Impact of Court Decisions Report

Commissioner of Taxation v Indooroopilly Childrens Services Pty Ltd

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Venue: Federal Court of Australia
Venue Reference No: QUD 253 OF 2006
Judge Name: Stone, Allsop & Edmonds JJ
Judgment date: 22 February 2007
Appeals on foot:
No

Impacted Advice

Relevant Rulings/Determinations:

• TR 99/5

Impacted Practice Statements:

• PS LA 2007/2

Subject References:
Fringe Benefits Tax
Carers share plan
Employee benefit trust

Brief summary of facts

• The respondent applied for a private ruling under Part IVAA of the Taxation Administration Act 1953 as to whether a liability for fringe benefits tax arose on the basis of a certain proposed arrangement set out in the ruling request.

• ABC Development Learning Centres Pty Ltd (ABC) is licensed to operate childcare centres. It licences or franchises Regional Management Companies (RMCs) to carry on the operation of the childcare centres. The RMCs employ their own staff. The respondent was one such RMC.

• ABC is the wholly owned subsidiary of ABC Learning Centres Ltd (ABC Public). ABC Public indicated an intention to:

1)

establish an employee share plan scheme which would provide shares in ABC Public to current and future employees of the RMCs;

2)

settle a trust - a Carers Share Plan (CSP) - with an arm's length trustee;

3)

gift shares to the trustee of the CSP.

The RMCs, including the respondent, were intended to have no role in the operation of the CSP.

• The initial share issue was to be calculated by reference to the number of employees of the RMCs who had signed AWAs, the length of employment with RMCs and other criteria. The issue was not to involve any specification as to the number or value of shares to which any individual employee would be entitled. The trustee would exercise its discretion to issue shares to particular employees at a later time having regard to matters such as their employment position and their years of service.

• The Commissioner ruled that the initial issue of shares by ABC Public would give rise to the provision of a fringe benefit in respect of the respondent's employees. The Commissioner relied on his views in Taxation Ruling TR 1999/5. The respondent objected to the ruling and the Commissioner disallowed the objection. The respondent appealed to the Federal Court.

• The decision of Collier J was handed down on 14 June 2006. Her Honour decided that the view expressed in Essenbourne Pty Ltd v FC of T 2002 ATC 5201, about how the law should apply, was not clearly wrong and should be followed. Her Honour also decided that the facts of the case were not relevantly distinguishable from Essenbourne.

• In Essenbourne, Kiefel J held that a benefit provided to a trust will not be a 'fringe benefit' unless it is provided in respect of the employment of a particular employee. This view has been followed in a number of later single judge decisions - Walstern Pty Ltd v FC of T (2003) 138 FCR 1, Spotlight Stores Pty Ltd v FC of T 2004 ATC 4674, Caelli Constructions (Vic) Pty Ltd v FC of T (2005) 147 FCR 449 and Cameron Brae Pty Ltd v FC of T 2006 ATC 4433.

• The Commissioner's view of the law, as expressed in TR 1999/5, was that a benefit provided in respect of the employment of more than one employee is a 'fringe benefit', notwithstanding that it is not provided in respect of a particular employee; alternatively, that a benefit provided in respect of more than one employee is provided in relation to each and every employee.

• The Commissioner appealed from the decision of Collier J

Issues decided by the court or tribunal

The court was unanimous in dismissing the Commissioner's appeal. Edmonds J provided reasons for decision, with which Stone and Allsop JJ agreed in separate judgements.

Edmonds J said that it was necessary, as Kiefel J had held in Essenbourne, to identify a particular employee in respect of whose employment a benefit is provided (paragraph 35). References to 'the employee' in the definition of fringe benefits support the view that there had to be a particular employee identified. Those references limited the term 'in relation to an employee' at the beginning of the definition.

His Honour also said that the requirement to identify a particular employee in respect of whom a benefit is provided is consistent with the identification of an 'associate' to whom a benefit is provided - in many cases it will not be possible to determine whether a recipient of a benefit is an associate of an employee unless the identity of the relevant employee is known (paragraph 36).

His Honour accepted that a benefit provided to a common associate of a number of employees, such as the trustee of a trust under which those employees are capable of benefiting, can be a fringe benefit provided that the identity of each employee who will take a benefit is known with sufficient particularity at the time that the benefit is provided (paragraph 37). However, the shares provided to the trustee in this case were not provided in respect of the employment of any particular employee nor all of the employees capable of benefiting who will in fact receive a benefit - only some employees may later benefit, and their identity is not known (paragraph 38).

His Honour said that his conclusion was consistent with his view that there is no discernable legislative policy 'to accelerate and bring to charge.... a benefit which the employee may never get as against a policy of deferring taxes on the benefit unless and until it comes home to the employee' (paragraph 39).

If he were wrong on the main construction point, his Honour concluded that paragraph (e) of the definition of fringe benefit would not apply because it did not appear that there was any arrangement between ABC Public and the respondent for the provision of the benefit (paragraph 40); however, he would have held that paragraph (ea) applied, the respondent participating in or facilitating a scheme or plan involving the provision of the benefit.

Allsop J criticised what he perceived as the Taxation Office administering the law contrary to the earlier single judge decisions of the Court about the meaning and content of the definition of a 'fringe benefit'. If the Commissioner has the view that the courts have misunderstood the meaning of the law, his Honour pointed out that the proper course would be to appeal a decision, by 'prompt institution of other proceedings', or the executive can refer the matter for consideration of legislative change. Stone and Edmonds JJ agreed with his Honour's comments, the latter adding that the Commissioner could have earlier sought 'a declaration from the Court as to the proper construction' of the relevant law (paragraph 47).

Tax Office view of Decision

The Commissioner announced on 22 February 2007 that he would not be seeking special leave to appeal from the decision of the Full Court and that the ATO will be reviewing the FBT assessments associated with outstanding employee benefit arrangement cases that are affected by the decision of the Full Court.

The Tax Office accepts that it would have been better if the issue could have been brought before the Full Court more promptly. However, the Tax Office was unaware that it could have sought a declaration from the court rather than relying on the usual appeal processes in Part IVC of the Tax Administration Act.

In view of the Court's comments the Tax Office is now seeking advice from the Solicitor-General and the Australian Government Solicitor on what avenues are available for using the declaratory powers of the Court to clarify the proper construction of the taxation laws in a more timely way as suggested by the Court.

Administrative Treatment

Implications on current Public Rulings & Determinations

Paragraphs 45 to 49 of Taxation Ruling TR 1999/5 will be withdrawn and the Ruling will recognise the view of the Full Court that it is necessary to identify a particular employee in respect of whose employment a benefit is provided before a 'fringe benefit' can exist.

TR 1999/5 will also be amended to recognise the view of the Full Court that a benefit provided to a common associate of a number of employees, such as the trustee of a trust under which those employees are capable of taking share of the benefit, can be a 'fringe benefit' if the identity of each of the employees who will take a share of the benefit is known with sufficient particularity at the time that the benefit is provided, such that it can be said that the benefit is provided in respect of the employment of each of those employees (the decision in Caelli Constructions is an example).

The opportunity will also be taken to update TR 1999/5 to recognise the following aspects of the decisions in the Walstern, Spotlight Stores, Caelli Constructions and Indooroopilly cases:

•

A trustee of a trust or non-complying superannuation fund, which has been set up to provide benefits to employees, is an 'associate' of an employee where the employee is capable of benefiting under the trust or fund - see Caelli Constructions, at paragraph 56; Spotlight Stores, at paragraph 121; and Edmonds J in Indooroopilly, at paragraphs 23 and 37.

•

The payment of money by an employer to the trustee of a trust in respect of the employment of an employee is the provision of a property benefit - see Caelli Constructions, at paragraphs 63 to 66; and Walstern, at paragraph 90 (which recognised that the allocation by the trustee of money provided was the provision or property, being the benefit in the trust fund constituted by the money as tangible property.

Implications on Law Administration Practice Statements

Paragraphs 82 - 89 of PSLA 2007/2 Management of Decisions of Courts and Tribunals are currently under review pending the consultation with the Attorney General's Department on the potential use of declaratory proceedings.

Court citation:
[2007] FCFCA 16
(2007) 239 ALR 85
(2007) 158 FCR 325
2007 ATC 4236
65 ATR 369

Legislative References:
Fringe Benefits Tax Assessment Act 1986
136(1)
definition of "fringe benefit"
definition of "in respect of"

Case References:
Caelli Constructions (Vic) Pty Ltd v Commissioner of Taxation
(2005) 147 FCR 449
60 ATR 542
2005 ATC 4938

Cameron Brae Pty Ltd v Commissioner of Taxation
(2006) FCA 918
2006 ATC 4433
63 ATR 488

Essenbourne Pty Ltd v Federal Commissioner of Taxation
[2002] FCA 1577
2002 ATC 5201
51 ATR 629

Spotlight Stores Pty Ltd v Federal Commissioner of Taxation
[2004] FCA 650
2004 ATC 4674
(2004) 55 ATR 745

Walstern v Federal Commissioner of Taxation
(2003) 138 FCR 1
(2003) 54 ATR 423
2003 ATC 5076

Other References:
PSLA 2007/2