FEDERAL COURT OF AUSTRALIA Slade Bloodstock v Commissioner of Taxation [2007] FCAFC 173 FRINGE BENEFITS TAX - repayment of loan made by employees to employer – whether 'benefit' – whether 'fringe benefit' – policy and purpose of fringe benefits tax legislation PRACTICE & PROCEDURE – appeal allowed by consent Fringe Benefits Tax Assessment Act 1986 (Cth) ss 148(1), 136(1) SLADE BLOODSTOCK PTY LIMITED v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA VID 206 OF 2007 FINN, KENNY AND EDMONDS JJ 23 NOVEMBER 2007 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 206 OF 2007 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: SLADE BLOODSTOCK PTY LIMITED Appellant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGES: FINN, KENNY AND EDMONDS JJ DATE OF ORDER: 23 NOVEMBER 2007 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The orders made by Heerey J on 23 February 2007 be set aside and in lieu thereof it be ordered that the appeal from the decision of the Administrative Appeals Tribunal constituted by Dr G Hughes, Member, in applications No. VT 2005/259-261 and given on 31 July 2006 be dismissed. 3. The respondent pay the appellant's costs (including any reserved costs) of this appeal and of the proceeding before Heerey J to be taxed on a party and party basis if not agreed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 206 OF 2007 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: SLADE BLOODSTOCK PTY LIMITED Appellant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGES: FINN, KENNY AND EDMONDS JJ DATE: 23 NOVEMBER 2007 PLACE: MELBOURNE REASONS FOR JUDGMENT THE COURT: 1 This is an appeal from a judge of this Court – [2007] FCA 188; 2007 ATC 4261; (2007) 65 ATR 832 – allowing an appeal by the respondent ('the Commissioner') from a decision of the Administrative Appeals Tribunal ('the Tribunal') – [2006] AATA 666; 2006 ATC 2348; (2006) 64 ATR 1050 – setting aside the orders of the Tribunal and affirming the decision of the Commissioner under review. 2 Prior to the time fixed for the hearing of the appeal, the Court was informed by the parties that they agreed that the appeal should be allowed and that the decision of the Tribunal should be affirmed. The Court was provided with a joint statement by the parties setting out a summary of the background facts leading to the Commissioner issuing to the appellant assessments of fringe benefits tax under the Fringe Benefits Tax Assessment Act 1986 (Cth) ('the FBT Act') for the years ended 31 March 2000, 2001 and 2002, a summary of the proceedings in the Tribunal and before the primary judge and a summary of the reasons why the parties agreed that the appeal should be allowed. A copy of this joint statement is reproduced at [4] below. 3 On the material before the Court, the Court was of the view that it deserved to be provided with a more detailed explanation of why the Commissioner, having successfully appealed the decision of the Tribunal, was now conceding that the appellant's appeal to this Court should be allowed and submitting that other orders in terms of an agreed short minute of proposed orders should be made. To this end, on the date fixed for the hearing of the appeal, the Court heard from both parties. 4 Before detailing the explanation given, it will be helpful to an understanding of these reasons if we set out the terms of the parties' joint statement referred to above: '1. Slade Bloodstock Pty Ltd (the Appellant) appeals against a judgment of the Honourable Justice Heerey allowing an appeal by the Commissioner of Taxation of the Commonwealth of Australia (the Commissioner) from a decision of the Administrative Appeals Tribunal constituted by Dr Gordon Hughes (the Tribunal), setting aside the orders of the Tribunal and affirming the decision of the Commissioner under review. The parties agree that the appeal should be allowed and that the decision of the Tribunal should be affirmed. Minutes of proposed orders are agreed. Summary of the facts 2. The facts giving rise to this appeal are set out in the reasons for judgment of Heerey J and in greater detail in the Tribunal's reasons for decision. In summary, they are as follows. 3. The Appellant is the trustee of the Slade Bloodstock Unit Trust. Mr Robert Slade and Mrs Corinna Slade (the Slades) are the ultimate beneficiaries of the Unit Trust. The Slades are also the sole shareholders of the Appellant and Mr Slade is the sole director and secretary. During the relevant fringe benefit tax years the Slades were employees of the Appellant. 4. The Appellant carried on a racehorse syndication business. The Slades provided working capital to the Appellant pursuant to a loan agreement dated 28 April 1999 (the loan agreement) under which the Appellant agreed (in clause 5) to repay any and all amounts owing to the Slades at call and, if directed to do so by the Slades, to make repayments by way of payments to third parties, including but not limited to payments on behalf of the Slades for loans, credit cards, mortgages and school fees. 5. During the fringe benefit tax years ended 31 March 2000, 31 March 2001 and 31 March 2002, the Appellant made certain payments to, or at the direction of, the Slades in the form of car benefits, household expenses, meal, entertainment and other private expenses (the subject payments). During those years, the Slades received no payment from the Appellant other than the subject payments. 6. The Commissioner assessed the subject payments as liable to fringe benefits tax under the Fringe Benefits Tax Assessment Act 1986 (Cth) (the FBTA Act). Section 136(1) of the FBTA Act defines a "fringe benefit", in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, to mean, relevantly. "a benefit … provided to the employee … by … the employer … in respect of the employment of the employee." 7. Before the Tribunal the Slades contended that the subject payments were repayments of the loan given by the Slades to the Appellant and not benefits provided "in respect of" their employment by the Appellant. The proceedings below 8. The Tribunal found that the Slades were employees of the Appellant during the relevant years; that the subject payments were "benefits" within the meaning of s 136(1) of the FBTA Act; and that the benefits were not provided in respect of the Slades' employment by the Appellant but were "nothing more than … loan repayment[s]". 9. On the Commissioner's appeal to the Federal Court, the only issue in dispute was whether the Tribunal erred in holding that the loan repayments were not made "in respect of the employment" of the Slades by the Appellant. Heerey J held that the Tribunal erred in failing to apply s 148(1)(a) of the FBTA Act, which provides: "A reference in this Act to 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". 10. Heerey J held that the effect of s 148(l)(a) was that, although the subject payments related to the Slades' entitlement as creditors of the Appellant under the loan agreement, they were also payments in respect of their employment by the Appellant. This appeal 11. The Tribunal found that the subject payments were repayments of loans made by the Slades to the Appellant. Heerey J reiterated that finding of fact. The Commissioner now concedes that the repayment of a loan owed by an employer to an employee is not a benefit that is "provided … in respect of …employment", at least where under the loan agreement there is a binding obligation to repay that is imposed without reference to the employment of the lender. 12. At least in the usual case, a loan repayment will be the product or incident of a creditor/debtor relationship. In the present case, the Appellant owed money as a debtor. Its repayments progressively discharged its indebtedness. The Slades received the payments as creditors. Their entitlement to the payments existed independently and irrespective of their position as employees. In the circumstances there was no material or relevant connection between the making of the repayments and the employment of the Slades. 13. Justice Heerey referred to s 148(l)(a) of the FBTA Act and relied upon the fact that the Slades received "no other remuneration" and that there were no other employees of the Appellant. However, the finding of fact was that the subject payments were repayments of a loan. Accordingly, they did not constitute any form of remuneration. More importantly, the Slades' entitlement to the payments arose not because they performed work as employees but because they lent money to the Appellant. 14. The words "in respect of" in the definition of "fringe benefit" have been held to require not merely some or a causal relationship, but a sufficient or material relationship between the employee's employment and the benefit provided: see J & G Knowles v Commissioner of Taxation (2000) 96 FCR 402 at [26]; Starrim v Commissioner of Taxation (2000) 102 FCR 194 at [52]. In this appeal, for the reasons outlined above, the Appellant contends and the Commissioner concedes that there was not a material relationship between the Slades' employment and the subject payments. 15. When the parties agreed that the appeal should be allowed it was considered proper to inform the Court as soon as practicable by the filing of proposed minutes of consent order to ensure that costs were minimised and the Court was given sufficient notice that the appeal would not proceed. 16. The Commissioner received advice from Senior Counsel that the course adopted is proper and appropriate and is in accordance with his Model Litigant obligations.' 5 At the hearing referred to in [3] above, Senior Counsel for the Commissioner explained that at each stage of the proceedings below, the Commissioner took advice on whether he should appeal or defend an appeal. Following the decision of the Tribunal, he took advice as to whether he should appeal the Tribunal's decision and, in this regard, he was advised that he should. It was submitted that, contrary to what the primary judge said at [16] of his reasons – that the appeal did not seek to challenge any findings of primary fact – there were challenges that certain of the facts as found by the Tribunal were not open on the evidence. We were taken to the questions of law raised in the notice of appeal, specifically question (4), to the grounds set out therein, specifically grounds (11) and (12), as well as to the transcript of the hearing before the primary judge indicating that the particular findings of fact covered in these grounds were agitated in oral submissions before the primary judge. 6 Similarly, Senior Counsel for the Commissioner explained that following the filing of the appellant's appeal to this Court against the primary judge's allowance of the Commissioner's appeal, the Commissioner took advice as to whether he should defend the appeal to this Court and, in this regard, he was advised that he should not for the reasons set out in the joint statement reproduced in [4] above. 7 Senior Counsel for the Commissioner, during the course of his submissions, suggested that the first occasion on which the Commissioner learnt that the payments in question might be repayments of loans was when the decisions under review were in the Tribunal. This was disputed by Senior Counsel for the appellant by reference to transcript of the cross-examination of Mr Slade in the Tribunal, however, we do not think anything turns on this issue for present purposes. 8 We have concluded from this further explanation that the Commissioner was justified in taking the course he did in appealing the Tribunal's decision even though some of the grounds of his appeal are at odds with the position he now adopts in conceding that the appellant's appeal to this Court should be allowed. Presumably, that is a function of the advice he received at the time to appeal against the Tribunal's decision. 9 The Commissioner's position on the appeal to this Court, namely, that he should agree to the appeal being allowed, is, in our view, undoubtedly correct. In our view, there is real doubt as to whether the repayment of a loan, in whole or in part, is a 'benefit' as defined in subs 136(1) of the FBT Act, as distinct from the discharge, in whole or in part, of a pre-existing right, and it would not seem to be encompassed by the terms of para (c) of the definition. Even if it is, there is also real doubt as to whether it can ever constitute a 'fringe benefit' as defined in the same provision, even with assistance of subs 148(1) of the FBT Act. The reasons which underlie the Commissioner's agreement that the appeal should be allowed are supportive of our view on the 'fringe benefit' issue. 10 Finally, we would observe that our views on these issues are consistent with the policy and purpose underlying the fringe benefits tax legislation of which the FBT Act forms an integral part. Fringe benefits tax was only ever intended to tax the provision of benefits where, if the benefit had been provided in cash, there would have been a derivation of income. It is true that it was also the policy and purpose of the legislation to tax benefits which might not be income of the employee because the benefit was provided to an associate of the employee or because the benefit could not be converted into money. But it was never intended to apply to a repayment of a loan made by an employee to his employer; such a repayment could never be a derivation of income by the lender/employee. 11 For these reasons, we agree that the appropriate orders are those set out in the short minute of proposed orders signed by the parties. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court. Associate: Dated: 23 November 2007 Counsel for the Appellant: Mrs J Batrouney SC Solicitor for the Appellant: Rigby Cooke Counsel for the Respondent: Mr G Davies QC with Mr A Pound Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 13 November 2007 Date of Judgment: 23 November 2007