CATCHWORDS FRINGE BENEFITS TAX - employer Bank charges lower rate of interest and waives establishment fee on loans made to staff - whether foregone establishment fee a "residual fringe benefit" within Div 12 of Part III of Fringe Benefits Tax Assessment Act 1986 - relationship between Division 4 ("Loan Fringe Benefits") and Division 12 ("Residual Fringe Benefits") of Part III. Fringe Benefits Tax Assessment Act 1986, ss 16, 18, 45, 48, 136 WESTPAC BANKING CORPORATION v COMMISSIONER OF TAXATION No NG 386 of 1996 No NG 451 of 1996 No NG 452 of 1996 Lockhart, Lindgren, Sackville JJ Sydney 18 October 1996 IN THE FEDERAL COURT OF AUSTRALIA) NEW SOUTH WALES DISTRICT REGISTRY) No NG 386 of 1996 GENERAL DIVISION ) No NG 451 of 1996 No NG 452 of 1996 On appeal from a Judge of the Federal Court of Australia BETWEEN: WESTPAC BANKING CORPORATION Appellant AND: COMMISSIONER OF TAXATION Respondent CORAM: Lockhart, Lindgren, Sackville JJ PLACE: Sydney DATE: 18 October 1996 MINUTE OF ORDERS THE COURT ORDERS: 1. THAT the appeal be dismissed. 2. THAT the appellant pay the respondent's costs. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA) ) NEW SOUTH WALES DISTRICT REGISTRY) No. NG 386 of 1996 ) NG 451 of 1996 GENERAL DIVISION ) NG 452 of 1996 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: WESTPAC BANKING CORPORATION Appellant AND: COMMISSIONER OF TAXATION Respondent COURT: LOCKHART, LINDGREN, SACKVILLE JJ. DATE: 18 OCTOBER 1996 PLACE: SYDNEY REASONS FOR JUDGMENT LOCKHART J. I agree with the reasons for judgment of Lindgren J. and Sackville J. and with the orders proposed by them. I certify that this page is a true copy of the reasons for judgment herein of the Honourable Justice Lockhart. Associate Dated: 18 October 1996 IN THE FEDERAL COURT OF AUSTRALIA) NEW SOUTH WALES DISTRICT REGISTRY) No NG 386 of 1996 GENERAL DIVISION ) No NG 451 of 1996 No NG 452 of 1996 On appeal from a Judge of the Federal Court of Australia BETWEEN: WESTPAC BANKING CORPORATION Appellant AND: COMMISSIONER OF TAXATION Respondent CORAM: Lockhart, Lindgren, Sackville JJ PLACE: Sydney DATE: 18 October 1996 REASONS FOR JUDGMENT LINDGREN J: INTRODUCTION: The appellant ("the Bank") appeals from a judgment of the Court constituted by a single Judge given on 24 April 1996. The trial Judge dismissed the Bank's appeals against decisions of the respondent ("the Commissioner"), rejecting the Bank's objections to assessment of fringe benefits tax for the years ended 31 March 1992, 31 March 1993 and 31 March 1994. In its fringe benefits tax returns in respect of those three tax years, the Bank returned as the taxable value of "loan fringe benefits" provided by it to employees, the amount by which the "notional amount of interest" (see later) in relation to a loan to an employee in respect of the year of tax exceeded the amount of interest that had in fact accrued on the loan in respect of that year. This amount may conveniently be referred to as the "interest concession". The Commissioner contends that in addition to the interest concession, amounts of loan establishment fees which would have been charged if the borrowers had not been employees of the Bank and which were not in fact charged by reason of their status as such employees, also represented fringe benefits the taxable value of which should have been returned. He accepts that the foregone loan establishment fees do not constitute loan fringe benefits but contends that they constitute "residual fringe benefits" (see below). BACKGROUND FACTS It is convenient to set out the following account of certain background facts from the Reasons for Judgment of the trial Judge: "Generally, where a person wishes to borrow from the Bank, that person (if not an employee) will be interviewed by a bank officer, generally a bank manager. There may be follow up interviews thereafter. The manager authorised to approve the particular lending will make a financial assessment of the affairs of the applicant for finance and may make or arrange to make an internal assessment of the value of the security offered. The manager may need to make a submission to a person higher up in the Bank hierarchy to approve the loan. If the loan is approved the Bank will notify its customer accordingly, requiring the customer to advise the Bank whether the customer accepts the terms and conditions of the loan which the Bank has approved. A customer who does accept those terms and conditions is required to pay an establishment fee. Without that fee being paid the loan will not be made. However, the fee is payable whether or not the customer thereafter decides not to draw on the facility. According to the Bank's Australian Retail Credit Policy document in force at the relevant time, it was intended that the establishment fee reimburse the Bank for costs (for example, interviews, submissions, financial assessment, stamping, registration of documents, inspections and settlements) relating to loan applications-approvals for: '* all new advances/loans; * extensions/increases (including amount and/or term) of existing facilities; and * secured/unsecured approvals.' There appear to be a limited number of facilities which are exempt from establishment fees. No significance was placed on this fact by the Bank. Where an employee of the Bank seeks to borrow from the Bank, the application is made not to an officer at manager level, but to the Personnel Department of the Bank. It is Bank policy that loans be made to employees on a concessional basis. Essentially, the procedure which an employee is required to undergo in order to obtain a loan is not greatly different from that which would apply to a member of the public. An employee makes an application and that application is considered. There may be the need to make financial assessments of the material contained in the application. If inadequate material is obtained, contact can be made with the employee by telephone. Valuation inspections, where appropriate, are made. For present purposes, however, there are two differences between the procedure adopted by the Bank in dealing with applications by the public for loans and that adopted when dealing with employees. First, the loan, if initially drawn down, will be at a reduced rate of interest. Second, employees are not required to pay an establishment fee. It is in these circumstances that the Commissioner of Taxation claims that the Bank is liable to pay fringe benefits tax during the year ended 31 March 1994, in respect of the loan establishment fees foregone by the Bank in respect of loans made by it to its employees. The value of the fringe benefits said to arise as a result of the failure to charge establishment fees to employees of the Bank, was said by the Commissioner to be $1,857,000. The Bank, both in the objection to the fringe benefits tax assessment and in a statement of facts, issues and contentions lodged by it, challenged the quantum of the taxable fringe benefits on which the tax was assessed. However, no evidence was adduced on the part of the Bank going to the issue of quantum. It is now conceded that if fringe benefits tax was properly payable in the circumstances I have outlined above, then the assessment made by the Commissioner is correct. The short issue between the parties, therefore, is whether fringe benefits tax is exigible where loans are made by the Bank to its employees but the employees to whom those loans have been made are not required to pay an establishment fee." The following matters revealed by the Bank's Australian Credit Retail Policy and by oral evidence touching establishment fees deserve emphasis. An establishment fee was payable by ordinary (non-employee) customers of the Bank if and when they signed and returned to the Bank an acknowledgment endorsed on a duplicate of the Bank's letter of approval setting out the terms and conditions of the facility approved, agreeing to those terms and conditions. It was not payable merely by reason of the Bank's consideration and assessment of an application, its decision to approve of it, or even its writing of the letter advising of the approval and setting out the terms and conditions of the facility approved. Accordingly, it was not payable if the applicant chose not to agree to the Bank's terms and conditions. On the other hand, it was payable whether or not the customer ever drew on the facility. Bank officers of the appropriate class and level of seniority had a discretion to waive or refund the establishment fee, in whole or in part. In the case of applicants who were not already customers, consideration would be given to collection of all or part of the establishment fee in advance. In sum, the Bank's evidence showed that, at least in the ordinary case, the establishment fee was payable once an agreement in writing was concluded between the Bank and the applicant on the terms and conditions on which the Bank was to make its credit facility available. The evidence led by the Bank before the trial Judge showed that it administered a "scheme" or "policy" under which it made available concessional credit facilities to its employees, and to its employees and their spouses as joint borrowers, where the employee applicants satisfied certain requirements. The terms of the scheme changed from time to time. During the relevant tax years, they were expressed in two successive versions of the Bank's "Personnel Manual" (subsequently called "Employee Guidelines"). The earlier version began as follows: "1 ADVANCE POLICY 1.1 GENERAL TERMS AND CONDITIONS RELATING TO ALL CONCESSIONAL ADVANCES This section is to be read by all staff applying for concessional finance. 1.1.1 AvailabilitySubject to eligibility and satisfactory work performance, officers and services personnel have access to concessional finance for the purposes detailed in the advance policy rules and on the following terms. The Bank reserves the right to: · Decline any application even if it meets the guidelines. · Alter the terms and conditions of policy at any time. Where purchase of assets is involved (e.g. house, car) concessional finance is available only for the purchases in the name of officer, or officer and spouse." The nature and extent of the concessions available depended upon such factors as the seniority of the position occupied by the applicant employee, the purpose for which the finance was required, any security provided, and the borrower's ability to meet repayments. In the period between June 1992 and November 1994 the Personnel Manual was rewritten and reissued, chapter by chapter, although the substance of the policy did not change substantially. The new form of introductory provision of this later version was as follows: "1. General conditions applying to all staff loans (excluding Bankcard/ Mastercard and bank overdrafts) Purpose Westpac provides concessional loans to staff as part of its strategy to attract, retain and motivate effective performers relative to the competitive market in which Westpac operates. Jurisdiction This policy applies to all current Westpac Banking Corporation staff in Australia (excluding staff in subsidiaries). Who is eligible to apply? Non-packaged staff who are performing effectively also graded 02 and above may access concessional loans after 12 months [sic] service. 01 officers are eligible to access concessional loans after completing 6 full years of service at an effective level of performance. Packaged staff may access concessional loans immediately. Lending must be in the name of the officer or officer and spouse jointly. What concessional loans are available to staff? Westpac makes available to staff a number of concessional loans. These are listed in the following table along with the basis for interest rates. Interest rates are set as a percentage of the public rate (usually the Variable Housing Rate (VHR)) as reviewed by the bank from time to time. The following table highlights the account type and the account usage indicators to be entered into bank systems to indicate that they are concessional rate loans. ............................................................................................................... What other general conditions apply to staff lending? Concessional Loans are not an automatic entitlement n Any application may be declined if it does not meet the bank's normal lending criteria. As a guide, repayments and all other commitments should not exceed 33% of net income. Westpac reserves the right to decline any application even if it meets the guidelines." It is clear that by both versions of the Personnel Manual, the Bank held out to its employees that it would consider applications for concessional finance by reference to the Personnel Manual; that if they satisfied its terms they could reasonably expect to be granted concessional finance; but that the Bank expressly reserved the right to decline an application, even if it satisfied those terms, and to alter the terms of the scheme at any time. The evidence showed that, as in the case of an outsider applicant, if an employee's application was approved, the Bank wrote a letter advising of the approval, setting out the terms and conditions of the loan or other credit facility approved, and inviting the employee, if he or she found the terms and conditions acceptable, to sign and return an acknowledgment on a duplicate of the letter. In respect of most classes of facility, this included the statement, "I acknowledge, undertake and accept that this offer is only being made available to me because I am an employee of the Bank". In the case of most of the classes of facility, no establishment fee was payable by the employee. In sum, as noted earlier, in the case of non-employee applicants, the establishment fee was, in the ordinary case, payable on return to the Bank of the signed agreement to the terms and conditions set out in the Bank's letter. Employees for whom concessional credit facilities were approved also signed and returned agreements to the terms and conditions set out in the Bank's letter, but ordinarily there was no establishment fee payable by them. THE LEGISLATIVE SCHEME Section 5 of the Fringe Benefits Tax Act 1986 imposes tax in respect of the "fringe benefits taxable amount" of an employer of a year of tax. Section 3 provides that the Fringe Benefits Tax Assessment Act 1986 ("the Act") is incorporated and is to be read as one with the Fringe Benefits Tax Act 1986. Section 66 of the Act provides that subject to the Act, tax imposed in respect of the "fringe benefits taxable amount" of an employer of a year of tax is payable by the employer. For the three years in question in the present case, the expression "fringe benefits taxable amount" in relation to an employer in relation to a year of tax was defined in s 136 of the Act. (For the year of tax commencing 1 April 1994 and subsequent years, the expression has been defined to have the meaning given in 136AA). It was defined as, relevantly, the sum of the taxable values of all the fringe benefits (other than certain fringe benefits not presently relevant) in relation to the employer in relation to the year of tax. Sub-section 136 (1) defines "fringe benefit" and "benefit" in the following terms, so far as relevant: "'fringe benefit', in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit: (a)provided at any time during the year of tax; or (b)provided in respect of the year of tax; being a benefit provided to the employee or to an associate of the employee by: (c)the employer; (d)... ; or (e) ... ; in respect of the employment of the employee, but does not include: (f)... ; - (p) ... ;" (emphasis supplied) "'benefit' includes any right (including a right in relation to, and an interest in, real or personal property), [the word 'benefit', may well have been inadvertently omitted here, but if so, nothing turns on the omission] 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)... ; (b) ... ; or (c)an arrangement for or in relation to the lending of money;" (emphasis supplied) The word "provide" in relation to a benefit is defined in s 136 to include "allow, confer, give, grant or perform". The expression "in respect of" which occurs in the definition of "fringe benefit" is "defined" in s 136 thus: "'in respect of', in relation to the employment of an employee, includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment;" Part III (ss 6-65H) of the Act is headed "FRINGE BENEFITS". Division 1, comprising only s 6, provides that the provisions of Part III do not limit the generality of the expression "benefit". The 10 Divisions numbered 2 to 11 deal respectively with various specific classes of fringe benefits. Each is divided into Subdivision A and Subdivision B. Sub-division A describes the particular class of benefit with which the Division is concerned and Subdivision B identifies the taxable value of a fringe benefit of that class. Division 4 is headed "Loan Fringe Benefits". Subdivision A (ss 16, 17) of Division 4 is headed "Loan Benefits". Sub-section 16 (1) is as follows: "16(1) Where a person (in this subsection referred to as the 'provider') makes a loan to another person (in this subsection referred to as the 'recipient'), the making of the loan shall be taken to constitute a benefit provided by the provider to the recipient and that benefit shall be taken to be provided in respect of each year of tax during the whole or a part of which the recipient is under an obligation to repay the whole or any part of the loan." Section 136 defines "loan benefit" to mean "a benefit referred to in sub-s 16 (1)". Section 136 contains the following inclusory "definition" of "loan": "'loan' includes: (a) an advance of money; (b) the provision of credit or any other form of financial accommodation; (c) the payment of an amount for, on account of, on behalf of or at the request of a person where there is an obligation (whether expressed or implied) to repay the amount; and (d) a transaction (whatever its terms or form) which in substance effects a loan of money;" Section 136 defines "loan fringe benefit" to mean "a fringe benefit that is a loan benefit". Accordingly, Division 4 applies where both the "definition" of "loan benefit" in sub-s 16 (1) and the definition of "fringe benefit" in s 136 are satisfied. Subdivision B (ss 18, 19) of Division 4 is headed "Taxable Value of Loan Fringe Benefits". Section 18 is as follows: "18 Subject to this Part, the taxable value, in relation to a year of tax, of a loan fringe benefit provided in respect of the year of tax is the amount (if any) by which the notional amount of interest in relation to the loan in respect of the year of tax exceeds the amount of interest that has accrued on the loan in respect of the year of tax." The expression "notional amount of interest" is defined in s 136 by reference to a "statutory interest rate" which is defined in the same section by reference to a "benchmark interest rate". At the relevant time, this was, in turn, defined in the same section by reference to a rate of interest offered in respect of a Commonwealth Bank housing loan. In effect, if the interest which actually accrued on the loan in respect of the year of tax was less than the notional amount of interest in relation to the loan in respect of that year, the difference (I will refer to this as the "interest concession") was the taxable value of the loan fringe benefit. Division 12 is headed "Residual Fringe Benefits". Like each of Divisions 2-11, Division 12 comprises Subdivisions A and B. Section 45, within Subdivision A (ss 45-47), is as follows: "45 A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive)." (The definition of "benefit" in s 136 was noted earlier.) Clearly, a benefit which is classified as a loan benefit by sub-s 16 (1) noted earlier, cannot also be a residual benefit. Subdivision B (ss 48-52) of Division 12 is headed "Taxable Value of Residual Fringe Benefits". Section 48 is as follows: "48 Subject to this Part, the taxable value of an in-house non-period residual fringe benefit in relation to an employer in relation to a year of tax is - (a)where, at or about the comparison time, identical benefits were provided by the provider - (i) in the ordinary course of business to members of the public under an arm's length transaction or arm's length transactions; and (ii)in similar circumstances and subject to identical terms and conditions (other than as to price) as those that applied in relation to the provision of the recipients [sic] benefit to the recipient, an amount equal to 75% of the lowest price at which an identical benefit was so sold to a member of the public; or (b)in any other case - an amount equal to 75% of the notional value of the benefit at the comparison time, reduced by the amount of the recipients [sic] contribution." Section 136 defines the expressions "in-house period residual fringe benefit", "in-house non-period residual fringe benefit" and "in-house residual fringe benefit". In summary, a residual fringe benefit in relation to an employer is an in-house residual fringe benefit where, relevantly, the provider is the employer and, at the relevant time, carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders. It was not in dispute that at all material times the Bank carried on a business which included the provision to outsiders of benefits relevantly identical or similar to those provided to employees. The reference to "period" and "non-period" in two of the expressions referred to are satisfied according to whether the in-house residual fringe benefit is or is not "provided during a period". REASONING OF THE TRIAL JUDGE I adopt the account of "the Judgment Below" given in the Reasons for Judgment of Sackville J which I have had the advantage of reading. OUTLINE OF PARTIES' SUBMISSIONS ON THE APPEAL Outline of the Bank's submissions on the appeal Division 4 exhausts the Act's coverage of benefits associated with loans to employees. Section 18 within that Division has the effect of limiting the taxable value of all such benefits to the amount of the interest concession. An employer's consideration of all aspects of an employee's application for a loan and its writing of the letter of offer or commitment to its employee, do not constitute, for the purpose of the Act, benefits over and above the loan benefit which falls within Division 4. According to the trial Judge's reasoning, an employer's consideration of its employee's application and writing of a letter of offer or commitment constitute separate loan fringe benefits calling for separate valuation and, so, for an apportionment of the establishment fee as between them. This demonstrates the unreality of the conclusion reached by the trial Judge. The measure of taxable value for which s 18 provides demonstrates an intention to eliminate any concern with features of the loan other than interest. The circumstances of particular loans differ in terms of security, duration and periodicity of repayment. All such differences are ordinarily reflected in differences in the interest rate charged. Yet s 18 defines the taxable value of a loan fringe benefit in all cases as being the amount of the interest concession. This reveals a legislative intent to provide a simple code in Division 4 dealing comprehensively with all benefits associated with loans by employers to employees. All steps antecedent to the making of a loan are so intimately bound up with the making of the loan that they are incidents of it rather than benefits in themselves. In considering an employee's application, an employer does not "provide" any benefit "to" the employee. Rather, the employer acts in its own interests (the Bank referred to Employers Mutual Indemnity Association Ltd v Federal Commissioner of Taxation (1943) 68 CLR 165 at 173-174 (Latham CJ)). The first time it provides a benefit to its employee is when it makes the loan. Outline of Commissioner's submissions on the appeal "10 The relevant benefit is the 'privilege service or facility' of entertaining, examining and deciding an application for loan made by the staff member concerned, and providing advice as to whether the purchase price represents 'reasonable value for the officer concerned', or whether a proposed educational course for which a loan is sought is of benefit to the employee. That is a benefit for which non staff applicants are charged an establishment fee, whether or not the applicant takes up any loan facility which is offered by the Bank. It involves the Bank in doing, at the applicant's request, the things listed above, and in offering the privilege or facility of the loan. 11 Consideration and determination and advice upon the application is not one of the terms on which a loan is made, but a benefit provided before the loan is undertaken and provided. It forms no part of any loan benefit." (Respondent's written submission, paras 10 and 11) When the Bank provides a concessional credit facility to an employee, the only "loan" as defined in s 136, and the only "loan benefit" within sub-s 16 (1), is the provision of money in consideration of the promise to repay. It is not open to the Bank to put submissions based, in substance, on the method of valuation since it was conceded before the trial Judge that the value of any residual fringe benefit was the amount in dispute (the respondent cites Water Board v Moustakas (1988) 180 CLR 491; Federal Commissioner of Taxation v Brambles Holdings Ltd (1991) 28 FCR 451 at 454-6). Whatever be the precise definition of the benefit in the present case, its market value is the amount of the establishment fee which would be payable by an ordinary customer in the same circumstances. It is true that Division 4 does, and Division 12 does not, deal with the valuation of loan fringe benefits. But the benefit with which the case is concerned is not a loan benefit or part of a loan benefit. Nor is it material that the Bank could, or might, if it had anticipated the liability presently in dispute, have charged a higher rate of interest to employees or to some of them. The interest rate in fact charged was concessional and was related to the employee's position in the Bank, not to the cost or risk associated with the making of the loan. REASONING Division 4 It is important to understand the nature of the loan fringe benefits the subject of Division 4. It will be recalled that the expression "loan benefit" is defined in s 136 to mean a benefit referred to in sub-s 16 (1). What is the nature of the benefit referred to in that sub-section? In my opinion, it is not simply the making of a loan (as defined in s 136), but the making of a loan as there defined which there is an obligation to repay. This result flows from the concluding words in sub-s 16 (1) (quoted in full earlier): " ... and that benefit shall be taken to be provided in respect of each year of tax during the whole or a part of which the recipient is under an obligation to repay the whole or any part of the loan." It follows that for the purposes of sub-s 16 (1), a contractual or other undertaking to advance money, to provide credit or other financial accommodation, or to pay an amount for, on account of, on behalf of or at the request of another person (cf the definition of "loan" in s 136), where any obligation to repay can arise only in the future, does not constitute a loan benefit. This view receives some support from sub-s 18 (1), quoted earlier, which defines the taxable value in relation to a year of tax of "a loan fringe benefit provided in respect of the year of tax". The taxable value of the benefit provided during any year of tax during which the recipient is under an obligation to repay the whole or any part of the loan, is declared to be "the amount (if any) by which the notional amount of interest in relation to the loan in respect of the year of tax exceeds the amount of interest that has accrued on the loan in respect of the year of tax." This formula at least suggests an assumption by the drafter that there has been an "actual" advance of money, provision of credit or other form of financial accommodation, or payment of a kind referred to in the definition of "loan": interest does not commonly begin to accrue at an earlier point of time. Of course, in the case of an employee, the amount of interest that has accrued may, in fact, be nil, that is to say, the loan to the employee may be interest free. Moreover, it must be acknowledged that the forms of financial accommodation known to commerce are so multifarious that it cannot be assumed that interest can never commence to accrue before there is an actual advance of money, provision of credit or other form of financial accommodation, or payment. What is important for present purposes, however, is that in the familiar forms of financial accommodation, interest begins to accrue after some monetary outlay has been made by the financier. While the expression "provision of credit or any other form of financial accommodation" in para (b) of the definition of "loan" in s 136 may, in ordinary parlance, encompass a credit facility agreed but not yet drawn upon, such a credit facility is not one in respect of which there is either an obligation to repay, or, at least ordinarily, a potential accrual of interest. The view which I have expressed does not ignore the distinction between paras (a) and (b) of the definition of "loan". Under a simple sale of goods on credit there is no "advance of money" but there is both a "provision of credit" and an obligation to repay. For the foregoing reasons, in my view Division 4 catches in respect of any year of tax only the making of a loan as defined where the recipient is under an obligation to repay the whole or a part of the loan during the whole or a part of that year. The Bank's investigation, assessment and determination of an application, writing of the letter of approval and receipt of the signed acknowledgment do not, of course, themselves generate an obligation to repay. Division 12 The learned trial Judge held that although it is clear that a benefit cannot be a residual fringe benefit if it is included within the category of loan fringe benefit, it does not follow that the provisions of Division 4 are an exclusive code for all benefits that in any way related to loans. I agree. On the assumption that there is a benefit, as defined in s 136, provided by the Bank to its employees in respect of their employment in relation to the lending of money but antecedent to the "actual" advance, provision of credit or other financial accommodation, or payment, I can find no legislative intent that such a benefit must be treated as part of the subject matter of Division 4. On the contrary, such a benefit, on the assumption that it is provided, seems to me to be the very kind of benefit intended to be caught as a residual fringe benefit by the "catch-all" provisions of Division 12. This conclusion leaves for consideration the question whether there was in the present case a residual fringe benefit at all. Contrary to the Bank's submission, the learned trial Judge held that there was. I agree with his Honour's conclusion on this issue also. Initially, the Commissioner had submitted that the relevant benefit was the non-charging of the establishment fee but by the time of the hearing before his Honour, the Commissioner identified the benefit as: " ... the service provided by the Bank to its staff member in assessing the loan application, considering it, reviewing security (if security is offered), inspecting the property, considering any other relevant matters and communicating the Bank's decision." (AB 203-204) In the case of both ordinary and employee applicants for financial accommodation, the Bank assesses the application in all its relevant respects, takes a decision, and, if the decision is a favourable one, writes advising the applicant of the approval and of the terms and conditions on which the financial accommodation will be made available and inviting the applicant to sign and return an "acknowledgment" agreeing to those terms and conditions. When the applicant does this, an establishment fee is payable by an ordinary customer, but not, at least ordinarily, by an employee. In my view, the steps taken by the Bank to which I have referred involve the provision of a benefit or service by it to the applicant, whether the applicant is an ordinary customer or an employee. It is true that, in the case of both outsiders and employees, the Bank acts in what it perceives to be its own commercial interests. But this is not inconsistent with the proposition that its conduct as described also constitutes or includes the provision of a benefit or service to the applicant. Where the benefit or service begins and ends may be arguable. According to the narrower view, it comprises only the writing of the letter of offer or commitment and the receipt, by way of return, of the applicant's written acknowledgment. On the other hand, and more broadly, it may be that it extends back to include the antecedent steps of investigation, assessment and decision. What is important is that at least that for which outsiders pay an establishment fee includes the writing of the letter of offer or commitment and receipt of the applicant's signed acknowledgment. Although the evidence did not include the form of letter written to outsiders, the writing of the letter of offer or commitment, whether to them or to employees, at least once the signed acknowledgment is returned, gives rise to a legal or moral obligation on the part of the Bank to make the financial accommodation available. I have no difficulty in regarding this as a benefit or service provided by the Bank. It is beside the point that it may not be proper to view each isolated act of the Bank, such as the inspection of any security offered, as the provision of a benefit or service by it to the applicant. Again, the acts with which we are concerned in the present case are those for which ordinary customers pay an establishment fee. On the broader view to which I referred above, the commitment of the Bank to make the advance, provide the credit or other financial accommodation, or make the payment of a kind referred to in the definition of "loan", to be found in the writing of the letter and receipt of the applicant's signed acknowledgment, is an integral part of the Bank's conduct for which the establishment fee is payable or foregone, as the case may be. I agree with Sackville J that the passage from the judgment of Latham CJ in Employers Mutual Indemnity Association Ltd v Federal Commissioner of Taxation (1943) 68 CLR 165 at 173-174 quoted in his Honour's Reasons for Judgment does not bear on the present case. An indemnity insurer's investigation and determination of a claim made against it by the claimant-insured take place exclusively in its interest and by reference to the pre-existing legal rights and obligations of the parties to the contract of insurance. Employees of the Bank did not have a right to a concessional credit facility. The terms of the scheme were expressly declared to be subject to the Bank's right to decline any application even if it met the guidelines, and, moreover, to alter the guidelines at any time. Employees apply for credit facilities pursuant to the scheme administered by the Bank. The writing of the letter of offer or commitment is the outcome of the Bank's assessment of the application pursuant to the scheme. I have no difficulty in accepting that the benefit to which I have referred is provided by the Bank to the employee "in respect of the employment of the employee". For the foregoing reasons, I would dismiss the appeal. If the residual fringe benefit does not include the steps antecedent to the writing of the Bank's letter, the benefit is an "in-house" non-period residual fringe benefit". If it does, it may be this or, perhaps less probably, an "in-house period residual fringe benefit". It is important again to recall that the Bank did not press an issue of quantum which it had raised in its statement of facts, issues and contentions, and the Bank's concession before the trial Judge that if fringe benefits tax was payable, the Commissioner's assessment was correct. Accordingly, any question of the taxable value of the residual fringe benefit provided by the Bank to its employees antecedent to the making of the loan is not of concern on the appeal. Would the Bank's processes of investigation, assessment and determination alone constitute the provision of a benefit or service by the Bank to its employee? This question does not arise for decision in the present case, but I will say something about it. An outsider does not pay an establishment fee for those acts alone. On one view they are simply part of the general conduct of the Bank's business and are subsumed, for present purposes, in the Bank's communication to its employee of approval or rejection of the application. Another way of expressing this view is to say that the first stage at which a benefit or service is provided is when the Bank writes to its employee. There is an opposing view. The Personnel Manual is at least a holding out or undertaking to staff that applications by them for concessional finance will be considered, assessed and determined by the Bank against the conditions of the scheme, subject to its overriding discretions to decline any application and to change the terms of the scheme. According to this view, that consideration, assessment and determination constitute the provision by the Bank to its staff of a benefit or service in respect of their employment, albeit one raising difficulties of valuation. No doubt, if an application satisfies all the conditions of the scheme, in the ordinary case it will be approved. The prospect or chance of approval will vary from application to application according to all the circumstances of the individual case. So will the value of that prospect or chance. That for which an outsider pays an establishment fee is, or culminates in, the Bank's letter of offer or commitment. The fee is not payable merely for the Bank's consideration and assessment of, and decision upon, the application: these processes amount to something less than that for which the establishment fee is paid. Accordingly, in relation to those processes the establishment fee does not represent "the lowest price at which an identical benefit [is] sold to a member of the public" (see para 48 (a) of the Act). Apparently, the taxable value of the processes of consideration, assessment and decision would be "an amount equal to 75% of the notional value of the benefit at the comparison time" (see para 48 (b) of the Act). In view of the conclusion which I reached earlier, it is not necessary or desirable that I consider such hypothetical questions further. CONCLUSION In my view, the appeal should be dismissed with costs. I certify that this and the preceding 26 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren. Associate: Dated: 18 October 1996 IN THE FEDERAL COURT OF AUSTRALIA) NG 386 of 1996 NEW SOUTH WALES DISTRICT REGISTRY) NG 451 of 1996 GENERAL DIVISION ) NG 452 of 1996 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: WESTPAC BANKING CORPORATION Appellant AND: COMMISSIONER OF TAXATION Respondent CORAM: LOCKHART, LINDGREN, SACKVILLE JJ. PLACE: SYDNEY DATE: 18 October 1996. REASONS FOR JUDGMENT SACKVILLE J: The Proceedings Westpac Banking Corporation (the "Bank") appeals from orders made by a Judge of this Court, Hill J. His Honour dismissed appeals by the Bank against decisions made by the Deputy Commissioner of Taxation in respect of the Bank's liability to fringe benefits tax for the financial years ending 31 March 1992, 31 March 1993 and 31 March 1994. In each case, the Deputy Commissioner disallowed the Bank's objection to an assessment to fringe benefits tax. The assessment was based on the Bank's policy of not charging its employees establishment fees for loans made to them by the Bank. The issue on the appeals was stated in various ways by the respective parties. To adopt the language of the trial Judge, in general terms the issue is whether "fringe benefits tax is exigible where loans are made by the Bank to its employees but the employees to whom those loans have been made are not required to pay an establishment fee". The answer to this question depends on the construction of the Fringe Benefits Tax Assessment Act 1986 (Cth) (the "Act"). The Facts The following statement of facts is largely taken from the judgment of the trial Judge, supplemented by reference to documents to which the Court was referred in the course of argument. Westpac Banking Corporation ("the Bank") grants credit facilities to its customers. These facilities include housing loans, loans for investment purposes, car finance and credit cards. During the relevant financial years, a person (other than an employee) wishing to obtain one or more of these facilities from the Bank was usually required to follow a series of procedures specified by the Bank. The necessary arrangements were ordinarily made by the appropriate branch manager. A customer intending to apply for a loan was usually, although not invariably, interviewed by a bank officer. Two or three interviews might have been required, depending on the complexity of the application. The customer completed an application form, which was then considered by the Bank. That consideration involved a financial assessment of the customer's affairs and, in the case of a proposal for a secured loan, included an inspection and valuation of the proposed security. The Bank's Lending Support Procedures stated that "[t]he primary elements in the assessment of credit proposals are the ability to repay and the viability of a business. However the subject of security assessment is of vital importance to the [Bank]". Depending on the size of the loan sought by the customer, the branch manager could require approval from a more senior officer within the Bank. If the Bank decided to approve a loan or facility, it notified the customer accordingly. The letter usually required the customer to signify acceptance of the terms and conditions specified in the letter and stated that the customer would be subject to the conditions contained in the formal legal documentation. The Bank charged customers an establishment fee. The Bank's guidelines stated that the "fee should normally be collected immediately approval for accommodation is conveyed to customer, notwithstanding that it may or may not be used". His Honour found that a customer who accepted the Bank's terms and conditions was required to pay the establishment fee, whether or not that customer decided to draw on the facility. The guidelines did, however, contemplate that the Branch Manager could refund the fee or part thereof, should the advance not proceed, but suggested that "a charge of 50% scale would be appropriate in most cases". Unless the fee was paid, the loan would not be made by the Bank. According to the Bank's Australian Retail Credit Policy, it was intended that the establishment fee reimburse the Bank for costs (such as interviews, submissions, financial assessments and inspections) relating to loan applications or approvals for – all new advances/loans; – extensions/increases (including amount and/or term) of existing facilities; and – secured/unsecured approvals. The Bank formulated "General Conditions Applying to all Staff Loans" ("the General Conditions"). The General Conditions stated that staff loans were intended to provide "concessional loans to staff as part of [the Bank's] strategy to attract, retain and motivate effective performance relative to the competitive market in which [the Bank] operates." The General Conditions provided that "packaged staff" could "access concessional loans immediately". Certain categories of "non-packaged staff", who were performing effectively, were also eligible to apply for concessional loans. Under the heading "What other general conditions apply to staff lending?", the General Conditions emphasised that "[c]oncessional loans are not an automatic entitlement". The criteria included the following: "Any application may be declined if it does not meet the bank's normal lending criteria. As a guide, repayment and all other commitments should not exceed 33% of net income. [The Bank] reserves the right to decline any application even if it meets the guidelines." An employee of the Bank, who wished to borrow under the concessional scheme applied not to a branch manager, but to the Personnel Department of the Bank. Apart from this difference, as his Honour found, the procedure which an employee was required to undergo was not greatly different from that which applied to a member of the public. The employee made an application, which was considered by the Bank. As part of that consideration, the Bank undertook a financial assessment of the applicant. Where appropriate, the Bank arranged for inspections and valuations of property proposed as security for the loan. If the Bank approved the application, the Bank advised the employee of the approval by letter. The standard form letter for a "flexible purpose housing loan" was in evidence. It stated that the loan was made available to the employee, subject to a satisfactory property inspection and security and loan documentation being completed to the Bank's satisfaction. The letter included the following passage: "The flexible purpose housing loan is subject to the Staff Concessional Advance Policy guidelines contained in the Personnel Manual, volume 1 - Benefits section. It is your responsibility to ensure all general terms and conditions relating to Concessional Advances are clearly understood and adhered to before acknowledgment of this offer and throughout the term of the loan. This flexible purpose housing loan offer is given subject to your acceptance of the above terms and conditions and also those contained in the formal legal documentation to be provided to you. If the above terms and conditions are acceptable to you, would you please sign the attached duplicate of this letter in acknowledgment and hand it to the branch at the time of executing the loan documentation or before. The loan will not proceed until the acknowledged copy of the terms and conditions is held by the lending branch." The practices adopted by the Bank in relation to staff loans differed from those followed in relation to other customers, in two main respects. First, the loan, if drawn down by the employee, was at a reduced rate of interest. Secondly, employees were not required to pay the establishment fee charged to other customers. The Assessments and Appeals By reason of s.72 of the Act (which provides for a first return to be a deemed assessment) the Bank was deemed to be assessed to fringe benefits tax in respect of the non-charging of establishment fees for the taxation years ending 31 March 1992, 31 March 1993 and 31 March 1994. The Bank lodged notices of objection against the deemed assessments and the Commissioner disallowed the objections. It appears that the value of the fringe benefits was assessed by the Bank itself (on the assumption that it was liable to pay fringe benefits tax). In any event, the value of the benefits provided to employees by reason of the failure to charge establishment fees was assessed at $1,857,000 for the year ended 31 March 1992. The assessed value for the year ended 31 March 1994 was $872,400. The Appeal Book does not reveal the value assessed in respect of the year ending 31 March 1993. The Bank appealed to the Court against the Commissioner's objection decisions. The Bank's statement of issues, facts and contentions contended that the non-charging of establishment fees by the Bank was not a residual benefit within the meaning of s.45(1) of the Act. The statement also contended that, if the non-charging of an establishment fee in respect of a staff loan was a residual benefit, the taxable value of these fringe benefits was nil. However, at the trial the Bank's then counsel conceded that the issue of quantum had been dealt with and "the matter has effectively gone away". In the event, no evidence as to valuation was led and his Honour approached the case on the basis that the only issue was whether there was "a separate category for residual fringe benefits exclusive of loan fringe benefits in a case such as [this]". As I have previously noted, the trial Judge dismissed the Bank's application. I shall return to his Honour's reasons after considering the legislative scheme governing the present case. The Legislative Scheme I adopt the account of the legislative scheme given in the Reasons for Judgment of Lindgren J which I have had the advantage of reading. The Judgment Below The trial Judge described the Bank's principal submission as having been put in two different, but related ways. First, the Bank had contended that the benefit which it provided to the employee was the "making of the loan". Thus Division 4 of Part III applied and operated to the exclusion of Division 12. In other words, since there was a loan benefit, there could not also be a residual fringe benefit arising out of the Bank foregoing the establishment fee. The Bank's second and related argument was that the non-charging of the establishment fee was so closely related to the loan and interest charged under it, that it was excluded from the definition of "residual benefit". The establishment fee was merely an attribute of the loan itself and did not bear a character materially different to interest payable by the borrower. His Honour accepted that there was a relationship between the steps taken by the Bank to consider an application for finance and the loan resulting from that process. His Honour continued: "But that does not mean that the undertaking to make available funds by way of loan can not of itself be regarded as a benefit. Nor would it mean that the process of consideration and assessment of a loan application can not be seen as a benefit. Once this is appreciated, I think that the first submission of the Bank must fail, in whichever alternative version it may be expressed." The trial Judge also rejected the Bank's alternative submission, that the non-charging of the establishment fee was not a "right, privilege, service or facility...provided under an arrangement for, or in relation to, the performance by the employee of work", within the statutory definition of "benefit". His Honour identified the benefit provided by the Bank as the service to the staff member, in assessing and processing the loan application. Alternatively, the benefit consisted of the Bank committing itself to the loan. Viewed in this way, it was clear that a benefit was provided to the employee. Moreover, the benefit was "in respect of" the employee's employment. The service of considering the application, together with the commitment of funds, came about because of the employee's employment with the Bank. In this sense, it was correct to say that the service was in respect of the employee's employment. His Honour added this observation in support of his conclusion: "the conclusion I have reached accords with the general policy of the legislation to tax benefits which may substitute for remuneration. Bank officers who borrow from their [employers] obtain two different advantages over and above those accruing to the public, namely, a concessional rate of interest (a loan fringe benefit) and the non-charging of the ordinary establishment fee (a residual benefit). Both stem from the officer's employment. They are different benefits and each is taxable to the employer under the Act." Division 4 I agree with the observations made by Lindgren J in relation to the operation of Division 4. Division 12 I agree in general with what Lindgren J has written on the application of Division 12 to the facts of the present case and add the following observations. Mr Emmett QC, who appeared with Mr Renwick for the Bank, suggested that the conclusion that Division 12 applied led to inconvenient if not absurd results. He contended that it would be difficult to value the benefit constituted by the assessment and consideration of the application separately from the value of the benefit constituted by the commitment which the Bank made to make funds available to the applicant. But valuation was not an issue at the trial and no evidence was led on the issue. It is not apparent why the valuation of the service, provided by an employer to an employee, of assessing and considering a loan application should present special difficulties. The Act sets out the criteria to be applied in determining the taxable value of residual fringe benefits (see especially ss.48 and 49). There is nothing to suggest that the Court would have special difficulty in applying the statutory criteria to a benefit of the kind involved in the present case, if the parties were to adduce the appropriate evidence. Mr Emmett also contended that, to classify the consideration and assessment of the employee's application as a residual benefit separate from the advance of funds or the commitment to advance funds would detract from the objective stated in the Treasurer's second reading speech on the Fringe Benefits Tax Assessment Bill. According to the Treasurer, the Bill's "design features are directed at making the operation of the tax as readily manageable as possible for employers. The Bill also contains all the rules necessary to identify and value the wide range of fringe benefits it deals with". Second Reading Speech, House of Representatives, 2 May 1986, at 3021. I see nothing inconsistent between these very general observations and the conclusion that the assessment and consideration of a loan application are not encompassed within the statutory concept of a "loan fringe benefit". I agree with the trial Judge that, in principle, the general policy of the legislation is to tax benefits which may substitute for remuneration. Each case must depend on its own circumstances. But if consideration of a loan application is capable of constituting a "benefit" for the purposes of the Act, it is quite capable of being a benefit provided to an employee additional to the reduced interest rate on the loan itself. Whether the benefit has a taxable value is a separate question. The answer to that question will depend upon whether identical benefits are provided to the public and whether the recipient could reasonably have been expected to pay for the benefit from the provider under an arm's length transaction (see ss.48 and 49 and the definition of "notional value" in s.136(1) of the Act). Because of the concession which the Bank made at the trial, no issue arises in this case as to the taxable value of the benefit provided by the Bank to employees applying for concessional staff loans. It follows from what I have said that the service provided by the Bank to its employees, in considering and assessing their applications for concessional staff loans, was not a "loan fringe benefit" within s.16(1) of the Act. The service was therefore capable of constituting a "residual benefit" within s.45(1), assuming of course that it otherwise satisfied the definition of "residual benefit" in the Act. Was There a Fringe Benefit? The Bank challenged the trial Judge's conclusion that the Bank's assessment and consideration of the loan application was a "fringe benefit" for the purposes of the Act. Mr Emmett submitted that the Bank's consideration of the employee's loan application did not constitute a service to the employee, but was a task undertaken solely in the Bank's own interests. It was not a fringe benefit because it was not provided "in respect of the employment of the employee", as required by the definition of the expression "fringe benefit" in s.136(1). Mr Emmett cited in support of his contention a passage from the judgment of Latham CJ in Employers' Mutual Indemnity Association Limited v Federal Commissioner of Taxation (1943) 68 CLR 165. The issue in that case was whether a company limited by guarantee, which carried on the business of providing insurance to its members, was rendering "services to its members" by investigating and adjusting claims. If it was, the company was a "co-operative company" within the meaning of the Income Tax Assessment Act 1936 (Cth), and not entitled to an exemption. The passage cited was as follows (at 173-174): "It is contended for the company that when the company investigates and adjusts a claim made against it and either resists payment, or ultimately pays under the policy, the company is rendering services to its shareholders. In my opinion this is not the case. The company is bound by the terms of the policies which it issues to indemnify policy holders according to the terms of the policies, and in the case of workers' compensation policies it is also by statute liable directly to insured workers (Workers' Compensation Act 1926-1938 (N.S.W.) s.18(3)). In making the investigations which are necessary before the company decides whether to pay or to resist a claim the company is not engaged in rendering a service to the particular shareholder who has taken out the policy, or to its shareholders generally. It is acting on its own account. It is either discharging a liability which it has undertaken, or is resisting a liability alleged by the shareholder or some other person to exist but disputed by the company. Accordingly, in my opinion, the business of the company in investigating, adjusting and paying claims under policies cannot be brought within the category of rendering services to any other persons." The present case is different. The Bank was not assessing loan applications to determine whether it was obliged to discharge a pre-existing liability arising from the terms of a policy. It is true that the Bank had published criteria governing eligibility for staff loans. But whether or not they had contractual force, they vested considerable discretion in the Bank, which retained the right to decline an application even if it met the guidelines. Moreover, an employee whose application was approved after the process of assessment and consideration received a substantial commercial advantage, namely, a loan at subsidised interest rates presumably not available from any other source. From the employee's point of view, the assessment and consideration of the application were necessary (albeit preliminary) steps to obtaining a valuable commercial benefit available because of his or her employment. While the process was undertaken in part to protect the Bank's interests, it was also a step undertaken in the interests of employees seeking to take advantage of a commercial benefit available by reason of their employment. Of course, as I have already said, the taxable value (if any) of the service provided by the Bank to its employees is a separate question that does not arise in the present case. Conclusion In my view, the appeals should be dismissed, with costs. I certify that this and the preceding 14 pages are a true copy of the Reasons for Judgment of the Honourable Justice Sackville. Associate: Dated: 17 October 1996 Heard: 18 September, 1996 Place: Sydney Decision: 18 October 1996 Appearances: Mr A.R. Emmett QC, with Mr J.G. Renwick, instructed by Allen Allen & Hemsley, appeared for the appellant. Mr A.H. Slater QC, with Mr R. Hamilton, instructed by Australian Government Solicitor, appeared for the respondent.