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26 Feb 07 No FBT on shares issued to trustee - Indooroopilly

The Full Federal Court (Stone, Allsop and Edmonds JJ) has dismissed an appeal by the Commissioner from the decision of Collier J, who 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 taxpayer had sought a private ruling to this effect, but had been refused by the Commissioner.

The Commissioner's primary argument on appeal was that a fringe benefit had been provided to the trustee of the trust as an "associate" of each of the employees, because each of the employees was capable of benefiting under the trust [see s 26AAB(14)(a)(iv) of the ITAA 1936] even though none of the employees benefited at the time of issue of the shares and may never in fact have benefited under the trust having regard to its discretionary nature. This argument was rejected by the Court.

Edmonds J, with whom the other judges agreed, said at para s 37-8:

"37 This does not mean...that a benefit provided to a number of employees or 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 a share of the benefit – cannot be a ‘fringe benefit’. It will be a fringe benefit provided the identity of each of the employees who will take a share of the benefit is known with sufficient particularity, at the time the benefit is provided, to enable it to be said that the benefit is provided in respect of the employment of each of those employees.

38 However, where, as here, the identity of those employees capable of taking the benefit who will in fact take the benefit, is not known at the ‘provision time’, as wide as the phrase ‘in respect of the employment’ is... if the reference to ‘the employee’ throughout the definition [of 'fringe benefit'] is to a particular employee, as I think it is, I am unable to conclude that the benefit here provided by ABC...to the trustee...is a ‘fringe benefit’; at the ‘provision time’ the benefit is not provided in respect of the employment of any particular employee or all of the employees capable of benefiting taken as a whole, only some of them, and they are not known. The provisions of subs 148(1) of the FBTAA take the matter no further."

In refusing to issue a favourable private ruling, the Court was very critical of the Commissioner's failure to follow a number of Federal Court decisions which supported the taxpayer's view that there was not liability to FBT. Allsop J said, at para 3:

" From the material that was put to the Full Court, it was open to conclude that the appellant was administering the relevant revenue statute in a way known to be contrary to how this Court had declared the meaning of that statute. Thus, taxpayers appeared to be in the position of seeing a superior court of record in the exercise of federal jurisdiction declaring the meaning and proper content of a law of the Parliament, but the executive branch of the government, in the form of the Australian Taxation Office, administering the statute in a manner contrary to the meaning and content as declared by the Court; that is, seeing the executive branch of government ignoring the views of the judicial branch of government in the administration of a law of the Parliament by the former. This should not have occurred. If the [Commissioner] has the view that the courts have misunderstood the meaning of a statute, steps can be taken to vindicate the perceived correct interpretation on appeal or by prompt institution of other proceedings; or the executive can seek to move the legislative branch of government to change the statute. What should not occur is a course of conduct whereby it appears that the courts and their central function under Chapter III of the Constitution are being ignored by the executive in the carrying out of its function under Chapter II of the Constitution, in particular its function under s 61 of the Constitution of the execution and maintenance of the laws of the Commonwealth."

FCT v Indooroopilly Children Services(Qld) Pty Ltd [2007] FCAFC 16 (Full Federal Court; Stone, Allsop and Edmonds JJ; 22 February 2007).

For a copy of the decision, go here

Following the decision, the Commissioner advised that he will not be seeking special leave to appeal the decision of the Full Federal Court in the Indooroopilly Children Services case in relation to the Fringe Benefits Tax (FBT) matter. Accordingly, the ATO will be reviewing outstanding employee benefit arrangement cases that are impacted by the Court's decision in relation to FBT assessments. Taxation Ruling TR 99/05 will also be modified to take account of the Court's decision.

For a copy of the Commissioner's advice, go here

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