On 22 February 2007, the Full Court of the Federal Court of Australia (full court) confirmed that fringe benefits tax cannot be assessed on contributions (relevantly, share issues) to employee benefit trust schemes. In doing so, the full court upheld five decisions of single judges of the Federal Court, including the first in the series, Essenbourne (2002).
The full court took the opportunity to remind the commissioner that when issuing private rulings to taxpayers his role is to apply, not interpret, the taxation laws. Specifically, the full court said the commissioner cannot ignore ‘considered decisions of a court declaring the meaning of a statute’.
Peter Smith, senior associate in Freehills’ Brisbane office, who ran the case for the taxpayer comments:
... the court’s criticism of the Commissioner will be welcomed by many in the business community, who have become increasingly frustrated by the Commissioner’s approach in dealing with tax disputes arising in a commercial context, including ‘the perception that at times the Tax Office has a win at all costs’ (to use the words of the tax watch dog, David Vos) approach in litigating those disputes.
Primary issue — no fringe benefit on share issues
The full court found that a contribution can only be a ‘fringe benefit’ where it is provided in connection with a particular employee or group of employees, or an associate of the employee(s). If the employee or associate cannot be identified when the contribution is made to the trust, the contribution cannot satisfy the definition of ‘fringe benefit’.
Secondary issue — commissioner must apply the law
The taxpayer, Indooroopilly Children Services (Qld) Pty Ltd, sought a private ruling from the commissioner about whether the issue of shares in its holding company to the trustee of an employee share scheme would attract fringe benefits tax. Although Justice Kiefel of the Federal Court had previously answered that question in the negative in Essenbourne, the commissioner said he disagreed with Justice Kiefel and issued the private ruling in line with T/R 1999/5—concluding that fringe benefits tax must be paid for each share issue.
The taxpayer objected. The commissioner disallowed the objection. He did so, despite Justice Hill of the Federal Court in Walstern having earlier confirmed that Justice Keifel in Essenbourne ‘was clearly right’.
In those circumstances, the full court said the commissioner had three options, given that he had chosen not to appeal the earlier decisions:
- follow Essenbourne and Walstern and allow the taxpayer’s objection
- ask parliament to change the law, or
- promptly seek a declaration from the Federal Court as to the proper construction of the statute.
Justice Allsop commented that the commissioner’s conduct puts taxpayers in the position of 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’.
This article was written by Peter Smith, Senior Associate, Brisbane.
More information
For information regarding possible implications for your business, contact