FEDERAL COURT OF AUSTRALIA TAXATION – fringe benefits tax – exempt residual benefit – whether child care facility conducted by applicant and two other corporations on premises leased by them is located on business premises of the applicant for the purposes of s 47(2) of Fringe Benefits Tax Assessment Act 1986. WORDS AND PHRASES – "of". Fringe Benefits Tax Assessment Act 1986 (Cth) s 47(2), 136(1) Taxation Administration Act 1953 (Cth) s 14ZAF, 14ZAZA Saraswati v The Queen (1991) 172 CLR 1 – affirmed Bailey v Worsley (1969) VR 79 – cited Re Simersall; Blackwell v Bray (1992) 35 FCR 584 – cited ESSO AUSTRALIA LIMITED v COMMISSIONER OF TAXATION VG 213 of 1998 JUDGE: MERKEL J PLACE: MELBOURNE DATE 2 OCTOBER 1998 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 213 of 1998 BETWEEN: ESSO AUSTRALIA LIMITED (ACN 000 018 566) AppELLANT AND: COMMISSIONER OF TAXATION Respondent JUDGE: MERKEL j DATE OF ORDER: 2 october 1998 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The appeal be allowed. 2. In so far as the Private Ruling of the respondent dated 19 February 1997 relates to the appellant's liability to fringe benefits tax the Ruling be set aside and be remitted to the respondent to be determined in accordance with law. 3. The respondent pay the appellant's costs of the appeal. 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 VG 213 of 1998 BETWEEN: ESSO AUSTRALIA LIMITED (ACN 000 018 566) Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: MERKEL J DATE: 2 october 1998 PLACE: MELBOURNE REASONS FOR JUDGMENT Introduction The premises at 219 Dorcas Street, South Melbourne ("the leased premises") are leased from the United Church in Australia Property Trust (Victoria) by Esso Australia Ltd ("Esso"), Lend Lease Corporation Ltd ("Lend Lease") and BP Australia Limited ("BP") for the purposes of conducting a child care facility for the benefit of the employees of Esso, Lend Lease and BP. Esso claims that the child care facility at the leased premises is provided by it for the benefit of its employees and qualifies for exemption from fringe benefits tax as an exempt residual benefit, pursuant to s 47(2) of the Fringe Benefits Tax Assessment Act 1986 (Cth) ("the Act"). The issue arising for determination on the present appeal is whether the child care facility, located on the premises leased by Esso, Lend Lease and BP, is located on business premises of Esso for the purposes of s 47(2) of the Act. Background On 22 March 1996, Esso applied to the Commissioner pursuant to s 14ZAF of the Taxation Administration Act 1953 (Cth) ("the Administration Act") for a private ruling, inter alia, on whether Esso was liable to fringe benefits tax under the Act in respect of the child care facility provided by it for the benefit of its employees at the leased premises. On 19 February 1997, the Commissioner issued a notice of private ruling that for the years of income ended 31 December 1996, 1997 and 1998, the child care benefits provided by Esso will be "fringe benefits", as defined in s 136(1) of the Act, as the child care facility is not located on business premises of Esso. The parties were in agreement as to the facts and details of the arrangement on which the private ruling was based. Those facts and the arrangement may be briefly summarised as follows: · Esso, Lend Lease and BP have established a child care centre for the benefit of employees of the three companies at the leased premises under a three year lease, with options for three further terms each of three years; · Esso, Lend Lease and BP have entered into an agreement with KU Children's Services to manage and operate the child care services to be provided at the leased premises; · employees of Esso have been entitled to make an election to forego salary in consideration of Esso providing the employee with the provision of child care services at the leased premises. The relevant part of the Private Ruling of the Commissioner was as follows: "Is Esso liable to FBT on the provision of child care benefit? The child care benefits provided by Esso under the salary sacrifice arrangement will be "fringe benefits" as defined in subsection 136(1) of the FBTAA. This is based on the conclusion that the child care benefits provided to employees are not provided on the "business premises" of Esso, as discussed in Taxation Ruling TR96/27. As such, the child care benefits are prevented from being exempt residual benefit under subsection 47(2) of the FBTAA and will be liable to Fringe Benefits Tax." On 1 July 1997, Esso objected to the private ruling under s 14ZAZA of the Administration Act. The Commissioner notified Esso of his decision to disallow the objection against the private ruling and Esso applied to the Administrative Appeals Tribunal ("the AAT") for a review of that decision under s 14ZZ of the Administration Act. On 24 April 1998, the AAT affirmed the decision of the Commissioner on a ground which was not contended for by either party. The ground was that the exemption under s 47(2) is not available to premises which become business premises solely as a result of the location of a child care facility thereon. Esso has appealed to the Court from the decision of the AAT on the ground that it erred in law in affirming the decision of the Commissioner. The Act Esso is liable to pay tax under the Act in respect of fringe benefits as defined in s 136(1) in relation to an employee unless, inter alia, the benefit is an exempt benefit. Section 47(2) of the Act provides: "Where: (a) a residual benefit provided to a current employee in respect of his or her employment consists of: (i) the provision, or use, of a recreational facility; or (ii) the care of children of the employee in a child care facility; and (b) the recreational facility or child care facility, as the case may be, is located on business premises of: (i) the employer; or (ii) if the employer is a company, of the employer or of a company that is related to the employer; the benefit is an exempt benefit." 'Business premises' is defined in s 136(1) of the Act as follows: "'business premises', in relation to a person, means premises, or a part of premises, of the person used, in whole or in part, for the purposes of business operations of the person, but does not include: (a) premises, or a part of premises, used as a place of residence of an employee of the person or an employee of an associate of the person; or (b) a corporate box; (c) boats or planes used primarily for the purpose of providing entertainment unless the boat or plane is used in the person's business of providing entertainment; or (d) other premises used primarily for the purpose of providing entertainment unless the premises are used in the person's business of providing entertainment." 'Person' is defined in s 136(1) as follows: "'person' includes: (a) a body politic; (b) a body corporate; (c) a partnership; (d) any other incorporated association or body of persons; and (e) a person in the capacity of trustee'." Plainly, the purpose or object of the exemption in s 47(2) is to encourage an employer to provide recreational and child care facilities on the business premises of the employer for the benefit of employees. The parties are in agreement that the child care benefits provided by Esso are liable to fringe benefits tax unless the leased premises qualify for exemption under s 47(2). The Issues The appeal raises the following issues: · Are premises which become business premises of an employer solely as a result of the location of a child care facility thereon, excluded from the exemption provided for under s 47(2)? · Is the child care facility at the premises leased by Esso, Lend Lease and BP located on business premises of Esso? · Where two or more "persons" jointly lease premises are those persons "a body of persons", for the purposes of para (e) of the definition of "persons" in s 136(1), with the consequence that the business premises of those persons are not business premises of any one of them? Business Premises In his public Taxation Ruling TR96/27 dated 18 December 1996, the Commissioner adopted a broad view of the meaning of "business operations" for the purpose of the definition of "business premises" in s 136(1) of the Act. The Commissioner (at para 39) stated that: "…an activity would constitute a business operation where: (a) it is an activity which is undertaken in the course of carrying on a business, being either: (i) an activity undertaken in the ordinary course of carrying on a business (such as one that comprises the day to day operations of the taxpayer); or (ii) an activity which is not undertaken in the ordinary course of carrying on a business, but is still undertaken in the course of carrying on a business (such as an activity which has a reasonable incident to, or is in connection with, or facilitates the carrying on of a business operation); or (b) it is an activity which, although not itself a business, has a business or commercial character and is undertaken for the purpose of profit making by way of a business operation or a commercial transaction." The Commissioner (at paras 40 and 41) explained why he was of the view that the provision of child care facilities by an employer would fall within the term "business operations": "...'business operations' arise only in the context of a business or a profit making undertaking. In this context, the provisions of benefits to employees in the form of child care would be an important factor in recruiting, retaining and otherwise rewarding employees. Activities undertaken in connection with the provision of those benefits to employees would be 'business operations' of the employer who carried on the business or carried out the profit making undertaking. Thus, if that employer used his/her premises for operating a child care facility on the premises, the operations would be regarded as 'business operations'. The consequences of this view is that the provision of facilities such as child care, recreational, car parking or health care for employees would be an activity falling within 'business operations' In relation to a child care facility, this broad interpretation of 'business operations' will enable an employer who operates the child care facility on his/her premises to claim the tax exemption in subsection 47(2) in a broader range of circumstances. The exemption will apply, not just where the premises are used for a child care facility and other business operations, but also where the premises are used exclusively for operations of a child care facility." Although the AAT appeared to accept that the provision by an employer of child care facilities could fall within the term "business operations" in relation to the employer, it was of the view that, where the only business operation conducted at the premises was a child care facility, the premises would not qualify for an exemption under s 47(2) of the Act. In arriving at that conclusion the AAT interpreted s 47(2) as if there was to be added after the words "business premises" the following words: "other than premises which may become business premises solely as a result of the location of a child care facility thereon." It can be accepted that where a literal or grammatical meaning of a statutory provision does not conform to the legislative purpose as ascertained from the statute as a whole, including the policy which may be discerned from its provisions, a court is entitled to give effect to that purpose by addition to, omission from, or clarification of, the particular provision: see Saraswati v The Queen (1991) 172 CLR 1 at 22 per McHugh J. However, it is not apparent that any identifiable legislative purpose is served by the addition of the words suggested by the AAT. Indeed, in my view, the addition of those words tends to defeat, rather then give effect to, the legislative purpose of encouraging the provision of child care facilities at business premises of an employer. I am of the view that the Commissioner in Taxation Ruling TR 96/27 correctly adopted a broad view of the meaning of "business operations" for the purpose of the definition of "business premises" in s 136(1) of the Act. Once it is accepted that the provision of benefits to employees in the form of child care at business premises of an employer is an important factor in recruiting, retaining and otherwise rewarding employees and, as such, is part of the business operations of the employer, it does not seem to be relevant whether the child care facilities are located at the premises where the employer carries out other business operations, or are located at premises of the employer which have been procured solely for the purpose of the provision of a child care facility thereon. Common sense would dictate that in many instances basic requirements for child care facilities may be such that it is inappropriate for the facilities to be located upon the same premises where the other business operations of an employer are conducted. In my view, Esso and the Commissioner were clearly correct in contending that the construction put forward by the AAT in its decision in the present matter was wrong. Was the child care facility located on business premises of Esso? The Commissioner contended that there was to be imported into the requirement that a child care facility be located on business premises of the employer, the additional requirement that the employer have exclusive possession or sole occupation of the premises. It was then contended that in the present case, as Esso, Lend Lease and BP were jointly and severally entitled to possession of the premises at which the child care facility was located, the requirement of exclusive possession on the part of Esso alone was absent. The Commissioner also contended that, in any event, as the business premises were premises of the three employers it was not apt to describe them as business premises of any one of those employers. Esso disputes the Commissioner's contentions. It contends that there is no warrant for importing exclusivity as a requirement under s 47(2) of the Act. Esso, giving examples, submitted that if the legislature intends to impose such a requirement in taxation legislation it usually does so expressly. It was further contended that there is nothing in the policy or the nature of the subject matter of the relevant statutory provisions that would justify such a requirement. The relevant requirement in s 47(2) is that the child care facility be located on "business premises of the employer". Obviously the meaning to be attributed to those words will be influenced by the context of, and the purpose intended to be served by, the exemption granted in s 47(2). In other contexts it has been accepted that the word "of" is not a word of precision in defining a relationship between a person and a thing and generally, is apt to embrace a connection, association or relationship which may fall short of a proprietorial relationship or one involving ownership: see Bailey v Worsley (1969) VR 79 at 83 per Lush J and Re Simersall; Blackwell v Bray (1992) 35 FCR 584 at 591 per Gummow J. The Macquarie Dictionary relevantly defines "of" as: "Belonging or possession, connection, or association:" It seems to me that, under s 47(2), for the relevant business premises to be those of an employer, the employer must have a right to possession of the premises, at least to the extent necessary to enable the conduct thereon of the relevant recreational or child care facility. If the employer has the requisite possessory entitlement in respect of the premises it does not appear to matter whether that entitlement is one of ownership, exclusive possession or non-exclusive possession. In the present case, Esso is in possession of the leased premises for the purpose of the provision of the relevant child care facilities at those premises. I can see no reasons why Esso's possession must be exclusive. The fact that the definition of "business premises" in s 136(1) includes premises used "in whole or in part" for the purposes of business operations of an employer, whilst not determinative of the present issue, does not support a requirement of sole or exclusive possession. The more difficult question is whether it is apt to describe the leased premises as business premises of a particular employer where, as in the present case, the employer is one of three employers in possession of the premises for the purpose of conducting the relevant child care facility. In such circumstances, the issue of whether premises are premises of a particular person involves questions of fact and degree. For example, if a child care facility is located on premises leased by twenty different employers for that purpose, it is more difficult to say that the facility is located on the business premises of any particular one of those employers than where the facility is located on premises leased for that purpose by only two employers. In the present case, the premises were initially leased jointly and severally by Esso and Lend Lease which had the right to exclusive possession of the premises for the purpose of the conduct of a child care facility thereon. Subsequently, BP also became a lessee. The three employers engaged KU Children's Services to manage and operate a child care facility at the premises for the benefit of the employees of each of the employers. Each of the employers was to be liable for one third of the costs of providing the facility. At all material times Esso has been, and will be, in possession of, and has the right to use, the leased premises as a child care facility. I have already explained why, in my view, the possession and use of premises as a child care facility by an employer for the benefit of employees of that employer can result in those premises being business premises of the employer. Accordingly, prima facie the leased premises appear to be able to be described as business premises of Esso. The fact that the premises are also leased by Lend Lease and BP for the same purpose does not have the consequence that the premises are not business premises of each of the employers. In such circumstances it is apt to describe the premises at which the child care facility is located as business premises of Esso. In my view it is not to the point that the premises may also be business premises of Lend Lease or of BP. In the course of argument I raised with Senior Counsel for the Commissioner the situation of three barristers each leasing their chambers from the same lessor and then jointly and severally leasing the library area adjoining their chambers from the same lessor. In such circumstances it seemed to me to be apt to say that the library facility is located on the business premises of each of the barristers notwithstanding that the rights in respect of the facility and its use are rights of each of the three barristers. In my view, the approach that I have taken to the construction of s 47(2) is consistent with and promotes the purpose of the exemption and is to be preferred to the more restrictive construction contended for by the Commissioner: see s 15AA of the Acts Interpretation Act 1901 (Cth). Whilst it is correct to say that the purpose or object of s 47(2) is to encourage the provision of child care facilities located at business premises of the employer, if it is apt to describe the particular premises as business premises of an employer, it does not seem to me to matter that the premises might also be business premises of another employer. Indeed, that possibility appears to have been anticipated by the definition of "business premises" in s 136(1) which includes premises which are only used "in part" for the purposes of the business operations of an employer. For the above reasons it is my view that the child care facility is located on the business premises of Esso for the purposes of s 47(2) of the Act. The Commissioner, in his submissions, raised the possibility that the child care facility might have been a joint venture of the three employers, not just for their own employees, but also for members of the public. I am not satisfied that the Private Ruling was sought on that basis or that the facts on which the ruling was based support the Commissioner's submission. Indeed, if the facility was a joint venture for profit of the three employers the issues which arise under s 47(2) would be quite different to those sought to be raised in the application for the private ruling. Accordingly, I do not pursue this aspect of the matter further. Is the lease to a "body of persons"? Finally, the Commissioner relied on the definition of a "person" in s 136(1) as including a "body of persons". It was then contended that the definition of "business premises" in s 136(1) was to be interpreted with the definition of "person" with the consequence that the leased premises were business premises of the relevant "body of persons" being Esso, Lend Lease and BP. It followed, so it was said, that those premises were not the business premises of any one of the "body of persons". In my view the Commissioner's submissions ought to be rejected. The issue is whether the relevant business premises are business premises of the employer. For the reasons set out above, it is my view that the leased premises are premises used in whole or in part for the purpose of the business operations of Esso and that, as the relevant child care facility is located on those premises, they are business premises of Esso. The fact that the premises are also used in whole or in part for the purposes of the business operations of Lend Lease and BP does not affect the conclusion that they are business premises of Esso. The definition of a "person" in s 136(1) is an inclusive definition which is intended to extend the definition, where appropriate, beyond an individual. As the definition includes, inter alia, a "body corporate" and a "body of persons" each definition might be applicable to the definition of "business premises" in s 136(1) and, consequently, to s 47(2). For the reasons I have already set out, I am of the view that the relevant person for the purposes of the definition of "business premises" in s 136(1) is Esso (ie a body corporate) rather than Esso, Lend Lease and BP (ie a body of persons). Conclusion For the above reasons, it is my view that the AAT erred in law in affirming the Commissioner's Private Ruling that the child care benefits provided by Esso under the salary sacrifice arrangement referred to in the Ruling were liable to fringe benefits tax as they were not exempt residual benefits under s 47(2) of the Act. It appeared to be common ground between the parties that in the event that the appeal was allowed, it would be appropriate to remit the matter back to the Commissioner to determine Esso's application for a Private Ruling in relation to the child care facility in accordance with law. As Esso has succeeded on its appeal, it is appropriate that the Commissioner pay Esso's costs of and incidental to the hearing of the appeal. I certify that this and the preceding eleven (11) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Merkel Associate: Dated: 2 October 1998 Counsel for the Applicant: Mr J de Wijn QC with Mrs J Batrouney Solicitor for the Applicant: Clayton Utz Counsel for the Respondent: Mr B J Shaw QC Solicitor for the Respondent: Australian Government Solicitors Date of Hearing: 15 September 1998 Date of Judgment: 2 October 1998