Slade Bloodstock Pty Ltd and Commissioner of Taxation
[2006] AATA 666
•31 July 2006
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2006] AATA 666
ADMINISTRATIVE APPEALS TRIBUNAL № VT2005/259‑261
TAXATION APPEALS DIVISION
Re: SLADE BLOODSTOCK PTY LTD
Applicant
And: COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal: Dr Gordon Hughes, Member
Date:31 July 2006
Place:Melbourne
Decision:The Tribunal sets aside the decisions under review and in substitution decides that the payments made by the applicant in the 2000, 2001 and 2002 income years were not fringe benefits made in the course of employment and therefore not subject the fringe benefits tax.
The Tribunal certifies that the matter has terminated in a manner favourable to the applicant.
(sgd) Gordon Hughes
Member
TAXATION – Fringe Benefits Tax ‑ monies paid in partial discharge of a loan – whether payments are a "benefit" – whether payments are a "fringe benefit" – whether payments made "in respect of employment"
Fringe Benefits Tax Assessment Act 1986 ss 73, 114, 136, 137, 138B, 148B
J & G Knowles and Associates Pty Ltd v Commissioner of Taxation (2000) 96 FCR 402 Starrim Pty Ltd v Commissioner of Taxation (2000) 102 FCR 194
Re Curtain World Pty Ltd and Deputy Commissioner of Taxation [1999] AATA 14
REASONS FOR DECISION
31 July 2006 Dr Gordon Hughes, Member
1. This application was heard by the Tribunal on 2 May 2006. Slade Bloodstock Pty Ltd (the applicant) was represented by Mr Arthur Athanasiou, a solicitor with Rigby Cooke Lawyers, and the Commissioner of Taxation (the respondent) was represented by Mr Peter Sest of counsel.
2. The applicant was seeking a review of a decision by the Commissioner to assess fringe benefits tax (FBT) in respect of payments made by the applicant to or on behalf of Mr Robert Slade (Robert) and Mrs Corinna Slade (Corinna).
BACKGROUND
3. The applicant was incorporated on 28 April 1999 and acts as trustee of the Slade Bloodstock Unit Trust (the unit trust).
4. The beneficial interest in the issued units of the unit trust is held by the Sandalwood Trust (the discretionary trust) and ultimately benefits the members of the Slade family, being Robert and Corinna.
5. Robert controls the applicant, being its sole director and secretary. The shares are held by Robert and Corinna.
6. Robert is a Certified Plasticising Accountant with the status of associate. He has always had an interest in racehorses and during the 1990s he decided to commence a business acquiring and syndicating racehorses.
7. The unit trust was established in the 2000 income year. The applicant carries on the business of racehorse acquisition and syndication as the trustee of the unit trust.
8. Initially, Robert and Corinna kept working independently of the activities of the applicant.
9. The applicant is in the business of purchasing racehorses at yearling sales and then advertising for potential investors to become members of a syndicated partnership in respect of each horse. The applicant also provides a support role to each syndicated partnership.
10. In 2003 the respondent audited the affairs of the applicant and issued original FBT Assessments for the FBT years ended 31 March 2000, 31 March 2001 and 31 March 2002. The audit determined that the applicant had provided a number of benefits to Robert and Corinna in the form of car benefits, household expenses, meal, entertainment and other private expenses. The respondent contends that these payments were provided to Robert and Corinna by the applicant in connection with their employment, whereas the applicant contends that the payments were made in the partial discharge of the debt it owed to Robert and Corinna.
11. The applicant contends that at no time prior to the 2003 income year was either Robert or Corinna employed by it, nor did they receive payments for services provided to it. The applicant contends that it was only at the insistence of the respondent's auditor that Robert and Corinna became employees of the applicant for pay as you go withholding (PAYGW) purposes.
12. For the 2000 and 2001 income years, the applicant suffered losses of $616.00 and $9,907.00 respectively. However, there was an operating profit in the 2002 income year.
13. The applicant's turnover for the 2000, 2001, and 2002 income years was approximately $200,000, $355,000 and $836,000 respectively.
14. Income from syndications for the 2000, 2001 and 2002 income years was approximately $153,000, $247,000 and $805,000 respectively.
15. In the relevant FBT years in question, the applicant relied on funding by Robert and Corinna to continue conducting its enterprise.
16. The applicant had entered into a written loan agreement with Robert and Corinna dated 28 April 1999 to the effect that the applicant would repay any and all amounts owing by it to Robert and Corinna at call. The applicant also agreed to make repayments to any third party at the direction of Robert and Corinna, including but not limited to payments for loans, credits cards and mortgages.
17. Robert and Corinna initially contributed money from their separate employment activities into the applicant in order to fund its activities.
18. The loan accounts of Robert and Corinna collectively at the end of each income year were as follows:
30 June 2000 $14,618.00 CR
30 June 2001 $67,272.00 CR
30 June 2002 $94,506.00 CR
19. Drawings made by Robert and Corinna from the bank account of the applicant were treated by the respondent as fringe benefits.
20. These drawings were treated by Robert and Corinna, however, as being for their own private purposes by way of reducing the amount owed by the applicant to them and progressively discharging the applicant's obligation towards them in accordance with their written agreement.
21. By 30 June 2003 the applicant's loan account with Robert and Corinna had gone into debit, meaning that Robert and Corinna both owed the applicant money from drawing down their at call loan account.
22. Robert and Corinna would at times utilize a motor vehicle acquired by them in the name of the applicant for business purposes. They would also use the vehicle for private purposes, and the value of the use of that vehicle for private purposes calculated after a proportion for private use of 15 per cent was negotiated by the respondent's representatives and the applicant during the course of the audit.
23. The applicant did not lodge an FBT return for the relevant years.
24. As a result of the audit in 2003, default assessments were issued pursuant to section 73 of the Fringe Benefits Tax Assessment Act 1986 (the FBT Act) (the FBT assessments), as follows:
Year
Date of Issue
Taxable Amount
Tax Payable
2000
28 APR 04
$46,609.00
$22,605.36
2001
30 APR 04
$32,688.00
$15,853.68
2002
30 APR 04
$41,715.00
$20,231.77
25. The FBT assessments were based on the following benefits provided to Robert and Corinna Slade by the applicant:
Benefits
2002
2001
2000
Expense Payments
House Curtain
6,700
Various Private Expenses
6,718
8,498
Other Household Expenses
2,754
699
659
Housing Loan – Mortgage Interest
13,747
5,201
4,993
Meal Entertainment
1,632
1,031
828
Car
2,670
2,162
2,326
$20,803
$15,811
$24,004
Grossed up amount
$46,609
Type 1
$15,023
$22,590
Type 2
$26,692
$10,098
Total Aggregate FBT Amount
$41,715
$32,688
$46,609
Tax Payable
$20,231.77
$15,853.68
$22,605.36
26. The respondent assessed the additional tax payable by way of penalty under section 114 in Part VIII of the FBT Act (failure to furnish return) for the 2000 and 2001 years, and section 284-85 in Schedule 1 of the Taxation Administration Act 1953 (the TAA Act) for the 2002 year (the Penalty Assessments) as follows:
2002
2001
2000
Tax shortfall
$20,231.77
$15,853.68
$22,605.36
Allowance for deductibility
$14,162.22
$10,463.42
$14,467.42
(ie 100% less co. tax rate)
Culpability rate 50% (recklessness)
50%
50%
50%
Penalty
$7,081.11
$5,231.71
$7,233.71
27. The applicant contended that the payments drawn by Robert and Corinna did not relate to any employment relationship but involved a discharge by the applicant of its obligations as a debtor in the relevant FBT years.
28. The applicant further contended that if and to the extent the payments were "fringe benefits", they were not provided in the course of the employment of either Robert or Corinna because at the time of the drawing down of the loan accounts neither Robert nor Corinna were employees as defined in the FBT Act.
29. The applicant also contended that even if fringe benefit payments were made to Robert and Corinna as employees of the applicant, those payments did not relate to their employment for the purposes of section 136(1) of the FBT Act.
30. Finally, the applicant contended that no penalties should apply or, if any penalties should apply, they should be remitted to some lesser amount.
31. The respondent contended that Robert and Corinna were at all relevant times employees of the applicant and provided their services to it to enable it to carry on the business. The respondent emphasised that for the purposes of ascertaining whether a person is an employee within the meaning of the FBT Act, section 137 extends the meaning of salary or wages to include non-cash benefits.
32. The respondent further contended that the benefits were provided by reason of, by virtue of, for or in relation directly or indirectly to, the employment of Robert and Corinna Slade. The benefits were provided in respect of employment, regardless of whether the benefits were also provided in respect of any other activity.
33. The respondent emphasised that during the course of the objection, the applicant's lawyers advised in a letter dated 17 September 2004 that the applicant did “not necessarily dispute the audit finding "that Robert and Corina Slade were employees” of the applicant.
34. In relation to the penalty assessments, the respondent contended that::
(a)Where there was a fringe benefits taxable amount of an employer for the year ended 31 March 2000, the employer was required to furnish a return no later than 28 April 2000.
(b)Where there was a fringe benefits taxable amount of an employer for the year ended 31 March 2001, the employer was required to furnish a return no later than 21 May 2001.
(c)The Applicant failed to lodge returns for the years ended 31 March 2000 and 31 March 2001. In the premises the Applicant is liable to pay additional tax by way of penalty under section 114 of the FBT Act equal to double the amount of tax payable. However, in accordance with Taxation Ruling TR 95/4 and section 117 of the FBT Act, the Commissioner has remitted the additional tax payable to 50% of the tax payable.
(d)Where there was a fringe benefits taxable amount of an employer for the year ended 31 March 2002, the employer was required to furnish a return no later than 28 April 2002.
(e)The Applicant failed to lodge a return for the year ended 31 March 2002. In the premises the Applicant is liable to pay an administrative penalty under section 284-75(3) in Schedule 1 of the TAA. Pursuant to sections 284-85 and 284-90 the amount of the penalty is 75% of the tax payable. However pursuant to section 298-20 in Schedule 1 of the TAA the Commissioner has remitted the penalty to 50% of the tax payable.
(f)The amounts of penalty assessed for the relevant years are not excessive.
FINDINGS
35. Under the FBT Act, section 136(1) defines a "benefit" as:
…any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:
(a) an arrangement for or in relation to:
(i)the performance of work (including work of a professional nature), whether with or without the provision of property;
(ii)the provision of, or of the use of facilities for, entertainment, recreation or instruction; or
(iii)the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;
(b) a contract of insurance; or
(c) an arrangement for or in relation to the lending of money.
36. The Tribunal is satisfied that the loan repayments constituted a "benefit" as defined by section 136(1) of the FBT Act. The payments represented, within the wide scope of section 136(1), a right, privilege, service or facility, and certainly a right of Robert and Corinna which was provided in relation to an arrangement for or in relation to the lending of money. The issue, therefore, becomes whether those payments represented a "fringe benefit".
37. A "fringe benefit" is defined in part by section 136(1) of the FBT Act as follows:
fringe benefit, 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; or
(d) an associate of the employer; or
(e)a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:
(i)the employer or an associate of the employer; and
(ii)the arranger or another person; or
(ea)a person other than the employer or an associate of the employer, if the employer or an associate of the employer:
(i)participates in or facilitates the provision or receipt of the benefit; or
(ii)participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;
and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;
in respect of the employment of the employee…
38. Section 138B of the FBT Act provides:
A reference in this Act to a benefit provided in respect of the employment of an employee is a reference to a benefit provided, or originally provided, as the case may be, in respect of that employment.
39. In relation to the provision of a benefit to a person "in respect of the employment of an employee", section 148(1) of the FBT Act provides as follows:
(1) A reference in this Act to the provision of a benefit to a person in respect of the employment of an employee is a reference to the provision of such a benefit:
(a)whether or not the benefit is also provided in respect of, by reason of, by virtue of, or for or in relation directly or indirectly to, any other matter or thing;
(b)whether the employment will occur, is occurring, or has occurred;
(c)whether or not the benefit is surplus to the needs or wants of the recipient;
(d)whether or not the benefit is also provided to another person;
(e)whether or not the benefit is, to any extent, offset by any inconvenience or disadvantage;
(f)whether or not the benefit is provided or used, or required to be provided or used, in connection with that employment;
(g)whether or not the provision of the benefit is, or is in the nature of, income; and
(h)whether or not the benefit is provided as a reward for services rendered, or to be rendered, by the employee.
40. The applicant contended that the repayment did not represent a "fringe benefit" because the payments were in discharge of a debt and were not a benefit paid in respect of the employment of an employee.
41. The first issue to be addressed in this regard is whether Robert and Corinna were "employees" of the applicant at the relevant time. The applicant asserted that Robert and Corinna were not employees. It was contended that they had only become employees of the applicant for PAYGW purposes later, as a consequence of the audit conducted on behalf of the respondent in 2003. Nevertheless, the Tribunal accepts that the basis upon which the auditor apparently made this insistence was well founded. The fact remains that both Robert and Corinna offered their services to the applicant on an increasingly regular, and ultimately full‑time, basis. What may have started as a hobby or a passion evolved over a short period of time into a viable business. Robert and Corinna may not have regarded themselves as being employees of the applicant but it is a fair categorisation of their relationship.
42. Once it is accepted that Robert and Corinna were "employees" of the applicant, and that the payments made to them were "benefits", the next question is whether the benefits were paid "in respect of the employment" of Robert and Corinna as employees.
43. In J & G Knowles and Associates Pty Ltd v Commissioner of Taxation (2000) 96 FCR 402 at paras 28 – 29, the Full Court of the Federal Court commented on the meaning of "in respect of":
…
While the width of the definition of "fringe benefits" was designed to capture benefits that, in truth, were other than remuneration, the stated purpose suggests that asking whether the benefit is a product or incident of the employment will be helpful. If it is not then the benefit is likely to be extraneous to the employment and will not bear FBT, notwithstanding that the employment might have been a causal factor in the provision of the benefit. In particular, the fact that a benefit is provided to a director because it was authorised by that director will not, of itself, be sufficient to characterise the benefit as one which is "in respect of" the employment. Without more, it is not a product or incident of that office.
To put the matter another way, although the process of characterising the benefit provided in a particular case can involve questions of fact and degree, it is not sufficient for the purposes of the Act merely to enquire whether there is some causal connection between the benefit and the employment: see Commissioner of Taxation (Cth) v Rowe (1995) 60 FCR 99 at 114 and 123…
44. In Starrim v Commissioner of Taxation (2000) 102 FCR 194, Lingren J stated at para 48:
… [S]ubs 148(1) of the Act signifies only that the factors referred to in it are not to be treated as inconsistent with the provision of a benefit being "in respect of" employment. In some instances, at least, the subsection refers to factors that might have been thought to suggest that a benefit was not provided in respect of the employment.
While it does not in terms purport to "expand" the meaning of the expression "in respect of the employment", s 148(1) is intended to eliminate constrictive preconceptions. Accordingly, a notion that a benefit is in respect of employment only if it is a form of remuneration for services is negated by par (h) of s 148(1) set out earlier. In sum, the subsection emphasises that the expression "in respect of" is intended to be of wide import and, I would add, highlights the potential difficulty of applying the provision in anything but the plainest of cases.
45. In applying Knowles, the Federal Court of Australia in Starrim stated at para 52 that:
…[T]he decision of the Full Court in Knowles establishes that the required relationship between the provision of a benefit and the employment is not established merely by the existence of some or a causal relationship, and, in particular, that it is not established by nothing more than the fact that the employee has been able to cause the benefit to be provided to him or her by reason of his or her office as a director of the employer. There must be a "sufficient" or "material" relationship between the employment and the provision of the benefit.
46. In Knowles, the Full Court of the Federal Court upheld an appeal by the taxpayer against an assessment of fringe benefits tax in respect of interest free loans made by a corporate trustee of a unit trust to its directors who, together with members of their families, were the persons for whose ultimate benefit the trust was established. The facts are not apposite to the current case. It is nevertheless instructive that the court found (at para 23) that it cannot be said that any causal relationship between the benefit and the employment is a sufficient link so as to result in a taxable transaction. In the court's opinion, it was necessary to establish a sufficient or material relationship or connection between the loans and the employment, in addition to the causal link.
47. The applicant insists that the payments were not in the form of remuneration but were in fact in the form of loan repayments. The terms of the loan agreement were as follows:
SHAREHOLDER'S LOAN AGREEMENT
IT IS HEREBY AGREED between
Slade Bloodstock Pty Ltd (ACN 087 331 459) hereinafter known as the Company,
And
Robert James Slade and Corinna Thomas, hereinafter known as the shareholder
That:
1.Any monies paid or advanced by the Company to the shareholder will attract annual interest to be paid in monies at a rate to be at least the "lending Rate for Bank Variable Housing Loans". As published by the Reserve Bank of Australia, hereinafter known as the benchmark interest rate.
2.All loan balances are to be determined at the 30th of June each year and a loan repayment schedule established. The schedule will repay the loan in seven (7) years. No minimum repayment is required for the year in which the loan is actually advanced. A minimum repayment is required in each subsequent year. The minimum repayment shall be determined by the following formula:
Amount of loan not repaid by the end of the previous year of income
XCurrent year's benchmark
interest rate1 – [1/{1+previous year's benchmark interest rate}] remaining term
It is noted that although the formula for the minimum repayment uses the previous year's interest rate, the actual interest rate must be the rate specified for the year.
3.Nothing in this agreement shall prevent the shareholder repaying more than the minimum repayment.
4.The shareholder agrees that the company may debit the shareholder loan account on 31 March each year with the shareholder's employee contribution to Fringe Benefits Tax, if any, on amounts that would be subject to FBT.
5.The company agrees to repay any or all amounts owing by it to the shareholder at call. The company further agrees to make repayments to any party directed by the shareholder, including but not limited to payments on behalf of the shareholder for loans, credit cards, mortgages, school fees and any other payee directed by the shareholder.
Dated this twenty eighth day of April 1999.
48. The respondent contends that the benefits paid to Robert and Corinna could only be categorised as a form of remuneration. Robert and Corinna were paid no other salary or wages, notwithstanding their absolute control over the applicant and the absolute dependence of the business upon their services. It would be artificial, the respondent says, to source the payment to Robert and Corinna's ultimate beneficial interest in the business, either alone or predominantly.
49. The Tribunal nevertheless has difficulty accepting that, in this instance, the payments made by the applicant to Robert and Corinna could be classified as being made "in respect of" their employment. While there is a superficial attraction in concluding that the payments were necessarily an incident of employment, particularly when viewed in the context of section 148(1) of the FBT Act, the Tribunal does not accept that this was in fact the case. The payments were at all times regarded by Robert and Corinna, and therefore the applicant, as nothing more than a loan repayment. They would have been entitled to such repayments regardless of the existence of the employment relationship, and they would have activated the repayments regardless of the existence of the employment relationship. The benefits were not connected with the employment of Robert and Corinna but rather they were related to the ultimate beneficial ownership held in the units of the unit trust. There was no material relationship between the employment of Robert and Corinna and the provision of the benefits – indeed, there was no relationship.
50. The respondent observed that the applicant had deducted certain payments from its assessable income when completing its tax returns, thus evincing a concession on the applicant's part that the payments were made for the purpose of gaining or producing its assessable income. This was particularly the case in relation to business related benefits such as car, entertainment and home office expenses. The respondent referred the Tribunal in this regard to Re Curtain World Pty Ltd and Deputy Commissioner of Taxation [1999] AATA 14, a case with some analogous features. However, the Tribunal does not consider that case to be of direct assistance in the matter before it. While there is merit in the respondent's contention that the applicant cannot have it both way, the Tribunal accepts the accuracy of the explanation provided to the respondent by the applicant's solicitors on 17 September 2004 that these expenses were claimed in error. The question of whether the payments made to Robert and Corinna were "in respect of employment" is ultimately determined by an application of the law to the facts and cannot be determined solely by the manner in which the applicant treated those expenses in its own tax returns.
51. The respondent queried the inclusion in the applicant's financial statements for the years ending 2001 and 2002 of a line item "Employee Contribution SBT". Robert told the Tribunal he was not aware why this had been included as it was a decision made by his accountant. The applicant's accountant, Phillip McGuiness, told the Tribunal that these amounts represented the private use element of a vehicle used primarily for business purposes. Normally, this amount would be added back as the employee's contribution to FBT but it could alternatively have been described as "Directors' Contribution". The Tribunal accepts this rationalisation in the context of this case. The narration is not considered by the Tribunal to be compelling recognition of the existence of FBT liability.
52. For the above reason, the Tribunal sets aside the reviewable decision and in substitution decides that the payments made by the applicant in the 2000, 2001 and 2002 income years were not fringe benefits made in the course of employment and therefore not subject the fringe benefits tax.
I certify that the fifty‑two [52] preceding paragraphs are a true copy of the reasons for the decision of:
Dr Gordon Hughes, Member
(sgd) Olympia Sarrinikolaou
Clerk
Date of hearing: 2 May 2006
Date of decision: 31 July 2006
Counsel for the applicant: Mr A. Athanasiou,
Solicitor for the applicant: Rigby Cook LawyersCounsel for the respondent: Mr P. Sest
Solicitor for the respondent: ATO Legal Services Branch
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