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The AAT has upheld the taxpayer company's appeal against a decision of the Commissioner to deny the taxpayer a deduction for payments made to an Employee Welfare Fund (the Fund), that is, a fund established for the benefit of its employees.

The payments were made to the Fund following a change in the law limiting the amount of deductible contributions that could be made to a superannuation fund. The taxpayer company was contractually bound to pay amounts in excess of the limits to 2 of its employees (Mr Mark Trail and Mr Allan Trail), being 2 of the 3 founders of the business subsequently purchased by the taxpayer company (in which they held a majority interest). The evidence for the taxpayer was that an agreement was reached with the 2 employees to vary the terms of their employment contracts with the company, such that the contributions required by those agreements to be made to superannuation would, instead, be made to the Fund. This was accepted by the AAT, despite the absence of documentary evidence. On this basis, the AAT held that the payments were deductible under s 51(1) ITAA 1936 and s 8-1 ITAA 1997, distinguishing Benstead Services Pty Ltd and FCT [2006] AATA 976; (2006) 64 ATR 1232; 2006 ATC 2511].

In relation to the Commissioner's argument that Part IVA applied to the payments, the AAT held that there was no tax benefit. Thus, Part IVA did not apply. It said, at para 29:

"What the scheme achieved was to make the full amount of the payments deductible by changing the character of the payments from superannuation payments to payments to the Employee Welfare Fund. But, had the scheme not been implemented, I find it impossible to conclude that [the taxpayer company] would have discharged its obligations to Mr Mark Trail and Mr Allan Trail in a way that was not fully tax deductible. It made no sense for [the taxpayer company, or for Mr Mark Trail and Mr Allan Trail as the ultimate beneficial owners of 51% of its capital, to make significant payments on the revenue account that were deductible only in part, and a relatively small part at that. It made even less sense for the minority shareholders."

Trail Bros Steel and Plastics Pty Ltd and FCT [2007] AATA 1850 (AAT, Hack SC DP, 12 October 2007).

For a copy of the decision, go here

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