FEDERAL COURT OF AUSTRALIA Essenbourne Pty Limited v Commissioner of Taxation [2002] FCA 1577 TAXATION - tax deduction - whether entitled to claim deduction for contribution to employee incentive trust - whether payment constituted capital expenditure - whether payment referrable to income production - whether tax benefit - whether applicant engaged in scheme to avoid tax TAXATION - fringe benefits tax - whether contribution to employee incentive trust ought to have been included in calculation fringe benefits taxable amount - whether trustee of employee incentive trust an associate of employees - whether payment property or residual benefit - whether individuals ought to be identified where multiple participants in trust - whether benefit to employee in connection with employment EVIDENCE - rule in Jones v Dunkel (1959) 101 CLR 298 - whether failure to call witness ought to give rise to drawing of adverse inferences Statutes Acts Interpretation Act 1901 (Cth) s 23 Fringe Benefits Tax Act 1986 (Cth) s 5 Fringe Benefits Tax Assessment Act 1986 (Cth) ss 67, 66, 136 Income Tax Assessment Act 1936 (Cth) ss 177F, 51, 177D, 177C, 26AAB Taxation Administration Act 1953 (Cth) s 14ZZ Cases British Insulated & Helsby Cables Ltd v Atherton (1926) AC 205 Discussed Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 Cited Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 Cited Hart v Federal Commissioner of Taxation [2002] FCAFC 222 Cited J & G Knowles & Associates Pty Ltd v Commissioner of Taxation (2000) 96 FCR 402 Cited Jones v Dunkel (1959) 101 CLR 298 Applied Kumagai Gumi Co Ltd v Commissioner of Taxation (1999) 90 FCR 274 Cited Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183 Cited Peabody v Commissioner of Taxation (1993) 40 FCR 531 Cited Roads and Traffic Authority of New South Wales v Commissioner of Taxation (1993) 43 FCR 223 Refd to Sun Newspapers Ltd v Federal Commissioner of Taxation (1939) 61 CLR 337 Cited The State of Queensland v The Commonwealth of Australia [The First Fringe Benefits Tax Case] (1986) 162 CLR 74 Cited ESSENBOURNE PTY LIMITED v COMMISSIONER OF TAXATION Q 170 of 2001 AND ESSENBOURNE PTY LIMITED v COMMISSIONER OF TAXATION V 273 of 2001 KIEFEL J 17 DECEMBER 2002 BRISBANE IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q170 OF 2001 BETWEEN: ESSENBOURNE PTY LIMITED (ACN 010 450 656) APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: KIEFEL J DATE OF ORDER: 17 DECEMBER 2002 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The respondent pay the applicant's costs of the appeal. 3. The parties provide Minutes of Order within seven days. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY V273 OF 2001 BETWEEN: ESSENBOURNE PTY LIMITED (ACN 010 450 656) APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: KIEFEL J DATE OF ORDER: 17 DECEMBER 2002 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The applicant pay the respondent's costs of the appeal. 3. The parties provide Minutes of further Orders within seven days. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q170 OF 2001 BETWEEN: ESSENBOURNE PTY LIMITED (ACN 010 450 656) APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT AND: IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY V273 OF 2001 BETWEEN: ESSENBOURNE PTY LIMITED APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: KIEFEL J DATE: 17 DECEMBER 2002 PLACE: BRISBANE REASONS FOR JUDGMENT 1 The applicant Essenbourne Pty Ltd ("Essenbourne") is the owner of a motor dealership in Stanthorpe, Queensland. The Marino family were at all relevant times directors of, and shareholders in, Essenbourne. The parents, Giuseppe and Santina Marino, have little direct dealing with the business but are said to be kept informed about it by their three sons. Mario Marino is described as a "Dealer/Principal", Salvatore ("Sam") Marino the Service Manager, and Venerando ("Vinnie") the Sales Manager. Vinnie and Mario Marino's wives perform some work for the dealership. Sam Marino is not married. 2 The brothers have worked in the dealership since 1983. Since about 1985 they have received an annual salary of $25,000 each. It is not disputed that such a salary does not reflect the work they carry out and that it is not comparable with salaries likely to be paid in other dealerships. Whilst it was said, at some points, that Essenbourne's strategy in keeping salaries low was so that it could cope better with periods of business downturn, it was also acknowledged that it enabled surplus funds from profitable years to be invested. The latter would seem to be consistent with the company's history of making contributions for the benefit of members of the Marino family. Essenbourne employs people other than the family members, but those employees are not included in the Essenbourne Superannuation Fund, the Employee Share Fund or the Employee Incentive Trust ("the Trust") which are to be considered here. 3 Since 1992, Essenbourne's profit from all divisions of the dealership, before payment of superannuation and other contributions, has ranged between $300,000 or $400,000 (the evidence is unclear) and $690,000. The latter figure was earned in 1997. In either 1991 or 1992, the brothers established the Essenbourne Superannuation Fund. Lynrose Pty Ltd ("Lynrose") was the trustee of the Fund and the brothers were directors and shareholders of it. Each of the members of the family were members of the Fund, although it would not appear that the parents perform any duties as employees. Essenbourne, as the employer, contributed $180,000 to the Fund in each of the years 1992 and 1993, $210,000 in 1995 and $215,000 in 1996. In the years 1994 and 1997 benefits to the family members, as employees, were provided by other means. The superannuation contributions to individual members were calculated by reference to their age, although the maximum amount which could have been paid on that basis was not paid in every year. In more recent years, larger amounts were contributed to the parents. The balance of contributions paid with respect to them stood at over $200,000 by 1997. The contributions to the sons then stood at about $61,000 for Mario Marino, $57,000 for Sam Marino and $38,000 for Vinnie Marino. Amounts in the order of $8,000 had been paid on account of Lena and Gina Marino the wives of Mario and Vinnie Marino respectively. Gina Marino's annual salary in 1996 was shown as some $23,000 and Lena Marino's $5,200. It may also be observed that in 1995, $25,000 was contributed on account of Mario and Sam Marino and $9,000 to Vinnie Marino. In 1996 the same amount, $26,000, was paid on account of each of them. Equal payments on account of the brothers and their wives were also made to the Fund in the years following 1997. 4 In 1994, Essenbourne contributed $225,000 to an Employee Share Plan on the advice of its, and the brothers', accountant, Mr Catanzaro. It is said that the contribution was based on an amount of $75,000 per year over three years "which represented the difference between the brothers' salaries and what they thought comparable salaries might be if they were not committed to the Dealership". The amount of the maximum age-based contributions which could have been made to the Fund that year by Essenbourne was $201,000. A deduction was claimed for the contribution. The basis for the change from payments to the Fund to payment to a Share Plan was said to be the need to tie Sam Marino to the dealership. Entitlements under the Plan were to arise only if an employee remained in employment for three years, although the documentation of the Plan provides for a term of five years. Sam Marino is said to have made statements to the effect that he was dissatisfied with his position with the dealership and was considering other options. I shall refer to this evidence at a later point. 5 In May 1997, Mario Marino spoke to Mr Catanzaro about whether another share plan could be entered into. Mario Marino said that he wanted to provide the same type of arrangement for Sam Marino as they had with the share plan, so that he would continue with the dealership. It was said that his position had not changed. Mr Catanzaro explained that the legislation had been amended and that the amount which could be contributed to such a Plan had been reduced. He recommended an Employee Incentive Trust. He explained that it had the same general advantages as a Share Plan. The funds could be invested but, additionally, the Trust could borrow and the funds could be accessed after five years, instead of at retirement. Whilst they would have to pay tax when they took the monies out of the Trust, there would not be a tax of 15 per cent on the contributions as there was in a superannuation fund. As with the Superannuation Fund, the brothers would have control over the investments. The brothers advised Mr Catanzaro that they thought their salaries would be about $50,000 per annum if they were employed in other dealerships. He calculated that age-based contributions for that year to the Superannuation Fund would have totalled approximately $250,000. This meant, he says, that over a five year period a contribution of $125,000 per brother, a total of $375,000, was appropriate. He thought that was too much having regard to the amount of the profits that year. He advised them that it should be limited to the sum which could be contributed to the superannuation fund on the basis of the members' age. This was a reference to contributions with respect to all seven members of the Fund. A contribution of $252,000 was made to the Trust for the year ending 30 June 1997. On the same day, 30 June 1997, that sum, together with a further $30.00 was paid to Gledshore Pty Limited ("Gledshore") for all of its issued shares. The $30.00 represented $10.00 paid as settlement monies and $10.00 each for the purchase of a Residuary Unit and an Employer Unit in the Trust, to which further reference will be made. Gledshore is a company controlled by the brothers. Its principal investments are in real estate. 6 Essenbourne claimed a deduction for the contribution for that income year. The deduction was disallowed in a Notice of Amended Assessment dated 2 September 1999. Essenbourne's objection was disallowed in February 2001. The Commissioner does not however seek to uphold the penalties imposed. At about the same time the Commissioner made a determination, under s 177F of the Income Tax Assessment Act 1936 (Cth) that the amount of $252,000, if otherwise allowable as a deduction, would not be allowable for that year. The Commissioner determined that, if the contribution was deductible, Essenbourne had engaged in a scheme to avoid tax. 7 On 30 November 2000, the Commissioner assessed Essenbourne to fringe benefits tax in respect of the fringe benefits tax year commencing 1 April 1997, by including in the fringe benefits taxable amount the amount of $252,000 paid by Essenbourne to the Trust. On 30 May 2001 the Commissioner disallowed the objection to that assessment. The Commissioner also imposed penalties under s 67 of the Fringe Benefits Tax Assessment Act 1986 (Cth), on the basis that Essenbourne had engaged in a scheme to avoid fringe benefits tax. The Commissioner does not now contend that there was a scheme and does not seek to uphold the penalties imposed. 8 Essenbourne appeals from the decisions on the objections under s 14ZZ of the Taxation Administration Act 1953 (Cth). the trust 9 On 30 June 1997, a Deed of Trust, the "Employee Incentive Trust Deed",was entered into following a resolution of the directors of Essenbourne. Marino Investments (Qld) Pty Ltd was the trustee. The directors resolved that Essenbourne should contribute $252,000 to the Trust. 10 The Trust Deed recites that the Trust is to provide benefits and incentives to employees. By cl 5.1 the employer is to make contributions for the benefit of "its employees generally". Any such contributions are to be paid to the Contribution Fund (cl 5.2). The Trust is said to be for eighty years subject to earlier termination by the trustee or by resolution of the unit holders (cl 19). 11 The three brothers were invited to subscribe for, and were each allotted on 30 June 1997, 84,000 Employee Units, each unit having a value of $1.00. The brothers did not pay for the units. The trustee advanced the monies on their account. An Employee Unit Holder has the right to receive distributions of income as determined from time to time by the trustee in respect of those units and to request the trustee to invest and vary the investment of funds subscribed by the employer, being funds credited to the Employee's "UI Account" (Underlying Investments Account). Upon redemption the unit holder is to receive the funds available to the trustee on sale or disposal of the underlying investments (see cl 4.3). The term "Underlying Investments" is defined as the investment of contributions in respect of Employee Units and Residual Units. The brothers were not credited with contributions in a UI account. 12 On the same day Lynrose subscribed for one Residuary Unit in the Trust. The holder of a Residuary Unit has the right to receive distributions of income from investment of the underlying investment for the Residuary Unit and any other money coming to that account and, upon redemption, to receive the funds available to the trustee on sale or disposal of the underlying investments (cl 4.4). In the event of the termination of the Trust, which may be effected by resolution of the registered unit holders (cl 19), the holder of Residuary Units becomes entitled to the funds in the Contribution Fund (cl 5.6). 13 Essenbourne became the holder of an Employer Unit and, as a result, obtained certain procedural and voting rights, but none to the distribution of income or assets. 14 Pursuant to cl 10.1 of the Deed, the trustee may issue Bonus Units in respect of Employee Units to the holders of those units out of the Contributions Fund on such basis as the Trustee, with the consent of the employee, may determine. The trustee is not however to issue any Bonus Units unless the Special Conditions relating to the Employee Units have been satisfied (cl 10.2; and see cl 8.3(c)). Pursuant to those Special Conditions employees are not entitled to receive an issue of Bonus Units unless they remain a full time employee of Essenbourne for a period of five years from the date of issue of the units. 15 Employee Units are to be redeemed by the trustee on certain events including upon the employee's request, with the agreement of the trustee and on satisfaction of the Special Conditions. They may otherwise be redeemed by the trustee upon cessation of employment or if the Special Conditions entitle the trustee to redeem. In default of the trustee redeeming the Employee Units, they are to be redeemed, at the latest, on a winding up of the trust (cll 9.1 and 9.2). 16 The position which then prevailed upon the steps above being taken was that Lynrose, the trustee of the Superannuation Fund, might become entitled to the contribution monies, if the trust were terminated. The brothers might receive some or all of the funds if Bonus Units were issued. whether a deduction 17 The Commissioner's reason for the decision was that the contribution made by Essenbourne to the Trust was capital in nature and therefore not deductible under s 51(1) of the Income Tax Assessment Act. Alternatively, the contribution was an expense incurred in connexion with its involvement in a scheme to avoid tax and was therefore not incurred in gaining or producing assessable income or carrying on a business under sub-s 51(1). Part IVA of the Act was said to apply to the arrangement. 18 Essenbourne based the deductibility of the contribution on its need to provide Sam Marino with an incentive to remain in the dealership, as it had done in 1994 by the creation of the Employer Share Plan. The situation with respect to him had remained the same. Mr Mario Marino and Mr Catanzaro gave evidence about statements said to have been made by Sam Marino, to the effect that he was dissatisfied with his employment in the dealership. Mr Sam Marino did not give evidence, although he was able to do so, the Court was informed. Evidence of statements made by him was tendered by Essenbourne on a limited basis, namely to establish the belief, on the part of those two witnesses, that something needed to be done to ensure that Sam Marino remained an employee. I shall return to the question of the relevance of this evidence to the issue of the nature of the payment. 19 Mr Mario Marino said that prior to the creation of the Employee Share Plan in 1994 Sam Marino had said to him on a number of occasions, and he had believed, that he was considering undertaking other types of work. He was considering running the family farm on a full time basis and planting a vineyard. When asked whether his brother provided a reason, Mario Marino said that Sam Marino had a lot of stress in his position. He had to deal with irate customers, although he agreed that this situation had prevailed for some time. 20 Mr Catanzaro was also aware of Sam's dissatisfaction, he said. The prospect of his leaving was of concern to his brothers who would have to employ a person outside the family and who was not likely to share the same level of commitment to the dealership. Mr Catanzaro was asked to find a solution. The solution he devised was to condition Sam's entitlement to Essenbourne's contribution to the Employee Share Plan to his remaining for a further three years. 21 Another aspect of the reason for the establishment of the Plan, and for the equal sharing of the employer contributions as between the three brothers, was also provided. It was said that Sam Marino might be concerned that he was not, in effect, receiving the same share in the profits of the dealership as his brothers. He might have this view of the superannuation contribution made on behalf of them and their wives. The only evidence of a concern that the brothers should share equally, was that of Mr Catanzaro. It was not suggested that Sam Marino had made a direct reference to any disparity of this kind, but rather that Mr Catanzaro thought that he might view the matter in this way. The statements initially attributed to Sam Marino did not include reference to the question of the sharing of superannuation contributions. Although it was said that Sam Marino thought that he was not well paid, by way of salary, Mr Catanzaro did not consider that increasing his salary was likely to be effective in tying him to the business. The receipt of more money does not appear to have featured very strongly in Sam Marino's complaints, if it did at all. 22 In May 1997, Mr Catanzaro was told that Sam Marino's position had not changed. Mr Catanzaro was told by him that he maintained his desire to leave the business. The brothers spoke to Mr Catanzaro about tying everyone together and providing a "better benefit" for Sam Marino than the superannuation contributions allowed. There is nothing to suggest that Sam Marino was concerned about the division of profits by way of superannuation contributions at this point. Although Mr Catanzaro said that Sam Marino might think that his two brothers' households received a greater share of the profits of the company, there is nothing to suggest Sam Marino in fact held such a view and there would seem to be little factual foundation for it. The greater disparity in income was produced by the wives' salaries, not the small amount of superannuation contribution. In the years prior to 1997 Sam Marino had not been disadvantaged by the sharing of the superannuation contribution and in the years subsequent to it the brothers shared equally. There is nothing to suggest Sam Marino had any belief that he would be disadvantaged in the future, if that was in fact to be the case. 23 Another aspect of the sharing of profits by means of the Employee Incentive Trust was referred to in evidence by Mr Catanzaro. On this topic the focus was upon all brothers sharing equally rather than upon improving the position of Sam Marino as was suggested at other points in the evidence. Mr Catanzaro said at a later point in his evidence that the Scheme would have allowed them to achieve an "asset base" and to leave the dealership at the same time. The implication was that it might be sold at the end of the period. It is not necessary to consider whether this was in fact planned. 24 The second limb of s 51(1) of the Income Tax Assessment Act provides that outgoings which are "necessarily incurred in carrying on a business for the purpose of gaining or producing … income" are allowable deductions "except to the extent to which, they are losses or outgoings of capital or of a capital … nature". The question whether the outgoing was incurred for the requisite purpose involves characterising the outgoing and looking to the relationship between the outgoing and the carrying on of business: Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1, 17; Hart v Federal Commissioner of Taxation [2002] ATC 4608, 4615; [2002] FCAFC 222. The relationship between them must be such as to import the character of an outgoing of the relevant kind. It is usually possible therefore, to characterise an outgoing as of this kind without recourse to the taxpayer's subjective thought processes: Fletcher, 17, 18. The example there given was of an outgoing which gives rise to the receipt of a large amount of assessable income. In such a case those facts would be sufficient to characterise the outgoing. The Court accepted, however, that it may be different where no relevant assessable income can be identified. 25 It may be necessary in some cases to consider, to an extent, the purpose or motivation for an outgoing, particularly where the outgoing is voluntary: Fletcher 17, Hart [32]. The end which the taxpayer subjectively had in view may be an element in characterising the outgoing: Fletcher, 17. Even so, it has been held that the test to be applied comprises both objective and subjective elements: "…Whether a voluntary outgoing was so incurred depends upon the answer to the composite question which we have indicated, namely, whether the outgoing was reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of that business and, if so, whether those responsible for carrying on the business so saw it." (Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183, 208). Deane and Fisher JJ had earlier observed that, to the extent that the subjective element is relevant to a voluntary payment, it is in the identification of the advantage which it was intended to achieve, not whether the advantage was the direct or indirect result of it or whether there was a motive to pursue it. Their Honours also expressed the view that the fact that the legitimate ends of a business might encompass what is in the personal interests of directors does not prevent the outgoing being of the necessary character. 26 In the present case the business purpose in making the payment to the Trust was said to be in retaining Sam Marino. An incentive was provided, as had previously been arranged through the Employee Share Plan. It was submitted for Essenbourne that the provision of retirement benefits, so as to keep Sam Marino in the dealership, was both properly connected to its business ends and reasonably appropriate. Consistent with the basis upon which it had put forward its evidence on this point, Essenbourne contended that the question was not whether Sam Marino in fact had the intention referred to, but whether Essenbourne and the other directors believed that there was a need to address how to retain him in the business. 27 The Commissioner submitted that the character of the outgoing was to be ascertained by reference to the brothers' desires to invest for the long term, to divide up profits and to obtain a deduction instead of paying tax on the contribution. The Commissioner also submitted that the evidence of Sam Marino's intention to leave, and the view that it needed to be addressed, were not credible. It is submitted that an inference available to the Commissioner from the evidence is that it was the objectives just referred to, in the context of long term investment of profits, which were being pursued. Sam Marino might have given evidence on that question and as to whether he was in fact dissatisfied and contemplating leaving the dealership. His evidence could resolve the question whether statements had been made by him to his brothers and Mr Catanzaro so as to provide a basis for their belief in what needed to be done. 28 The Commissioner seeks to rely upon the rule in Jones v Dunkel (1959) 101 CLR 298. The application of that rule requires that there be an inference available which favours the other party. In those circumstances the failure to call a witness who might reasonably be thought to be able to give evidence on the point leaves the Court in a position where opposing inferences can more confidently be drawn because they stand uncontradicted by someone who could say something about the true state of the facts (at 308). 29 A reference in this case to the payment to the Employee Incentive Trust as an outgoing does not provide an answer to the question whether it was reasonably incurred by Essenbourne in carrying on its business. It is equally possible, on those bare facts, that it be seen as a transfer of the profits of the company to the Trust so that they might be shared and, at the same time the taxation advantages obtained. Essenbourne relies upon its need to provide incentives for Sam Marino to stay with the business for another five years as the link to its business requirements. Such an objective could be considered as both reasonable and business-related, if it was the objective being pursued. The question which then remains is whether the brothers in truth viewed the outgoing in this way. That is the question to which the evidence is relevant. 30 It was submitted for Essenbourne that it is necessary for the Court to accept the evidence of Mario Marino and Mr Catanzaro as to their belief about Sam Marino's position because their evidence was not contradicted. Certainly their evidence could not be rejected out of hand, but it does not follow that it must be accepted. 31 Apart from the evidence of statements attributed to Sam Marino, there is nothing to indicate that he was considering leaving. He had held his position for a long time. The business was very much a family concern and one which was of benefit to them all. The fact that the parents received a substantial portion of the profits by way of superannuation contributions was not apparently a matter of concern to the brothers. The Commissioner placed some reliance upon there being other means to keep Sam Marino, more particularly to pay him more or provide more by way of superannuation contribution. I do not think much can be drawn from the method chosen as indicative of the true purpose of the brothers and therefore Essenbourne. Of some relevance however, is the fact that three brothers were to participate. Whether through bonus issues, or vesting of the funds in Lynrose after termination of the Trust, it was clearly intended that the brothers were to share some of the profits of Essenbourne. It was intended on this occasion, as it had been with the earlier Employee Share Plan, that the brothers share equally. 32 If there was a change to the position so as to give more to Sam Marino than before one might infer that some complaint was being addressed. The position was however that the brothers were sharing equally. Whilst that is not necessarily inconsistent with there being another purpose, to tie him to the dealership, it does not assist in proof of it. The fact that they are all unable to access the funds for a period conveys little about Sam Marino. It may simply be the period they all considered as the first time they might wish to access the funds. The provision of benefits to them at an early point was never a realistic option if they were to obtain the taxation advantages they sought. 33 As against the prospect that Essenbourne's purpose was to tie Sam to the business, is that the brothers sought to share profits in a tax effective way. I tend to the view that Sam Marino's position was not really a reason for the payment of the contribution. I do not accept as likely that he referred to there being an imbalance in the superannuation contributions. So far as concerns whether he was dissatisfied and wanted to leave the dealership, these are matters about which he could have given evidence. In these circumstances I conclude that his evidence in this regard would not have assisted Essenbourne. A conclusion that the payment was simply to provide for the three brothers and at the same time to obtain the advantages outlined is more confidently arrived at. A sharing of profits by the three brothers does not have the necessary connexion to Essenbourne's business. The outgoing is not deductible. 34 The Commissioner's alternative contention was that the payment was also of a capital expenditure, even if its purpose was to provide an incentive, especially to Sam Marino. In British Insulated & Helsby Cables Ltd v Atherton (1926) AC 205, at issue was the payment by a company into a pension fund for its employees. On the winding up of the fund the whole amount was to be distributed among the members. In the judgment ofViscount Cave (213-214) when an expenditure is made both "once and for all" and "with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade …" there is good reason to treat the expenditure as attributable not to revenue, but to capital. The lasting advantage to be obtained was the company retaining the services of a "contented and efficient staff" (214). Lord Atkins was of a similar view, holding that a payment not to meet a liability but having a purpose, in a general way, of improving the position of staff is a capital outlay (222). Earlier his Lordship had observed that the fund was not treated as part of the assets of the company. It had parted with its rights to it and the trustees had absolute power over the fund (220-221). 35 Essenbourne submitted that there was no clear majority view expressed in British Insulated. The Commissioner submits that Viscount Caves' reasoning has been cited with clear approval in Australia. In Sun Newspapers Ltd v Federal Commissioner of Taxation (1939) 61 CLR 337, 360-361, Dixon J was concerned with the difficulty of distinguishing capital outlays and working expenses. His Honour considered that, as a general rule, establishing, replacing or enlarging a profit-yielding subject may appear to be quite different from the continual flow of working expenses. The factual context of that case is different from the present but some observations in it may be useful. His Honour considered that a great initial outlay towards establishing goodwill to be a payment of a capital nature. On the other hand where goodwill is gradually established over the years by continual advertisement, the expenses associated with the advertisements are of an ordinary business type. As to the test of recurrence or once and for all payments, the result may be to procure "some asset or advantage of a lasting character which will enure for the benefit of the organisation or system or 'profit-earning subject'" (at 361). In that regard his Honour accepted the phrase coined by Viscount Cave and implicitly, its application. The test of recurrent expenditure is not just the fact that it is made every year or accounting period. The real test, his Honour held (362), is between expenditures to meet a continuous demand, as opposed to an expenditure which is made once-and-for-all. His Honour concluded that recurrence is not a test, only a consideration the weight of which depends on the nature of the expenditure. Further, the lasting character of the advantage is not necessarily a determining factor. His Honour concluded (363) that there were three considerations: the character of the advantage sought, in which its lasting qualities may play a part; and thirdly, the manner in which it is to be used or enjoyed in which recurrence may play a part; the means adopted to obtain it. "That is, by providing a periodical reward or outlay to cover its use or enjoyment for period commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment" (363). 36 In the present case the payment in question is of the surplus profits out of the company. The payment is not referrable to the conduct of its income-producing business. The advantage or benefit sought to be secured from it, from Essenbourne's point of view, is the improvement of the position of the three principals in the business. It has produced a benefit to be derived by them at some point in the future and the intangible benefit of job satisfaction in the interim. The payment is not made in such a way as to be seen as an operating expense. The fact that in most years Essenbourne made superannuation contributions does not assist in characterising this payment. In my view the payment is of a capital nature and, for that reason, not deductible. part iva 37 The scheme, as identified in the Commissioner's particulars provided in the proceedings, was as follows: "5.1 the applicant resolved to establish the Trust; 5.2 a Deed of Trust was entered into by Vincenzo Cataranzaro [sic] in his capacity as settlor and Marino Investments (Qld) Pty Ltd as Trustee; 5.3 three directors of the Applicant were appointed directors of the Marino Investments (Qld) Pty Ltd; 5.4 the directors of the Applicant resolved that the Applicant contribute $252,000 to the Trust; 5.5 the Applicant paid $252,000 to the Trust; 5.6 the directors of the Applicant resolved to request Marino Investments (Qld) Pty Ltd to invite Venerando Marino, Salvatore Marino and Mario Marino (who were all directors of the Applicant and Marino Investments (Qld) Pty Ltd) to subscribe for employee units in the Trust; 5.7 the Trustee Marino Investments (Qld) Pty Ltd agreed to advance $84,000 to each of Venerando Marino, Salvatore Marino and Mario Marino to purchase the units, and this was done by book entry alone; 5.8 Venerando Marino, Salvatore Marino and Mario Marino each applied for and were allotted 84,000 units in the Trust by Marino Investments (Qld) Pty Ltd; 5.9 Lynrose Pty Ltd as trustee for the Essenbourne Superannuation Fund applied for and was allotted, by Marino Investments (Qld) Pty Ltd, 1 residuary unit in the Trust for $10.00; 5.10 the Applicant applied for and was allotted, by Marino Investments (Qld) Pty Ltd, 1 employer unit in the Trust; 5.11 Marino Investments (Qld) Pty Ltd purchased shares in Gledshore Pty Ltd for the sum of $252,030.00; 5.12 all of the events set out above occurred on 30 June and 1 July 1997; 5.13 the Applicant claimed a tax deduction under section 51(1) of the Income Tax Assessment Act 1936 for the sum of $252,000 being the contribution by the Applicant as employer made to the Trust for the benefit of employees." 38 At the hearing the Commissioner was given leave to further amend the particulars by adding a further particular: "5.11A The possible future sale of the business of the Applicant - with respect to which the EIT provided an "exit strategy"." 39 The persons who, the Commissioner contended, were those who entered into or carried out the scheme, or any part of it, included the brothers and their parents, Mr Catanzaro, Essenbourne, the Trust, Marino Investment, Lynrose and Gledshore and officers and/or agents of the companies. The sole or dominant purpose of entering into the scheme was said to be the obtaining of a tax benefit. The Commissioner identified those persons having the purpose as all of those persons and companies listed above, and added that the list might not be complete. In relation to a conclusion that there was such a purpose, the Commissioner provided the following particulars of facts and matters that were said to be indicative of such a conclusion: "The matters to which regard is to be had pursuant to s 177D(b) are as follows: (i) The manner in which the scheme was entered into or carried out: The scheme was entered into and carried out in the manner described in response to Request (a) involving a contribution of $252,000 by the Applicant as employer (also being the amount of the tax deduction subsequently claimed by the applicant) made to the Trust for the benefit of Venerando Marino, Salvatore Marino and Mario Marino, being selected employees of the Applicant and persons in control of the Applicant and other entities referred to in the response to Request (a) above, and for which the Trust purports to advance funds to those persons for the purpose of them purchasing units in the Trust. (ii) the form and substance of the scheme: (a) The form of the scheme was to provide financial incentives to employees by way of the establishment of an employee benefit trust; (b) The substance of the scheme was: b-1 for the applicant to claim a deduction under section 51(1) of the Income Tax Assessment Act 1936 in respect of the contribution made to the Trust; b-2 only selected employees who had a controlling interest in the Applicant were invited to participate in the Trust controlled by the employer entity, the Applicant; b-3 the participating employees also control the Trustee of the Essenbourne Superannuation Fund, Lynrose Pty Ltd, who is also the holder of the only issued residuary unit of the Trust; b-4 the funds contributed by the Applicant were invested in a company (Gledshore Pty Ltd) which is controlled by the employees of the Applicant selected to become beneficiaries of the Trust; (iii) The time at which the scheme was entered into or carried out and the length of the period during which the scheme was carried out: The scheme was designed to enable the Applicant to obtain a deduction for the contribution to the Trust in the year of income ended 30 June 1997 as relevant agreements were entered into on 30 June 1997 and all relevant activities took place on the same date; (iv) The result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme: The deductibility of the contribution to the Trust in the year of income ended 30 June 1997 by the Applicant. (v) Any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme: The significant change in the financial position of the Applicant is the contribution of $252,000 to the Trust and the claim for a deduction of the contribution amount should the Commissioner's view on its deductibility under s 51(1) of the ITAA36 not be upheld. (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme: The participating employees in the Trust will have an interest in the Trust equal to the contributions made on their behalf by the Applicant. Those employees control the Applicant, being the employer, and were the Applicant's shareholders, and therefore will benefit from any deduction conferred upon the Applicant if the claim for a deduction is allowed. Gledshore Pty Ltd has received an investment equivalent to the contribution to the Trust from the Applicant, the Applicant's directors and the employee unit holders in the Trust being the directors and controllers of Gledshore Pty Ltd. The shareholder in Gledshore Pty Ltd is Marino Investments (Qld) Pty Ltd whose shares are owned by the participating employees. The participating employees in the Trust have obtained an interest of value in units in the Trust without incurring any outlay in terms of purchase price for the units or interest on any loans used to fund the purchase. (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out: No other consequence has been identified by the Respondent to date. (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any persons referred to in subparagraph (vi): a) The Applicant is controlled by, Venerando Marino, Salvatore Marino, and Mario Marino, (collectively referred to as "the employees") who were the only employees invited to contribute to the Trust; b) The employees are beneficiaries of the Trust; c) The employees are directors of the company appointed as trustee for the Trust; d) The employees control and are the shareholders in Lynrose Pty Ltd who is the Trustee for the Essenbourne Superannuation Fund as is the holder of the only issued residuary unit of the Trust; e) The employees are directors of the company in which all the funds of the Trust were invested (Gledshore Pty Ltd)." 40 The "tax benefit" was described by the Commissioner in the Statement of Reasons as follows: "If the scheme were not entered into, the reasonable expectation would be that the Employer Entity could not have claimed a deduction for payments made to the EIT. Therefore, the relevant tax benefit is the deduction claimed by the Employer Entity in the relevant year of income for contributors made to the EIT". 41 This aspect of the Commissioner's decision proceeds upon the basis that the payment in question has qualified as a deduction. Section 177F(1)(b) of the Income Tax Assessment Act provides that the Commissioner might make a determination disallowing a deduction where a tax benefit has been obtained, or would but for the section be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. Section 177C(1)(b) provides that a tax benefit in connection with a scheme refers to: "(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out;" 42 The section requires the making of an hypothesis as to what might reasonably be expected to have happened had the scheme identified not been entered into or carried out: Peabody v Commissioner of Taxation (1993) 40 FCR 531, 540. The prediction to be made must be sufficiently reliable to qualify as reasonable: Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359, 385. The tax benefit is relevant also to s 177D which provides: "Schemes to which Part applies 177D. This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where: (a) a taxpayer (in this section referred to as the "relevant taxpayer") has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and (b) having regard to: (i) the manner in which the scheme was entered into or carried out; (ii) the form and substance of the scheme; (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi); it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers)." 43 The purpose may be the sole or a dominant purpose. Par (b) of s 177D requires an objective conclusion to be drawn from the matters listed. It is a conclusion about a particular person's purpose not the scheme itself. The actual subjective purpose of a person is not relevant to this enquiry: Peabody v Commissioner of Taxation (542). 44 Essenbourne submits that in this case legitimate commercial choices can be seen to have been made, whereas the Part is concerned with blatant and artificially contrived schemes. In its submission it could reasonably be expected that, had these steps not been undertaken, a contribution to the superannuation fund would have been made with a consequent tax deduction. 45 In my view it is not possible to conclude that the company would have done nothing and retained the substantial profits in 1997, particularly given its history of contributions for the family members as employees. Any of the alternative steps it might take, increased salary or contributions, all involve deductions for Essenbourne, if one is to consider Sam Marino as the focus. Without that focus it would likely have paid to the superannuation fund as before. Mr Catanzaro said that age-based contributions in that year to the Superannuation Fund would have totalled approximately $250,000. This figure has regard to all seven members of the Fund, not just the three brothers and raises the question whether such a contribution would have been made given the apparent desire, on the part of the brothers, to share the profits amongst themselves. It seems to me however that this was simply an outcome possible with the Employee Incentive Trust. Absent that scheme they would have reverted to obtaining the highest deduction possible by allocating part of the superannuation contributions to the parents. Essenbourne also raised the question whether the Commissioner's decision could be regarded as a valid exercise of power given that it was made at a time when a particular person, or person, having the requisite purpose had not been identified. The argument was shortly stated but it is not in any event necessary for me to deal with it. the fringe benefits TAX assessment 46 Fringe benefits tax is imposed in respect of the "fringe benefits taxable amount" of an employer: s 66 Fringe Benefits Tax Assessment Act 1986 (Cth) (and see also s 5 Fringe Benefits Tax Act 1986 (Cth)). At the time relevant to this case "fringe benefits taxable amount" was defined in s 136(1) to accord with the meaning given by s 136AA of the Assessment Act. It provided that that amount is the product of a figure based on the fringe benefits tax rate multiplied by the "aggregate fringe benefits amount", which was in turn defined to include the sum of the taxable values, in relation to the current year of tax, of all of the fringe benefits in relation to the employer in relation to the current year of tax. The tax was, as Hill J observed in Kumagai Gumi Co Ltd v Commissioner of Taxation (1999) 90 FCR 274, 276, designed to overcome perceived inadequacies in the income tax law when applied to non-cash benefits provided by an employer, or the employer's associate, to an employee in respect of the employment. It is in substance a final withholding tax imposed on the provider of the benefits. The definition of "fringe benefit" in s 136(1) was, so far as is relevant, in these terms: "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; … being a benefit provided to the employee or to an associate of the employee by: (c) the employer … in respect of the employment of the employee, but does not include: (f) a payment of salary or wages … … (ha) a benefit constituted by the acquisition by a person of a share or right under an employee share scheme … (hb) a benefit constituted by the acquisition by a trust of money or other property where the sole activities of the trust are obtaining shares, or rights to acquire shares, in a company (the employer), or a holding company … of the employer, and providing those shares or rights to employees of the employer; (j) a benefit constituted by (i) the making of a payment of money to a superannuation fund (as defined by subsection 6(1) of the Income Tax Assessment Act 1936) that the person making the payment had reasonable grounds for believing was a complying superannuation fund …" 47 "Benefit" was defined in very wide terms. Section 136(1) provided that the word "associate" has the same meaning in relation to a person as that expression is used in s 26AAB of the Income Tax Assessment Act. That definition (s 26AAB(14)) includes as an associate: "… a trustee of a trust estate where the taxpayer or another person who is an associate of the taxpayer by virtue of another sub-paragraph of this paragraph benefits or is capable (whether by the exercise of the power of appointment or otherwise) of benefiting under the trust, either directly or through any interposed companies, partnerships or trusts …" 48 There are different categories of fringe benefits. The taxable value of them depends upon the way the fringe benefit is categorised. There are statutory formulae for the ascertainment of the taxable value of each type of benefit. Whilst the figure arrived at will often approximate the cost to the employer, the system of valuation is a purely legislative one: Kumagai Gumi, 282 [38]. 49 For the 1998 year of tax, the Commissioner assessed Essenbourne on its payment of $252,000 as a property benefit or alternatively as a residual benefit (sections 40 and 45 respectively of the Assessment Act). The benefit is said to arise from the provision of those monies to the trustee as an associate of the employees. The Commissioner does not contend that the relevant benefit is in the Employee Units. The property benefit is said to be an "external property fringe benefit". The taxable value of such a benefit, under s 43(c), is the notional value of the recipient's property at the "provision time". The "recipient's property" means the property to which the benefit relates. The "notional value" of the property means the amount that the person could reasonably be expected to have been required to pay to obtain the property or other benefit from the provider under an arm's length transaction. The "provision time" is the time when the relevant property was provided (see s 136(1)). Alternatively, it is submitted that the payment is an "external non-period residual fringe benefit" as defined in s 136(1), because it was provided and subsisted for a period of less than one day. Under s 50(c) the taxable value of such a benefit is the "notional value" of the "recipient's current benefit" at the "comparison time". The "comparison time" is the time at which the benefit is provided. 50 It is not suggested by the Commissioner that the three brothers had any entitlement to the money or the property in which it was invested. Under the Trust they had only the prospect of Bonus Units issuing. The Commissioner submits that it is not necessary that an employee be in receipt of a benefit where it has been provided to an associate of that employee. So much may be accepted. It is submitted that once the payment is made to an associate all that needs to be done is to calculate the taxable value of the benefit so provided. Whether valued as a property or a residual fringe benefit, the benefit in this case is $252,000. 51 The difficulty in the Commissioner's approach is that it does not identify a benefit to a particular employee. The statute may deem a benefit to be provided to an employee where it is provided to the employee's trustee, but this would not obviate the apparent necessity to identify the employee in question. The definition of "fringe benefit" would appear to require the identification of the employee to whom the benefit is provided. This is the principal contention of Essenbourne. 52 The Commissioner submitted that it could not have been intended that a particular benefit provided to one employee could be taxable, but if it were provided to a number of employees it could not be. The same benefit may be provided to multiple recipients without regard to the individual identity of each employee participating in the benefit, it was submitted. The example given was of one of the types of benefit considered in Roads and Traffic Authority of New South Wales v Commissioner of Taxation (1993) 43 FCR 223, 241, namely, camp accommodation. The focus, the submission proceeded, is on what the employer provides, not what the employee received: The State of Queensland v The Commonwealth of Australia [The First Fringe Benefits Tax Case] (1986) 162 CLR 74, 99. 53 There are some types of benefit, such as accommodation and motor vehicles, which might be enjoyed by a number of employees. In each case however, the Assessment Act requires that the taxable value of the benefit be ascertained. The benefit is not in the asset provided, but what the Act assumes the benefit provided to the particular employee to be. The fact that the focus of the Assessment Act is upon the benefit provided by the employer does not, in my view, mean that property which is made available for the later provision of benefits to employees is to be the subject of the tax. In the First Fringe Benefits Tax Case (at 99), in connexion with an argument that the tax was one imposed upon the property of the employer, it was pointed out that, although a benefit may be an interest in property, such as a lease, the tax is not imposed on the disposition as such. It is imposed on the benefit which the employer provides to the employee in connexion with that person's employment. 54 In my view, Essenbourne is correct in its contention that the definition of "fringe benefit" requires reference to a particular employee in connexion with the benefit said to have been provided. This is reflected in the references to a benefit being "provided to the employee or to an associate of the employee" and to the benefit being provided "in respect of the employment of the employee" (emphasis added). The latter reference, in particular, can only be to a particular person's employment. The Commissioner submitted that the reference to "an employee" in the definition should be read as "employees", in the case of certain benefits, as s 23 Acts Interpretation Act 1901 (Cth) would permit. In my view the Assessment Act requires that the particular employee be identified in connexion with the benefit. It is their employment which, after all, provides the necessary "link" to the benefit: see J & G Knowles & Associates Pty Ltd v Commissioner of Taxation (2000) 96 FCR 402. The definition does not admit of a reference to a number of employees in connexion with the benefit, the subject of the assessment. 55 The Commissioner did not suggest that there were other aspects of the Assessment Act which were inconsistent with the need to identify a particular employee. A reference to some aspects of the Act would seem to me to confirm this approach. This may be seen in the nature of the benefits provided, which may involve, for example, the private use by an employee or a financial dealing by the employer with them. The calculation of the taxable value of the benefit may also, in some cases, involve considerations personal to the particular employee. 56 The link between the benefit and the employment of the employee is required to be sufficient or material: J & G Knowles, 409, 410. It arises because of the words "in respect of the employment". A mere causal link with the employment of the employee will not be sufficient. Essenbourne submits that, at least until the issue of Bonus Units, there is not a sufficient connexion with the brothers' employment. It seems to me that the substantial link at this point is as between the payment and the deduction sought by Essenbourne. It is not necessary for me to further consider the point for, in my view, the payment by Essenbourne to the trustee does not qualify as a fringe benefit as it is defined. conclusion and orders 57 In Q170 of 2001 (the fringe benefits tax appeal) there will be orders that the appeal be allowed and the respondent pay the applicant's costs of the appeal. In V273 of 2001 (the deductions appeal) the appeal will be dismissed and the applicant ordered to pay the respondent's costs. I have considered whether to vary that order to reflect the Commissioner's failure on the issue of the scheme. In my view however the substantial aspect of the appeal involved the alleged deduction claimed by Essenbourne. In each appeal the parties are to produce minutes of further orders. I certify that the preceding fifty-seven (57) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kiefel. Associate: Dated: 17 December 2002 Counsel for the Applicant: Mr D Russell QC and Mr M Robertson Solicitor for the Applicant: McCullough Robertson Counsel for the Respondent: Mr B Sullivan SC, Mr R Hamilton and Mr J Momsen Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 30, 31 October; 1 November 2002 Date of Judgment: 17 December 2002