving him an equity in the vehicle is not to the point, when the terms of the section are quite clear. Those terms do not distinguish between provision of a leased vehicle, the lease terms of which are paid by the employee on the one hand, and provision of a vehicle at will by the employer for use in specified duties. There is no reason why ``provides'' should not be given its ordinary English meaning, namely ``to furnish or supply'' (Macquarie Dictionary). This plain reading is supported by the definition of ``car'' in section 11-1 of Schedule 2A which excludes vehicles on short term hire but impliedly includes cars on long term lease, whether or not the lease is to the employer or the employee.
27. In summary, therefore, if the applicant incurred car expenses, he would be precluded from claiming a deduction under section 51AF, whether or not he had any other basis upon which to claim deductibility. If he did not incur car expenses because of the salary sacrifice structure, he had no legal basis for claiming deductibility. Furthermore there is a real risk, dependent upon an examination of relevant factors in greater depth than is available in these proceedings, that the amount sacrificed is, in fact, assessable income. Whatever view ultimately prevails, therefore, my opinion is that the applicant will not succeed. If the merits of this claim were properly tested, perhaps in a subsequent tax year, I would naturally disqualify myself from hearing any review of an unsuccessful objection decision.
28. As I have said, however, the only formal decision I can give in this application is that the decision under review is set aside and in substitution therefor the Tribunal decides that
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