Private ruling: Distributions paid from a trust and FBT
Date of advice: 8 December 2022
Published: 23 January 2023
Ruling period: FBT year ending 31 March 20xx | FBT year ending 31 March 20xx | FBT year ending 31 March 20xx | FBT year ending 31 March 20xx
Date scheme commenced: 1 April 20xx

Ruling: Q1: Will the distributions made to current and former employees constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA? | A1: No. | Q2: Is the proposed gift assessable income of the recipients that is subject to the Pay As You Go withholding (PAYG-W) provisions? | A2: No.

Relevant facts and circumstances: The Office Pty Ltd ("Office) 'the Employer' has run as a family office managing investments on behalf of the client and his family. These investments have included managing the client's shareholdings a company in which he and his controlled entities formerly held a significant investment and in which he was a member of the Board. In 20xx, all shareholdings were sold to an unrelated Company. The client was subject to the Capital Gains Tax (CGT) provisions of the Income Tax Assessment Act 1997 (the ITAA) in respect of the assessable income derived from the disposal of his interests in the company. Upon sale, amongst all his other considerations, the client wished to gift some of the proceeds from the sale of his interests in the company to some individuals at some later date or upon his death. In the meantime, he wished to invest those funds for future growth to further benefit those persons. The intended recipients were persons who the client had formed strong personal relationships with and are employees of the employer. The gifts were to be one-off amounts which were to be determined on an arbitrary basis. The gifts were unsolicited, with no consideration, or expectation of consideration, passing from those individuals to the client. The intended recipients were not aware that the client planned to give them a gift. To date, the gifts have not been paid. Given his advanced age, the client was concerned that if he passed away prior to gifting these monies, they would form part of his estate and may not ultimately be distributed to the intended recipients. Furthermore, he was concerned that if he included a bequest to each of the intended recipients as part of his will, other beneficiaries of his estate might contest the will and attempt to stop the intended recipients from receiving those amounts or reduce the amounts they receive. In a measure designed solely to protect the funds and ensure they were ultimately distributed in accordance with his wishes, the client set up the Employee Trust ("the Trust") which was established with a settled sum of $x paid from the client's personal savings from which tax had already been paid. The client is the trustee of the Trust. To ensure all intended recipients were included as potential beneficiaries under the Trust, the Trust deed was broadly drafted to include as primary beneficiaries "Employees of the Office from time to time". This was the case notwithstanding the reason why the persons would benefit was due to the strong personal relationships the client had formed with the intended donees. It was also intended that the persons who benefit would include both current and former employees of the employer. However, the funds were never placed in the Trust as a means to remunerate or reward employees of the employer either formally or informally for work they had performed. The use of the name 'The Employee Trust' was merely a simple and convenient way to encapsulate all intended recipients. Without having formed the strong personal relationships with the client they would not have been included as intended recipients and certainly not if the relationship did not extend beyond being an employee. In transferring the funds into the Trust, the client did not attempt to claim any tax deductions or derive any other tax advantages. The transfer was solely done to ensure the funds were protected for the reasons stated above and not to derive any financial or tax advantage. Having the funds held in the Trust, tax has also been paid at the trustee rate of 47% on all earnings within the Trust with no attempt to derive any additional tax advantages. This includes accumulating income for a section 99A assessment and giving up possible tax. Personal Relationships The client has formed strong personal relationships with a number of individuals who work, or have worked, for the employer. These relationships have been developed over a number of years and include socialising at sporting and cultural events and being present at significant and deeply personal occasions including birthdays, marriages and funerals of close family members. A recent example was that, of the few people invited to celebrate the client's birthday, a number were employees or former employees of the employer. Some of these individuals have also sat through and supported the client as friends and moral supporters in court hearings including matrimonial and legal disputes. There was never any requirement in the individuals' employment agreements to attend such events nor be remunerated for attending such events. Over the years, the client has developed very deep love and affection for these persons and thinks of them as friends and not employees. In doing so, he wants them to benefit from his personal wealth just as he would his direct family and other friends. You have provided a copy of the Employee Trust deed.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Subsection 136(1). | Fringe Benefits Tax Assessment Act 1986 Subsection 148(1). | Income Tax Assessment Act 1997 Subsection 6-5(1). | Income Tax Assessment Act 1997 Section 6-10. | Income Tax Assessment Act 1997 Section 15-2. | Income Tax Assessment Act 1936 Section 318. | Taxation Administration Act 1953 Section 12-35.

Reasons for decision: Detailed Reasoning - Detailed reasoning: In order for the distributions to be subject to FBT, they must satisfy the definition of a 'fringe benefit' under sub-section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). Broadly, a 'fringe benefit' arises when the following conditions are satisfied: • a benefit is provided at any time during the year of tax • the benefit is provided to an employee or an associate of the employee • the benefit is provided by: (i) the employer; or (ii) an associate of the employer; or (iii) a third party other than the employer or an associate under an arrangement between the employer or associate of the employer and the third party; or (iv) a third party other than the employer or an associate of the employer, if the employer or an associate of the employer: (A) participates in or facilitates the provision or receipt of the benefit; or (B) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit; and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so; • the benefit is provided in respect of the employment of the employee • the benefit is not one that is specifically excluded as per paragraphs (f) to (s) of the definition of 'fringe benefit' in subsection 136(1). | Detailed Reasoning - Is a benefit provided?: Subsection 136(1) provides the definition of a 'benefit' as including: any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under: ' (a) an arrangement for or in relation to: (i) the performance of work (including work of a professional nature), whether with or without the provision of property (ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction or (iii) conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction; (b) a contract of insurance; or (c) an arrangement for in relation to the lending of money. Under the proposed arrangement a distribution of money will be provided to the employees by the Trust on behalf of the client. The distribution of money is a 'benefit' under subsection 136(1) of the FBTAA. Therefore, this condition in the definition of 'fringe benefit' in subsection 136(1) is satisfied. | Detailed Reasoning - Is the benefit provided to an employee or an associate of the employee?: An employee is defined in subsection 136(1) of the FBTAA to include a current, future and former employee. The intended recipients are current or former employees of the employer therefore the requirement that the benefit is provided to an employee, or an associate of the employee, has been met. | Detailed Reasoning - Is the benefit provided by an employer or an associate of the employer?: The term 'employer' is defined under subsection 136(1) of the FBTAA as: ...means: (a) a current employer; (b) a future employer; or (c) a former employer. In this case the distributions are not made by the employer they are made by the trust. Therefore, the benefits provided to the employees are not provided by the employer. | Detailed Reasoning - Is the benefit provided by an associate of the employer?: Subsection 136(1) of the FBTAA defines the term 'associate' as having the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). Associates of a company are listed in subsection 318(2) of the ITAA 1936. For the purposes of this Part, the following are associates of a company (in this subsection called the primary entity): ... (c) a trustee of a trust where the primary entity, or another entity that I an associate of the primary entity because of another paragraph of this subsection, benefits under the trust The employer is the primary entity. The direct beneficiaries of the trust are employees of the employer, not the employer itself. The company does not benefit under the trust. Therefore, the trust is not an associate of the employer. Accordingly, in this case the benefits are not provided by an associate of the employer Notwithstanding that the client is the trustee of the trust and an associate of the employer. Is the benefit provided by a third party other than the employer or an associate under an arrangement between the employer or associate of the employer and the third party? The beneficiaries of the trust are employees of the employer. The decision to make distributions from the trust, will be made by the trustee being the client. The decisions are to be made based on the strong personal relationships that have been formed between the client and the employees. The decisions will be made independently of the employer. Accordingly, the benefits to be provided will not arise from an arrangement between the employer and the trust. | Detailed Reasoning - Is the benefit provided in respect of the employment of the employee?: In considering whether a benefit is provided to an employee 'in respect of' their employment, subsection 136(1) defines 'in respect of', in relation to the employment of an employee, to include 'by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.' Subsection 148(1) of the FBTAA stipulates that: the provision of a benefit to a person in respect of the employment of an employee is a reference to the provision of such a benefit: (a) whether or not the benefit is also provided in respect of, by reason of, by virtue of, or for or in relation directly or indirectly to, any other matter or thing; (b) whether the employment will occur, is occurring, or has occurred; (c) whether or not the benefit is surplus to the needs or wants of the recipient; (d) whether or not the benefit is also provided to another person; (e) whether or not the benefit is, to any extent, offset by any inconvenience or disadvantage; (f) whether or not the benefit is provided or used, or required to be provided or used, in connection with that employment; (g) whether or not the provision of the benefit is, or is in the nature of, income; and (h) whether or not the benefit is provided as a reward for services rendered, or to be rendered, by the employee. In J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151;(2000) 44 ATR 22, the Full Federal Court, in examining the meaning of 'in respect of' an employee's employment held that the phrase required a 'nexus, some discernible and rational link, between the benefit and employment', though noted that 'what must be established is whether there is a sufficient or material, rather than a causal, connection or relationship between the benefit and the employment' Therefore, the relevant question to ask is whether the benefit is a product of the person's employment or for other reasons notwithstanding the recipient is an employee for the purposes of the FBTAA. Based on the facts provided, a distribution of money will be provided by the Trust on behalf of the client. The distribution will be provided based on the strong personal relationship the client has established with each of the intended recipients which had their origins from a time when they were employees of the employer. The distributions are not under an arrangement in relation to the performance of work. The intended recipients would not receive any distribution had they not formed these strong personal relationships with the client. The distributions are being provided to the beneficiaries from funds initially sourced from the client's personal funds which included the proceeds of sale of the business which was subject to CGT. In making the contribution to the Trust, the client did not seek to claim any tax deduction or derive any contemporaneous or future tax advantage. | Detailed Reasoning - Conclusion: The proposed gift by the client via the Trust to the beneficiaries will not be a fringe benefit as defined under sub-section 136(1) of the FBTAA, therefore the employer will not be liable for fringe benefits tax. This is on the basis that it is not provided in respect of the employment of theemployee, it is paid in respect of a personal relationship that the client had formed with the intended recipients. | Detailed Reasoning - Question 2 - Is the proposed gift assessable income of the recipients that is subject to the Pay As You Go withholding (PAYG-W) provisions?: Section 12-35, of Division 12 of the Taxation Administration Act 1953 (TAA 1953) states the following: • An entity must withhold an amount from salary, wages, commissions, bonuses or allowances it pays to an individual as an employee (whether of that or another entity). To determine whether there is a PAYG-W event, the payment needs to be examined to see if it is assessable income which consists of ordinary income and statutory income. If it is not assessable income, it then follows that it will not constitute an amount to which Section 12-35, of Division 12 of the TAA 1953 relates. | Detailed Reasoning - Ordinary income: Sub-section 6-5(1) of the ITAA 1997 states that your assessable income includes income according to ordinary concepts. Generally, a gift is regarded as a personal windfall gain and not as ordinary income, unless the taxpayer has received the gift because of, in respect of, or in relation to, any income producing activity of the taxpayer. In determining whether a gift is ordinary income, the courts have established that consideration of the whole of the circumstances is necessary and that the following factors need to be taken into account: • how, in what capacity, and for what reason the recipient received the gift ( Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570, (1953) 5 AITR 496; (1953) 10 ATD 126 (Squatting Investment Case); • whether the gift is of a kind which is a common incident of the recipient's calling or occupation ( Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 10 AITR 367; (1966) 14 ATD 286 (Scott's Case); • whether the gift is made voluntarily; • whether the gift is solicited ( Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 6 AITR 248; (1956) 11 ATD 68 ( Hayes' Case and Scott's Case ) • whether the gift can be traced to gratitude engendered by some service rendered by the recipient to the gift donor ( Squatting Investment Case ) • the motive of the gift donor (though this factor is rarely decisive in itself) ( Hayes' Case ); and • whether the recipient relies on the gift for regular maintenance of themselves and any dependants ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; (1952) 10 ATD 82 (Dixon's Case) and FC of T v. Blake (1984) 75 FLR 315; (1984) 15 ATR 1006; 84 ATC 4661 ). The proposed gifts to be made by the Trust were sourced from funds initially contributed by the client from his own personal savings. The purpose of the gifts is to recognise strong personal relationships built up over time with persons who are, or were, employees of the employer. The proposed gifts are one-off payments with no consideration given, or required to be given, in exchange for the gifts. The beneficiaries are unaware that the client is considering giving them a gift and accordingly, it is considered unsolicited. The proposed gift is not a common incident of the income earning activities with the employer but is to be given to the beneficiaries in recognition of the personal relationships built between them and the client during the period that the Office was their employer and in some cases, after the Office was their employer. Based on the above, the proposed distributions are in the nature of a gift that is a personal windfall or gain which does not have the qualities of ordinary income pursuant to subsection 6-5(1) of the ITAA 1997. | Detailed Reasoning - Statutory income: Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 10-5 of the ITAA 1997 lists those provisions. Included in this list, and of relevance to this matter, is section 15-2 of the ITAA 1997. Section 15-2 of the ITAA 1997 provides that the value to the taxpayer of all gratuities and benefits given or granted to them in respect of, or for or in relation directly or indirectly to any employment of or services rendered, shall be included in their assessable income. At issue in this arrangement is whether the gift was granted in relation directly or indirectly to the employee's employment. The leading cases in connection with this question of an indirect or direct relation to employment are Dixon's Case and Scott's Case . In both cases, it was decided that the phrase 'an indirect consequence of employment' was not an open-ended concept. Rather, there must be a connection between the payment and the employment such that the receipt 'is in a relevant sense a product' of the employment. Having regard to the exceptional nature of the proposed gift, it cannot be regarded, in a real sense, as being a product of the beneficiaries' employment as previously confirmed above for fringe benefits tax nor is it a benefit provided for services rendered. The proposed gift is given in recognition of the personal relationship established between XXXX and the beneficiaries. The proposed gift (money) is not statutory income and thus not assessable income under section 6-10 of the ITAA 1997. | Detailed Reasoning - Conclusion: The proposed gift by the client to the beneficiaries will not be subject to PAYGW by the Trust as the gift is not considered assessable income under subsection 6-5(1) or section 6-10 of the ITAA 1997.