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The Federal Court (Collier J) has held that the proposed issue of shares by a public company (ABC Learning Centres Limited - "ABC") to the trustee of a discretionary trust established for the benefit of employees of certain companies ("the companies") licensed or franchised to operate childcare centres by a wholly owned subsidiary of ABC would not give rise to a taxable fringe benefit.

The companies had applied to the Commissioner for a private ruling, believing that the issue had been settled by the decision of Kiefel J in Essenbourne Pty Ltd v FCT [2002] FCA 1577; (2002) ATC 5201; (2002) 51 ATR 629. In Essenbourne, Kiefel J held that the definition of ‘fringe benefit’ as defined by s 136(1) FBT Act 1986 requires reference to a particular employee in connection with the benefit said to have been provided. The companies took the view that the proposed share issue would not be made in respect of any particular employee who may have been a potential beneficiary of the discretionary trust. The Commissioner refused to give a favourable ruling, relying on the views expressed by him in Taxation Ruling TR 1999/5, issued prior to the decision in Essenbourne, and contrary to the views expressed in Essenbourne.

The Commissioner firstly invited the Court to overturn Essenbourne, as well as the 3 other cases which followed Essenbourne - Walstern Pty Ltd v FCT (2003) 138 FCR 1; (2003) 54 ATR 423 (a decision of Hill J); Spotlight Stores Pty Ltd v FCT [2004] FCA 650; (2004) 55 ATR 745; (2004) ATC 4674 (a decision of Merkel J); and Caelli Constructions (Vic) Pty Ltd v FCT [2005] 147 FCR 449; (2005) 60 ATR 542; (2005) ATC 4938 (a decision of Kenny J). This the Court declined to do. Collier J said, at para 53:

"I am not satisfied that the principle articulated by Kiefel J in Essenbourne is clearly wrong. With respect, there is little to add to the reasons provided by Kiefel J in Essenbourne or Hill J in Walstern which have been repeated in this judgment. I agree with the four judges in Essenbourne, Walstern, Spotlight Stores and Caelli Constructions that the identification of particular employees is a requisite element in the application of the definition of ‘fringe benefit’ under the FBTAA."

On the basis of this conclusion, the Court then considered the question of whether, in the present case, a fringe benefit was proposed to be provided in respect of a particular employee. The Commissioner argued that the facts of the present case were distinguishable from Essenbourne, in particular, that shares were to be provided in respect of particular employees. The Commissioner's argument was rejected by the Court which said, if anything, that the present case was an even stronger case than Essenbourne (see para 61). The class of employees named in the trust deed was wide enough to encompass future employees and, in any event, the trust was a discretionary trust. The shares were not to be issued in respect of any particular employee, none of whom had any vested interest in the shares.

The Commissioner was ordered to amend his private ruling accordingly. However, as the case was regarded by the parties as a test case, it is likely that the Commissioner will consider an appeal to the Full Federal Court: Indooroopilly Children Services (Qld) Pty Ltd v FCT [2006] FCA 734 (Federal Court, Collier J 14 June 2006).

For a copy of the decision, go here

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