Commissioner of Taxation v Indooroopilly Childrens Services Pty Ltd
Document type: Decision Impact Statement
Venue: Federal Court of Australia (QUD 253 OF 2006)
Judgment date: 22 February 2007
Date published: 25 February 2011

Summary of decision:
Outlines the Tax Office's response to this case which concerned whether FBT applied to the gift of shares to a trust established for the benefit of a class of employees.

Overview of facts:
• The respondent applied for a private ruling under Part IVAA of the Taxation Administration Act 1953 as to whether a liability for fringe benefits tax arose on the basis of a certain proposed arrangement set out in the ruling request. • ABC Development Learning Centres Pty Ltd (ABC) is licensed to operate childcare centres. It licences or franchises Regional Management Companies (RMCs) to carry on the operation of the childcare centres. The RMCs employ their own staff. The respondent was one such RMC. • ABC is the wholly owned subsidiary of ABC Learning Centres Ltd (ABC Public). ABC Public indicated an intention to: 1) establish an employee share plan scheme which would provide shares in ABC Public to current and future employees of the RMCs; 2) settle a trust - a Carers Share Plan (CSP) - with an arm's length trustee; 3) gift shares to the trustee of the CSP. The RMCs, including the respondent, were intended to have no role in the operation of the CSP. • The initial share issue was to be calculated by reference to the number of employees of the RMCs who had signed AWAs, the length of employment with RMCs and other criteria. The issue was not to involve any specification as to the number or value of shares to which any individual employee would be entitled. The trustee would exercise its discretion to issue shares to particular employees at a later time having regard to matters such as their employment position and their years of service. • The Commissioner ruled that the initial issue of shares by ABC Public would give rise to the provision of a fringe benefit in respect of the respondent's employees. The Commissioner relied on his views in Taxation Ruling TR 1999/5. The respondent objected to the ruling and the Commissioner disallowed the objection. The respondent appealed to the Federal Court. • The decision of Collier J was handed down on 14 June 2006. Her Honour decided that the view expressed in Essenbourne Pty Ltd v FC of T 2002 ATC 5201, about how the law should apply, was not clearly wrong and should be followed. Her Honour also decided that the facts of the case were not relevantly distinguishable from Essenbourne . • In Essenbourne , Kiefel J held that a benefit provided to a trust will not be a 'fringe benefit' unless it is provided in respect of the employment of a particular employee. This view has been followed in a number of later single judge decisions - Walstern Pty Ltd v FC of T (2003) 138 FCR 1, Spotlight Stores Pty Ltd v FC of T 2004 ATC 4674, Caelli Constructions (Vic) Pty Ltd v FC of T (2005) 147 FCR 449 and Cameron Brae Pty Ltd v FC of T 2006 ATC 4433. • The Commissioner's view of the law, as expressed in TR 1999/5, was that a benefit provided in respect of the employment of more than one employee is a 'fringe benefit', notwithstanding that it is not provided in respect of a particular employee; alternatively, that a benefit provided in respect of more than one employee is provided in relation to each and every employee. • The Commissioner appealed from the decision of Collier J | • The respondent applied for a private ruling under Part IVAA of the Taxation Administration Act 1953 as to whether a liability for fringe benefits tax arose on the basis of a certain proposed arrangement set out in the ruling request. • ABC Development Learning Centres Pty Ltd (ABC) is licensed to operate childcare centres. It licences or franchises Regional Management Companies (RMCs) to carry on the operation of the childcare centres. The RMCs employ their own staff. The respondent was one such RMC. • ABC is the wholly owned subsidiary of ABC Learning Centres Ltd (ABC Public). ABC Public indicated an intention to: 1) establish an employee share plan scheme which would provide shares in ABC Public to current and future employees of the RMCs; 2) settle a trust - a Carers Share Plan (CSP) - with an arm's length trustee; 3) gift shares to the trustee of the CSP. The RMCs, including the respondent, were intended to have no role in the operation of the CSP. • The initial share issue was to be calculated by reference to the number of employees of the RMCs who had signed AWAs, the length of employment with RMCs and other criteria. The issue was not to involve any specification as to the number or value of shares to which any individual employee would be entitled. The trustee would exercise its discretion to issue shares to particular employees at a later time having regard to matters such as their employment position and their years of service. • The Commissioner ruled that the initial issue of shares by ABC Public would give rise to the provision of a fringe benefit in respect of the respondent's employees. The Commissioner relied on his views in Taxation Ruling TR 1999/5. The respondent objected to the ruling and the Commissioner disallowed the objection. The respondent appealed to the Federal Court. • The decision of Collier J was handed down on 14 June 2006. Her Honour decided that the view expressed in Essenbourne Pty Ltd v FC of T 2002 ATC 5201, about how the law should apply, was not clearly wrong and should be followed. Her Honour also decided that the facts of the case were not relevantly distinguishable from Essenbourne . • In Essenbourne , Kiefel J held that a benefit provided to a trust will not be a 'fringe benefit' unless it is provided in respect of the employment of a particular employee. This view has been followed in a number of later single judge decisions - Walstern Pty Ltd v FC of T (2003) 138 FCR 1, Spotlight Stores Pty Ltd v FC of T 2004 ATC 4674, Caelli Constructions (Vic) Pty Ltd v FC of T (2005) 147 FCR 449 and Cameron Brae Pty Ltd v FC of T 2006 ATC 4433. • The Commissioner's view of the law, as expressed in TR 1999/5, was that a benefit provided in respect of the employment of more than one employee is a 'fringe benefit', notwithstanding that it is not provided in respect of a particular employee; alternatively, that a benefit provided in respect of more than one employee is provided in relation to each and every employee. • The Commissioner appealed from the decision of Collier J | Issues decided by the court or tribunal | The court was unanimous in dismissing the Commissioner's appeal. Edmonds J provided reasons for decision, with which Stone and Allsop JJ agreed in separate judgements. | Edmonds J said that it was necessary, as Kiefel J had held in Essenbourne , to identify a particular employee in respect of whose employment a benefit is provided (paragraph 35). References to 'the employee' in the definition of fringe benefits support the view that there had to be a particular employee identified. Those references limited the term 'in relation to an employee' at the beginning of the definition. | His Honour also said that the requirement to identify a particular employee in respect of whom a benefit is provided is consistent with the identification of an 'associate' to whom a benefit is provided - in many cases it will not be possible to determine whether a recipient of a benefit is an associate of an employee unless the identity of the relevant employee is known (paragraph 36). | His Honour accepted that 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 benefiting, can be a fringe benefit provided that the identity of each employee who will take a benefit is known with sufficient particularity at the time that the benefit is provided (paragraph 37). However, the shares provided to the trustee in this case were not provided in respect of the employment of any particular employee nor all of the employees capable of benefiting who will in fact receive a benefit - only some employees may later benefit, and their identity is not known (paragraph 38). | His Honour said that his conclusion was consistent with his view that there is no discernable legislative policy 'to accelerate and bring to charge.... a benefit which the employee may never get as against a policy of deferring taxes on the benefit unless and until it comes home to the employee' (paragraph 39). | If he were wrong on the main construction point, his Honour concluded that paragraph (e) of the definition of fringe benefit would not apply because it did not appear that there was any arrangement between ABC Public and the respondent for the provision of the benefit (paragraph 40); however, he would have held that paragraph (ea) applied, the respondent participating in or facilitating a scheme or plan involving the provision of the benefit. | Allsop J criticised what he perceived as the Taxation Office administering the law contrary to the earlier single judge decisions of the court about the meaning and content of the definition of a 'fringe benefit'. If the Commissioner has the view that the courts have misunderstood the meaning of the law, his Honour pointed out that the proper course would be to appeal a decision, by 'prompt institution of other proceedings', or the executive can refer the matter for consideration of legislative change. Stone and Edmonds JJ agreed with his Honour's comments, the latter adding that the Commissioner could have earlier sought 'a declaration from the Court as to the proper construction' of the relevant law (paragraph 47).

Issues decided:
The court was unanimous in dismissing the Commissioner's appeal. Edmonds J provided reasons for decision, with which Stone and Allsop JJ agreed in separate judgements. Edmonds J said that it was necessary, as Kiefel J had held in Essenbourne , to identify a particular employee in respect of whose employment a benefit is provided (paragraph 35). References to 'the employee' in the definition of fringe benefits support the view that there had to be a particular employee identified. Those references limited the term 'in relation to an employee' at the beginning of the definition. His Honour also said that the requirement to identify a particular employee in respect of whom a benefit is provided is consistent with the identification of an 'associate' to whom a benefit is provided - in many cases it will not be possible to determine whether a recipient of a benefit is an associate of an employee unless the identity of the relevant employee is known (paragraph 36). His Honour accepted that 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 benefiting, can be a fringe benefit provided that the identity of each employee who will take a benefit is known with sufficient particularity at the time that the benefit is provided (paragraph 37). However, the shares provided to the trustee in this case were not provided in respect of the employment of any particular employee nor all of the employees capable of benefiting who will in fact receive a benefit - only some employees may later benefit, and their identity is not known (paragraph 38). His Honour said that his conclusion was consistent with his view that there is no discernable legislative policy 'to accelerate and bring to charge.... a benefit which the employee may never get as against a policy of deferring taxes on the benefit unless and until it comes home to the employee' (paragraph 39). If he were wrong on the main construction point, his Honour concluded that paragraph (e) of the definition of fringe benefit would not apply because it did not appear that there was any arrangement between ABC Public and the respondent for the provision of the benefit (paragraph 40); however, he would have held that paragraph (ea) applied, the respondent participating in or facilitating a scheme or plan involving the provision of the benefit. Allsop J criticised what he perceived as the Taxation Office administering the law contrary to the earlier single judge decisions of the court about the meaning and content of the definition of a 'fringe benefit'. If the Commissioner has the view that the courts have misunderstood the meaning of the law, his Honour pointed out that the proper course would be to appeal a decision, by 'prompt institution of other proceedings', or the executive can refer the matter for consideration of legislative change. Stone and Edmonds JJ agreed with his Honour's comments, the latter adding that the Commissioner could have earlier sought 'a declaration from the Court as to the proper construction' of the relevant law (paragraph 47).

ATO view of decision:
The Commissioner announced on 22 February 2007 that he would not be seeking special leave to appeal from the decision of the Full Court and that the ATO will be reviewing the FBT assessments associated with outstanding employee benefit arrangement cases that are affected by the decision of the Full Court. The decision has now been applied to the affected cases. | In view of the Court's critical comments the Tax Office sought further advice from the Solicitor-General on the appropriateness of our conduct and what avenues are available for using the declaratory powers of the Court to clarify the proper construction of the taxation laws in a more timely way as suggested by the Court. | The joint advice led by the Solicitor-General has been received. The advice received refers to two previous advices, dated 15 December 2005 and 16 January 2006 . | Declaratory Proceedings | The Solicitor-General and counsel have advised that it would not usually be appropriate for the Commissioner to seek to use declaratory proceedings to resolve taxation disputes. In many cases, a declaration from the court would not be available to test an interpretation of the law because the question would be hypothetical or advisory. The advice confirms that the usual objection and appeal processes involving assessments and private rulings should be used to resolve issues between a taxpayer and the ATO. | Single Judge Decisions | The Solicitor-General and counsel have confirmed their earlier advice that the ATO is not required to follow a single judge decision if, on the basis of legal advice, there are good arguments that, as a matter of law, the decision is incorrect and prompt action is being taken to clarify the position. In the rare circumstances where the Commissioner does not appeal a decision which is considered incorrect, the ATO will seek to take prompt action to test the issue before the Full Court. | The Tax Office accepts that it would have been better if the FBT issue decided by the court in Indooroopilly could have been considered by the Full Court more promptly.

Administrative treatment:
Implications on current Public Rulings & Determinations | Taxation Ruling TR 1999/5 has been withdrawn. | The decision in the Caelli Constructions case supports the views that a trustee of a trust or a non-complying superannuation fund can be an 'associate' of an employee where the employee is capable of benefiting under the trust or fund, and that the payment of money by an employer to the trustee of a trust in respect of the employment of an employee is the provision of a property fringe benefit.

Legislative references: Fringe Benefits Tax Assessment Act 1986 136(1) definition of "fringe benefit" definition of "in respect of"
Case references: Essenbourne Pty Ltd v Federal Commissioner of Taxation [2002] FCA 1577 2002 ATC 5201 51 ATR 629 Walstern v Federal Commissioner of Taxation (2003) 138 FCR 1 (2003) 54 ATR 423 2003 ATC 5076 Spotlight Stores Pty Ltd v Federal Commissioner of Taxation [2004] FCA 650 2004 ATC 4674 (2004) 55 ATR 745 Caelli Constructions (Vic) Pty Ltd v Commissioner of Taxation (2005) 147 FCR 449 60 ATR 542 2005 ATC 4938 Cameron Brae Pty Ltd v Commissioner of Taxation (2006) FCA 918 2006 ATC 4433 63 ATR 488
Subject references: Fringe Benefits Tax Carers share plan Employee benefit trust
Other references: TR 99/5 PSLA 2007/2