Westpac Banking Corp v Commissioner of Taxation
[1996] FCA 266
•24 APRIL 1996
CATCHWORDS
TAXATION - Fringe Benefits Tax - loans made to employees at a concessional rate of interest where establishment fee normally charged to customers not charged to employees - whether residual fringe benefit - whether loan fringe benefit processes exclusive code in relation to benefits attributable to loans - whether benefit a fringe benefit.
Fringe Benefits Tax Assessment Act 1986 (Cth): ss45, s16(1), s136(1), definition of "fringe benefit", definition of "benefit".
Smith v Federal Commissioner of Taxation (1988) 164 CLR 513; applied.
WESTPAC BANKING CORPORATION v COMMISSIONER OF TAXATION
Nos NG 169-171 of 1995.
HILL J
SYDNEY
24 APRIL 1996
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) Nos NG169-171 of 1995
)
GENERAL DIVISION )
BETWEEN:WESTPAC BANKING CORPORATION
Applicant
AND:COMMISSIONER OF TAXATION
Respondent
CORAM: HILL J
PLACE: SYDNEY
DATED: 24 APRIL 1996
MINUTES OF ORDER
THE COURT ORDERS THAT:
(1)Application dismissed.
(2)Applicant to pay respondent's costs of the application.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) Nos NG169-171 of 1995
)
GENERAL DIVISION )
BETWEEN:WESTPAC BANKING CORPORATION
Applicant
AND:COMMISSIONER OF TAXATION
Respondent
CORAM: HILL J
PLACE: SYDNEY
DATED: 24 APRIL 1996
REASONS FOR JUDGMENT
Westpac Banking Corporation ("the Bank") grants credit facilities to its customers. Those credit facilities may take the form of housing loans, loans for investment purposes, automobile finance or credit card facilities.
Generally, where a person wishes to borrow from the Bank, that person (if not an employee) will be interviewed by a bank officer, generally a bank manager. There may be follow up interviews thereafter. The manager authorised to approve the particular lending will make a financial assessment of the affairs of the applicant for finance and may make or arrange to make an internal assessment of the value of the security offered. The manager may need to make a submission to a person higher up in the Bank hierarchy to approve the loan.
If the loan is approved the Bank will notify its customer accordingly, requiring the customer to advise the Bank whether the customer accepts the terms and conditions of the loan which the Bank has approved. A customer who does accept those terms and conditions is required to pay an establishment fee. Without that fee being paid the loan will not be made. However, the fee is payable whether or not the customer thereafter decides not to draw on the facility.
According to the Bank's Australian Retail Credit Policy document in force at the relevant time, it was intended that the establishment fee reimburse the Bank for costs (for example, interviews, submissions, financial assessment, stamping, registration of documents, inspections and settlements) relating to loan applications-approvals for:
"*all new advances/loans;
*extensions/increases (including amount and/or term) of existing facilities; and
*secured/unsecured approvals."
There appear to be a limited number of facilities which are exempt from establishment fees. No significance was placed on this fact by the Bank.
Where an employee of the Bank seeks to borrow from the Bank, the application is made not to an officer at manager level, but to the Personnel Department of the Bank. It is Bank policy that loans be made to employees on a concessional basis. Essentially, the procedure which an employee is required to undergo in order to obtain a loan is not greatly different from that which would apply to a member of the public. An employee makes an application and that application is considered. There may be the need to make financial assessments of the material contained in the application. If inadequate material is obtained, contact can be made with the employee by telephone. Valuation inspections, where appropriate, are made. For present purposes, however, there are two differences between the procedure adopted by the Bank in dealing with applications by the public for loans and that adopted when dealing with employees. First, the loan, if initially drawn down, will be at a reduced rate of interest. Second, employees are not required to pay an establishment fee.
It is in these circumstances that the Commissioner of Taxation claims that the Bank is liable to pay fringe benefits tax during the year ended 31 March 1994, in respect of the loan establishment fees foregone by the Bank in respect of loans made by it to its employees.
The value of the fringe benefits said to arise as a result of the failure to charge establishment fees to employees of the Bank, was said by the Commissioner to be $1,857,000. The Bank, both in the objection to the fringe benefits tax assessment and in a statement of facts, issues and contentions lodged by it, challenged the quantum of the taxable fringe benefits on which the tax was assessed. However, no evidence was adduced on the part of the Bank going to the issue of quantum. It is now conceded that if fringe benefits tax was properly payable in the circumstances I have outlined above, then the assessment made by the Commissioner is correct. The short issue between the parties, therefore, is whether fringe benefits tax is exigible where loans are made by the Bank to its employees but the employees to whom those loans have been made are not required to pay an establishment fee.
Senior counsel for the Bank identified two separate issues, necessary to determination of the case. These are:
(1)Whether the non-charging of the establishment fees should be treated as being part of a loan fringe benefit upon which fringe benefits tax is payable, pursuant to the provisions of subdivision B of Division 4 of the Fringe Benefits Tax Assessment Act 1986 (Cth) ("the Act"); and
(2)If the answer to the first question is "no", whether the non-charging of establishment fees, if otherwise a residual fringe benefit, was within the meaning of the Act, a "fringe benefit".
Before turning to these questions it is necessary to say something of the scheme of the legislation.
THE LEGISLATIVE SCHEME
The liability to fringe benefits tax arises under s66 of the Act which provides:
"Subject to this Act, tax imposed in respect of the fringe benefits taxable amount of an employer of a year of tax is payable by the employer."
The expression "fringe benefits taxable amount" is defined by s136AA of the Act. That definition refers to a formula whereby the aggregate fringe benefit amount is multiplied by a fraction. The expression "aggregate fringe benefits amount" is, in turn, defined in s136(1) of the Act relevantly by reference to the sum of the taxable values of all fringe benefits in relation to the employer in relation to the relevant year of tax.
The expression "fringe benefit" is defined in the same definitional section in the following terms:
"`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;
(d)an associate of the employer; or
... in respect of the employment of the employee, but does not include:
...".
Finally, for relevant purposes, the word "benefit" is defined in the same subsection in the following terms:
"`benefit' includes 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 Act in Part III enumerates various kinds of fringe benefits. So, for example, Division 2 is concerned with car fringe benefits, Division 3 is concerned with debt waiver fringe benefits, Division 4 with loan fringe benefits, Division 5 with expense payment fringe benefits, Division 6 with housing fringe benefits, Division 7 with living away from home allowance fringe benefits and so on. Division 12 is headed Residual Fringe Benefits. Relevantly, s45 defines "residual benefits" for the purposes of the Act in the following terms:
"45A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive)."
Thus the provisions of Division 12 on the one hand and Divisions 2 to 11 on the other, are mutually exclusive. Division 4 is concerned with "Loan Fringe Benefits". Section 16 reads:
"16(1)Where a person (in this subsection referred to as the `provider') makes a loan to another person (in this subsection referred to as the `recipient'), the making of the loan shall be taken to constitute a benefit provided by the provider to the recipient and that benefit shall be taken to be provided in respect of each year of tax during the whole or a part of which the recipient is under an obligation to repay the whole or any part of the loan."
Section 18 of Division 4 then provides how the taxable value of a loan fringe benefit is to be calculated. Generally, it can be said that the taxable value of a loan fringe benefit will be the difference between the amount of interest accruing on the loan in respect of the year of tax on the one hand and a notional amount of interest, referable to Commonwealth Bank rates, on the other. The value of the benefit will be reduced in circumstances where, and to the extent that, interest payable on the loan is deductible to the employee.
There is a definition of "loan" in s136(1) of the Act in the following terms:
"`loan' includes:
(a)an advance of money;
(b)the provision of credit or any other form of financial accommodation;
(c)the payment of an amount for, on account of, on behalf of or at the request of a person where there is an obligation (whether expressed or implied) to repay the amount; and
(d)a transaction (whatever its terms or form) which in substance effects a loan of money;".
THE PRIMARY SUBMISSION
The primary submission on behalf of the Bank is put in two separate, albeit related, ways. First, it is said, that where the Bank makes a loan to a member of its staff on concessional terms, it will have made a loan in the ordinary, as well as in the defined, sense. But the making of every loan is a loan benefit if made by a "provider" to a "recipient". The benefit is "the making of the loan". In consequence, Division 4 of Part III of the Act comes into play to permit the calculation of a taxable value of that loan fringe benefit. But once Division 4 has applied, there can be no residual fringe benefit in respect of the same benefit. Thus, because in the present case there has been a loan benefit by the making to employees of loans at concessional rates of interest, there can not as well be a residual fringe benefit arising out of the Bank foregoing the establishment fee.
An alternative way of putting the same argument is to say that the non‑charging of the establishment fee is so intimately related to the loan and the interest charged under it, that foregoing it would be excluded from the definition of residual benefit, even if Division 4 of Part III was not an exclusive code in respect of all benefits of any kind related to loans made by a provider to a recipient. It is said that the establishment fee is but an attribute of the loan itself and not of a character materially different to interest.
The Bank's submissions assert that a construction contrary to its submissions would lead to potentially bizarre results. It is said that, for example, if the relevant attribute for considerations of benefit were the concessional rate of interest which otherwise constituted the provision of a benefit by the provider to the recipient, and that concessional attribute was not regarded as part of the deemed loan benefit under s16(1) of the Act, then it would also be a residual benefit, notwithstanding that the taxable value of the loan fringe benefit was calculated by reference to the concessional rate of interest.
For the Commissioner on the other hand, it was submitted that the Bank's submissions failed to appreciate the nature of the Bank's establishment fee and the relationship between that fee and the Act. The Commissioner's submission was that the benefit which arose for consideration in the present case was not the non-charging of the establishment fee but rather the service performed by the Bank in assessing a loan, considering all relevant documentation and ultimately communicating its acceptance of the loan to the employee. It is submitted that the Bank undertakes to consider a loan, if a loan is applied for, and in so doing provides a privilege, service or facility which is a benefit. This it does at the request of the employee without charging a fee in contradistinction to charging a fee when it considers loans to other customers.
An alternative analysis could be made. The Bank, when approving the terms of a loan, commits itself morally, if not legally, to making funds available to the employee/applicant for them. It is this commitment which is the benefit to the employee.
Whichever way the matter is put, it is significant in the Commissioner's submission that where an establishment fee is paid by a customer of the Bank not being an employee, the fee is paid irrespective of whether the funds the subject of the Bank's approval to lend are in fact drawn down. That serves to differentiate, so it is said, the benefit in the present case from the kind of benefit which is a loan fringe benefit, on the other. It operates to divorce the establishment fee from the loan made by the Bank to the customer.
Although I think it is clear that a benefit could not be a residual fringe benefit if the benefit were included within the category of loan fringe benefits, I do not think it follows from this that the provisions of Division 4 of Part III of the Act dealing with loan fringe benefits are an exclusive code for all benefits that in any way relate to loans. While Division 4 is an exclusive code in respect of benefits which are loans, that is not the same thing.
There is no doubt that in the present case there is a loan in the ordinary sense of the word, that is to say, there is an advance of money in consideration of an undertaking to repay that advance. Of course there is a relationship between the undertaking of the Bank to make funds available to its employees and the actual loan which in due course it makes. There is also a relationship between the steps which the Bank takes in considering and assessing an application for finance and the loan which is the end outcome of that process. But that does not mean that the undertaking to make available funds by way of loan can not of itself be regarded as a benefit. Nor would it mean that the process of consideration and assessment of a loan application can not be seen as a benefit. Once this is appreciated, I think that the first submission of the Bank must fail, in whichever alternative version it may be expressed.
To characterise the establishment of a loan as being an attribute of the loan disguises the separate nature of the two. Where a bank has offered a loan to a customer (employee or otherwise) after a process of assessment of a loan application and that customer has accepted the terms and conditions of the loan, the bank commits itself to permit a draw down of funds on the terms and conditions which it has outlined. Neither that commitment nor the process of assessment is an attribute of the loan in the same sense as interest payable under the loan is.
THE SECONDARY SUBMISSION
The secondary submission of the Bank would have it that the non-charging of the establishment fee is not a right, privilege, service or facility "provided" under an arrangement for, or in relation to, the performance by the employee of work. It is submitted that, even if the non-charging of the establishment fee is a "residual benefit" for the purposes of the Act, there is no provision of that benefit by the Bank to an employee. It is pointed out that s45 does not deem there to have been "provided" any benefit by one person to another. Thus, before there can be a fringe benefit, it would have to be shown that there was a benefit in the defined sense which had been "provided" by the Bank to an employee and done so by force of the employment.
The word "provide" is defined in relation to a benefit to include, to "allow, confer, give, grant or perform". It is said that each of these expressions require some positive act and that to fail to charge an amount can not be the provision of any benefit. Here, if there is to be any benefit at all, that accrues, so it is argued, by reason of the employee's meeting the eligibility criterion, applying for a loan on concessional terms to the Bank and having that loan accepted. That is not, so it is said, a relevant provision of any benefit. Reference is made to the decision of the High Court in Constable v Federal Commissioner of Taxation (1952) 86 CLR 402 at 418.
The Commissioner says in the present case there is a benefit in the defined sense, being the service provided by the Bank to its staff member in assessing the loan application, considering it, reviewing security (if security is offered), inspecting the property, considering any other relevant matters and communicating the Bank's decision. Alternatively, there is a benefit in the Bank committing itself to making the loan. That is a benefit within the definition because it is a service or facility which the Bank itself provides. Further, it is conferred upon the employee and thus "provided" to him or her.
Once the benefit is defined, as the Commissioner now submits before me (rather than in the way the Commissioner initially defined it in the statement of facts, issues and contentions filed in the proceedings, namely by reference to the non-payment of the establishment fee), it becomes clear that there is a benefit and that the benefit is provided to the employee. The only element then necessary for there to be a fringe benefit is that the service be provided to the employee in respect of the employment of that employee.
It may be argued that the Bank only considers the application and performs the other services because the employee has requested it to do so, and that in considering the application it does not provide the service "in respect of" the employee's employment. While there may be some force in that argument, I do not think that it can be accepted. The words "in respect of the employment of the employee" are very wide words. The width of them is revealed in the decision of the majority members of the High Court in Smith v Federal Commissioner of Taxation (1988) 164 CLR 513. I think that it is correct to say that when a bank employee applies to the Bank for a loan and the Bank considers the loan application and deals with it in the usual way, the rendering of the service of considering the application with its attendant services, and the subsequent commitment of funds, comes about because the employee is in the employment of the Bank. In that sense it is correct to say that the service is in respect of the employee's employment and thus a fringe benefit.
It may be added that the conclusion I have reached accords with the general policy of the legislation to tax benefits which may substitute for remuneration. Bank officers who borrow from their employees obtain two different advantages over and above those accruing to the public, namely, a concessional rate of interest (a loan fringe benefit) and the non-charging of the ordinary establishment fee (a residual benefit). Both stem from the officer's employment. They are different benefits and each is taxable to the employer under the Act.
I would accordingly dismiss the application with costs.
I certify that this and the
preceding fourteen (14) pages
are a true copy of the Reasons
for Judgment herein of his Honour
Justice Hill.
Associate: Date: 24 April 1996
Counsel and Solicitors R F Edmonds SC instructed by
for Applicant: Allen Allen & Hemsley
Counsel and Solicitors A H Slater QC with R L Hamilton
for Respondent: instructed by Australian Government Solicitor
Date of Hearing: 19 April 1996
Date Judgment Delivered: 24 April 1996
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