FEDERAL COURT OF AUSTRALIA Walstern v Commissioner of Taxation [2003] FCA 1428 TAXATION – income tax – deduction claimed for contribution made to an off-shore non-complying superannuation fund - whether a private company employer can obtain unlimited deductions for contributions made to a superannuation fund benefiting employees who are directors and shareholders where those employees wish to obtain for themselves retained profits held by the employer to invest for their own benefit – whether contribution to fund made by employer for the purpose of making provision for superannuation benefits. TAXATION – fringe benefits tax – whether fringe benefits tax payable where contribution made to superannuation fund and subsequently allocated for the benefit of employee not a member at the time the contribution was made. TAXATION – penalties – whether reasonably arguable position that deduction allowable – whether exercise of discretion to remit penalty for fringe benefits tax miscarried. Fringe Benefits Tax Assessment Act 1986 (Cth) s 67, s 114, s 116, s 117, s 136(1) Income Tax Assessment Act 1936 (Cth) s 51(1), s 78(11), s 82AAE, s 226C, s 226K, s 267(1) Income Tax Assessment Act 1997 (Cth) s 8-1(1), s 25-50 Superannuation Industry (Supervision) Act 1993 (Cth) s 45 Taxation Administration Act 1953 (Cth) Division 284 Essenbourne Pty Ltd v Commissioner of Taxation (2002) 2002 ATC 5201 approved Federal Commissioner of Taxation v Roche (1991) 105 ALR 95 approved Kumagai Gumi Co Ltd v Federal Commissioner of Taxation (1999) 90 FCR 274 referred to Queensland v The Commonwealth (1987) 162 CLR 74 approved Raymor Contractors Pty Ltd v Federal Commissioner of Taxation (1991) 91 ATC 4259 approved Scott v Federal Commissioner of Taxation (No 2) (1966) 177 CLR 514 applied WALSTERN PTY LTD (ACN 010 567 772) v COMMISSIONER OF TAXATION N 706/02 N 707/02 N 708/02 N 709/02 HILL J 8 DECEMBER 2003 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N706 OF 2003 N707 OF 2003 N708 OF 2003 N709 OF 2003 BETWEEN: WALSTERN PTY LTD APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: HILL J DATE OF ORDER: 8 DECEMBER 2003 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The objection decisions relating to assessments of income tax for the years of income ending 30 June 1997 and 30 June 1998 be affirmed. 2. The objection decisions relating to assessments of fringe benefits tax for the fringe benefits tax year ended 31 March 1998 and the fringe benefits tax year ended 31 March 1999 be set aside and in lieu thereof it be ordered that the objection decisions be allowed in part. 3. The assessments of fringe benefits tax for the fringe benefits tax years referred to in order 2 be set aside by excising therefrom the penalties imposed. 4. The assessments of fringe benefits tax for the fringe benefits tax years referred to be remitted to the respondent Commissioner to consider in accordance with law the extent, if any, the penalties imposed under s 114 of the Fringe Benefits Tax Assessment Act 1986 (Cth) should be remitted pursuant to s 117 of that Act. 5. The applicant pay 95% of the respondent's costs of the applications. 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 N706 OF 2003 N707 OF 2003 N708 OF 2003 N709 OF 2003 BETWEEN: WALSTERN PTY LTD APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: HILL J DATE: 8 DECEMBER 2003 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The ability of a private company employer to obtain unlimited deductions for contributions made to a superannuation fund benefiting employees who are directors and shareholders without either the trustee of the fund being liable to pay tax on the amounts contributed or the employer being liable to pay fringe benefits tax must be the holy grail for tax planners. This is what was offered to the applicant in the present proceedings, Walstern Pty Ltd (ACN 010 567 772) ('Walstern'), by a well-known firm of chartered accountants. 2 Not surprisingly, it was an attractive proposition for Walstern and its sole shareholders, directors and employees, Mr Ronald Medich and Mr Roy Medich. Not surprisingly too, the proposal, when implemented, was challenged by the Commissioner of Taxation ('the Commissioner'), the respondent to the present proceedings. 3 When the Commissioner became aware that Walstern had claimed a deduction for a contribution of $1,000,000 said to have been made by it to a superannuation fund in the year of income ended 30 June 1997 and a further $1,000,000 in the year of income ended 30 June 1998, the Commissioner disallowed in each year the deductions claimed. He imposed penalties pursuant to s 226K of the Income Tax Assessment Act 1936 (the 1936 Act). At the same time the Commissioner assessed Walstern to fringe benefits tax under the provisions of the Fringe Benefits Tax Assessment Act 1986 (Cth) ('the FBTA Act'), including the amount of $1,000,000 claimed as a income tax deduction in the 1997 income tax year in Walstern's aggregated fringe benefits taxable amounts for the fringe benefits tax year ended 31 March 1998 ('the 1998 FBT year') and the amount of $1,000,000 claimed as an allowable deduction in the income tax year 1998, as included in the applicant's aggregate fringe benefits taxable amount for the fringe benefits tax year ended 31 March 1999 ('the 1998 FBT year'). Walstern objected against the assessments made. Its objections were disallowed. It now appeals to this Court in its original jurisdiction against the Commissioner's objection decisions. 4 Counsel for the Commissioner announced from the bar table that if the Commissioner was successful in upholding the assessments of income tax and fringe benefits tax for the two years in question, he would only seek to enforce payment of one amount of tax for each tax year. However, it was said this did not absolve the Court from determining the correctness of the disputed assessments of income tax and fringe benefits tax in the two years. If indeed it be the case that both the deductions claimed and the fringe benefits tax contested were respectively disallowed and the assessments upheld, it is difficult to see how the Commissioner could fail to proceed to collect tax found to be properly payable under the law. However, that is not a matter which presently is before the Court. However, I should say that there is much to be said for the view that the policy implicit in the FBTA Act suggests that fringe benefits tax was not intended to apply to a benefit obtained as a result of a contribution to a superannuation fund where that benefit was not deductible to the payer, even if the language of the legislation does not bring about that result. The facts 5 The primary facts are not really in dispute. What is in dispute are the conclusions to be drawn from those primary facts. 6 As already noted, Mr Ronald Medich and Mr Roy Medich were at relevant times the sole directors and shareholders of Walstern. Their shareholding was equal. They were also the only employees of Walstern. 7 Walstern is and was at all relevant times, a property developer. At all relevant times, it carried out significant development projects in western Sydney and was involved in refurbishing existing buildings or constructing new buildings or developing supermarket and associated sites. Over the period from 1991 to 1998, while its profits fluctuated from a low of $131,545 (excluding the superannuation contributions in 1997) to a high of $2,204,273 in the year of income ended 30 June 1996. 8 From the time Walstern commenced business, Walstern had adopted, through its directors, the policy of paying to the directors modest salaries and not paying dividends to any large extent so as to maximise the working capital of the company. As Mr Ronald Medich said to his brother early in the life of Walstern, 'the more we can leave in the company the more we can do with it.' The policy obviously contributed to Walstern's profit history. 9 In the 1991 to 1994 income years each director received a salary of $80,000. In the 1995 and 1996 years of income their salary was reduced to $50,000 each. In the 1992 year of income they established a superannuation fund (the Medich Superannuation Fund) and Walstern contributed to that fund for the benefit of each of Mr Ronald Medich and Mr Roy Medich $95,000 in the 1992 income year, $102,250 in the 1993 income year, $97,941 in the 1994 income year, $26,921 in the 1995 income year, $27,924.00 in the 1996 income year, $27,170 in the 1997 year of income, and $32,293 in the 1998 year of income. The Medich Superannuation Fund was a complying superannuation fund. Mr Ronald Medich, the more financially sophisticated of the two brothers, and upon whom Mr Roy Medich relied, saw the superannuation contributions made to the Medich Superannuation Fund to be relatively modest. According to Mr Ronald Medich in March or April 1997 the two brothers discussed the possibility of taking something like $1,000,000 out of Walstern (presumably by way of dividend or perhaps salary) with a further $1,000,000 in the next year to invest in shares or property. Mr Roy Medich preferred the idea that their investments be joint so that he did not have the problem of looking after his own investments. This is, as will be seen, an important piece of evidence. 10 Coincidentally around this time, Mr Roy Medich had a conversation with his accountant, Mr Warren Duncan. Mr Duncan had been introduced to the proposal ultimately adopted by Arthur Andersen and Co, then a large international firm of chartered accountants. The proposal involved 'overseas superannuation funds'. Mr Ronald Medich then spoke with Mr Duncan to find out more. He told Mr Duncan that over the past ten years he had been approached on a number of occasions to invest in risky tax schemes and that he did not wish to take a risk. Mr Duncan sought to allay this fear by introducing the name Arthur Andersen as ensuring that the scheme would be properly managed. 11 At the subsequent meeting in his office at which Mr Ronald Medich and another relative Mr Anthony Medich, who was secretary of Walstern attended, Mr Duncan handed to Mr Ronald Medich a document headed 'International Superannuation' prepared by Arthur Andersen. The document was said to be confidential. It could only be read in Mr Duncan's office and not taken away. Mr Ronald Medich wanted his own accountant to read the documents but was told that this was not possible. When asked by Mr Duncan how much Walstern might invest, Mr Ronald Medich said that he had already made some calculations of the amount that Walstern could afford and that he would like an investment of up to $2,000,000 in superannuation over two years, using the proposal to 'diversify our investment portfolio'. This too is an important piece of evidence. 12 Mr Ronald Medich formed the view that the proposal seemed commercially safe and sound. He was comforted by the Arthur Andersen name and by the fact that the funds in the off-shore superannuation fund would be managed by a recognised international funds manager. A meeting was arranged for Mr Ronald Medich with two accountants from Arthur Andersen at their offices in North Sydney. Mr Medich told the accountants that he was looking at investing for retirement but had not decided whether to invest in superannuation or something else. The accountants sought to convince Mr Medich that their proposal was a sound and proper investment and should outperform most other investments. Certainly if the tax consequences they suggested followed, this would clearly have been the case, even if the investment performance was less spectacular than it otherwise might have been. 13 Mr Medich was shown another copy of the document he had seen in Mr Duncan's office. He was given some details of the proposed trustee and how the proposal operated. Included in the material which the accountant showed Mr Medich was an opinion from a then senior barrister, Mr Gzell QC, now Mr Justice Gzell of the Supreme Court of NSW. As the accountants said, Mr Gzell QC was then one of Australia's top tax experts. The accountants pointed out the potential tax advantages which the proposal had, although they did say that there was no guarantee that the Australian Tax Office would agree with the analysis. After the meeting with the accountants the two brothers discussed the proposal and agreed to proceed with it. They later spoke with Mr Duncan and instructed him to prepare the relevant paper work. 14 It is important here to note that all steps taken in respect of the first $1,000,000.00 contribution were prearranged. Despite what presumably was an attempt by Mr Ronald Medich in his oral evidence to suggest otherwise, everything was prepared for Walstern and its directors by those who promoted the scheme. Thus minutes of directors meetings were prepared in advance and forwarded to Mr Medich so that they could be read at a meeting which was properly held. There is nothing wrong about that and it would be hardly credible if Mr Ronald Medich had himself used in minutes he personally prepared after the meeting the language appearing in the minutes tendered. These most likely were carefully settled by counsel or solicitors. 15 The arrangement involved what was referred to as the ATC Superannuation Fund. The trustee of the fund was the Auckland Trust Pty Ltd, a New Zealand company. The fund deed provided that an Australian resident employer could apply to become a participating employer in the fund. The fund would have separate accounts, one for each participating employer. 16 Upon admission by the trustee of the Australian resident employer as a participating employer, that employer would make a contribution to the fund. However, it was critical to the scheme that at the time the contribution was made there should be no designation of any employee on whose behalf contributions were made as no person who was an employee was to be a member of the fund at the time of making the contribution. Employee membership would arise when the employer recommended an employee or employees to the trustee of the fund to become members. Under the deed, the trustee in its discretion would then invite such employees to become members. As a precondition of membership the employee was required to make a contribution to the fund of an amount determined by the trustee in its absolute discretion to be the amount that would stand to the benefit of that employee on the date of admission to membership. It is obvious from the proposal that it was intended that the amount standing to the credit of the employee would be a sum equal to that employee's share of the employer's contribution. Allocation among employees was a matter for the trustee. Employees wishing to be members were then to be loaned the funds necessary to make the qualifying contribution on a limited recourse basis and bearing interest at the rate determined from time to time under s 136(1) of the FBTA Act. The recourse was limited to the amount of the qualifying contribution. 17 It was contemplated that the employee would submit a written application for membership to the trustee together with the qualifying contribution. Once the trustee accepted the employee as a member, the trustee would allocate an amount of the employer's contribution to the employee by crediting it to the employee's normal benefits account and crediting the qualifying contribution to the employee's qualifying contribution account. It was provided that the qualifying contribution would be held by the trustee for a period of twelve months from the date of admission of the employee member and bear interest at the bench mark interest rate, as defined in s 136(1) of the FBTA Act. At the end of twelve months the amount due by the employee to the fund would be offset against the amount of the qualifying contribution to be repaid by the fund to the employee. 18 The fund deed provided that a member was to become entitled to the amount held in the employee's superannuation account upon the occurrence of one or more of a number of events, including the obtaining of 55 years. If a member purported to assign benefits under the fund, the amount of the benefits could thereafter be applied in the discretion of the trustee to provide benefits to members or dependants of members. 19 The following steps were taken as contemplated: (1) on 27 June 1997 Walstern applied to become a participating employer in the fund (2) on 30 June 1997 the trustee of the ATC Superannuation Fund admitted Walstern as a participating employer. On the same day Walstern paid the sum of $1,000,000 to the trustee, this being the amount it claimed as a deduction in the 1997 year of income. (3) on 3 July 1997 Mr Ronald Medich received from Arthur Andersen a detailed technical analysis of the arrangement and also from a firm of solicitors, a bundle of documents to enable employees to be admitted as members. (4) on 4 July 1997 Mr Ronald and Mr Roy Medich as directors of Walstern resolved to invite themselves to become members of the fund. (5) on 25 July 1997 a letter was signed on behalf of Walstern addressed to each of Mr Ronald Medich and Mr Roy Medich inviting each to participate in the ATC Superannuation Fund. Each signed an application for membership, loan agreement and pro forma letter to the trustee and these were forwarded then to Mr Duncan to be actioned in New Zealand. Among the documents signed was the loan agreement between the trustees and each of the brothers in the amount of $500,000 to be used to make their qualifying contributions under the fund. Each gave a notice to the trustee of the fund that he required that the advance to be made was to be used exclusively to make the qualifying contribution. Each loan agreement provided that the advance and interest accrued was to be repayable on demand. (6) on 10 October 1997 the trustee of the fund admitted both the brothers as members of the ATC Superannuation Fund. The sum of $500,000 was allocated to each of them in their member accounts. 20 The investment strategy initially employed by the fund manager produced poor results. In consequence Goldman Sachs & Co Bank Zurich replaced the original manager of the fund. Later Goldman Sachs was replaced by Coutts Bank (Schweiz) (AG). Monies in the fund were invested. 21 The events in respect of the second income tax year are perhaps a little more complicated. Indeed there is some confusion whether the contribution in the 1998 income tax year was made to the ATC Superannuation Fund, which had changed its name to First Pacific Masters Superannuation Fund, or to a different superannuation fund also operating under the name First Pacific Masters Superannuation Fund. I do not, however, think that anything turns upon this. Part of the difficulty stems from the fact that, although in various provisions the original superannuation deed contemplated further contributions being made by a participating employer, it did not contemplate that there would be further qualifying contributions as preconditions for the trustee to make an allocation to the employee of the employer's contribution. This, however, was essential to avoiding fringe benefits tax if that was possible. 22 Although on 25 February 1998 it seems that the name of the ATC Superannuation Fund was changed to First Pacific Masters Superannuation Fund, on 5 May 1998 a new fund was established which was also called the First Pacific Masters Superannuation Fund. Both funds had the same trustee. The content of the new trust deed and rules was similar to the original deed, although somewhat differently organised, but in particular there was specific provision for a participating employer to make a further contribution and for an employee to make a further qualifying contribution as precondition for the allocation. 23 On 11 May 1998 Walstern received a set of documents referred to as a 'Continuing Contribution Kit' containing instructions in relation to making a further employer contribution to what may have been yet another fund, 'the FPM Superannuation Fund' a fund deed for which was executed on 12 May 1998 again with the same trustee. The deed establishing the new fund was substantially similar to the deed dated 5 May 1998 save in so far as it related to accrued interest. 24 On 12 May 1998 the directors of Walstern resolved to contribute a further amount of $1,000,000 to the superannuation fund and on the same day this amount was paid to the trustee. Documents similar to those signed in the previous year were signed and forwarded to the trustee. Mr Whitby, a director of the trustee, gave evidence to the effect that the trustee viewed the second contribution made as governed by the initial fund deed, amended, however, to permit a qualifying contribution. It is unclear what intention, if any, Walstern had when it made the further contribution, although since it was probably not aware of the existence of the further deeds it can be assumed it intended to contribute to the ATC Superannuation Fund but under its new name. The statutory provisions: 25 Subdivision AA of Division 3 of the 1936 Act provided for deductions for contributions to superannuation funds for the benefit of employees. The Sub-division distinguished between contributions made to a complying superannuation fund and contributions to a non-complying fund. A non-complying fund was defined in s 267(1) as: '…a fund that, at all times during the year of income when the fund is in existence, is a provident, benefit, superannuation or retirement fund, but does not include a fund that is a complying superannuation fund in relation to the year of income.' 26 A complying fund was defined by reference to the definition of that expression contained in s 45 of the Superannuation Industry (Supervision) Act 1993 (Cth). It is unnecessary to set that definition out, as it is common ground that the fund or funds to which contributions were said to be made was or were, if a provident, benefit, superannuation or retirement fund, not a complying fund and therefore a non-complying fund. 27 In the 1997 and 1998 years of income s 82AAE provided for a deduction for contributions to non-complying superannuation funds as follows: 'A deduction is allowable under this Subdivision in respect of an amount paid by a taxpayer as a contribution to a non-complying superannuation fund (as defined by subsection 267(1)) for the purpose of making provision for superannuation benefits for an eligible employee other than such an employee who is an exempt visitor to Australia for the purpose of section 517 in relation to the year of income in which the amount is paid.' 28 There was no definition of what a 'provident, benefit, superannuation or retirement fund' was. 29 Section 8-1(1) of the Income Tax Assessment Act 1997 (Cth) ('the 1997 Act') provided for a deduction in the 1998 year of income of: 'any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.' However, subsection (2) operated to deny a deduction under subsection (1) of a loss or outgoing, inter alia, if it was 'a loss or outgoing of capital, or of a capital nature'. 30 Section 51(1) of the 1936 Act, relevant to the 1997 year of income was in substantially identical terms. The subsection need not be set out here. 31 Section 78(11) of the 1936 Act applied only in the 1997 year of income. It provided for a deduction for the year of income in which the payment was made for: 'an amount paid by a taxpayer … as a pension, gratuity or retiring allowance to a person who is or was an employee or a dependant of an employee.' However, the amount was only an allowable deduction: '… to the extent that, in the Commissioner's opinion, it is paid in good faith in consideration of the past services of the employee in any business operations that were carried on by the taxpayer for the purpose of gaining or producing assessable income; ' 32 Section 25-50 of the 1997 Act provided for a deduction of amounts paid as pensions, gratuities or retiring allowances in the 1998 and later years of income. 33 Walstern sought and was granted leave to rely upon s 78(11), notwithstanding that the grounds of objection were, arguably, too narrow to encompass the subsection as a ground. Walstern did not seek leave to rely upon s 25-50 in the 1998 year, so that it is not necessary to set out the terms of that section. The argument based upon s 78(11) was, to say the least brief and with respect, rightly so. Statutory provisions relation to fringe benefits: 34 Fringe benefits tax is payable in circumstances where there is a 'fringe benefit' as defined in s 136(1) of the FBTA Act. That definition provides, positively: '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) an associate of the employer; or (e) a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement… between: (i) the employer or an associate of the employer; and (ii) the arranger or another person… in respect of the employment of the employee.' 35 There are a number of exclusions from the definition, although none is directly applicable. Indirectly relevant are paragraph (j)(i) which exclude from the definition the making of a payment of money to a superannuation fund as defined that the person making the payment had reasonable grounds for believing was a complying fund and paragraph (j)(ii) which exclude the making of a payment to a non-resident superannuation fund as defined in s 6E of the 1936 Act where the employee for whom the superannuation benefits are provided is an exempt visitor. 36 The word 'benefit' is defined as follows: 'benefit' includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under: (a) an arrangement for or in relation to (i) the performance of work (including work of a professional nature), whether with or without the provision of property; (ii) the provision of, or use of facilities for, entertainment, recreation or instruction; or (iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction; (b) a contract of insurance; or (c) an arrangement for or in relation to the lending of money. 37 The tax is payable on the 'taxable value' of the fringe benefit. As I pointed out in Kumagai Gumi Co Ltd v Federal Commissioner of Taxation (1999) 90 FCR 274, the scheme of the legislation depends upon a statutory valuation formula. There is such a formula for each of the 12 categories of fringe benefit for which the FBTA Act provides. Thus it is necessary after determining that there is a fringe benefit to categorise the benefit into one of the 12 types of benefit to determine the valuation formula applicable. In the present case the parties are in agreement that if there is a fringe benefit in the year of tax provided by Walstern the benefit would fall either into the category of 'property fringe benefit', as an 'external property fringe benefit' or the category 'residual fringe benefit'. Fortunately it will be unnecessary to decide between these two categories since the valuation formula arrived at will be the same, namely, the 'notional value of the recipient's property at the provision time reduced by the amount of the recipient's contribution.' 38 The expression 'notional value' is defined in s 136(1) as follows: 'notional value', in relation to the provision of property or another benefit to a person, 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.' 39 The expression 'recipients contribution' is also defined in s 136(1) and relevantly means: '… the amount of any consideration paid to the provider or to the employer by the recipient …reduced by the amount of any reimbursement paid to the recipient in respect of that consideration.' 40 While it will be necessary to make reference to other provisions of the FBTA Act the above sections suffice for the moment to assist in defining the issues for decision which arise. 41 It should be noted, however, that there is a general anti-avoidance provision in the FBTA Act which has been derived from Part IVA of the 1936 Act although there are some differences. Section 67 thus provides that the Commissioner may determine to increase the amount of any fringe benefits tax amount of an employer (and accordingly increase the amount of fringe benefits tax payable) where: (a) an employer … has obtained or, but for this section, would obtain, a tax benefit in respect of a year of tax in connection with an arrangement under which a benefit is or was provided to a person … and (b) it would be concluded that the person, or one of the persons, who entered into or carried out the arrangement or any part of the arrangement did so for the sole or dominant purpose of enabling the eligible employer to obtain a tax benefit in connection with the arrangement or of enabling the eligible employer and another employer or other employers each to obtain a tax benefit in connection with the arrangement…' 42 There will be a 'tax benefit' (see s 67(2)) where an amount is not included in the aggregate fringe benefits amount of the employer of the year of tax where 'the amount would have been included, or could reasonably be expected to have been included, in that aggregate fringe benefits amount if the arrangement had not been entered into or carried out.' 43 The Commissioner, in assessing Walstern in relation to fringe benefits tax, applied s 67 of the FBTA Act. However, he submitted before me that fringe benefits tax was payable whether or not s 67 had application. The issues for decision: 44 In respect of the income tax assessment the following issues arise: (1) Whether s 82AAE authorised in each year of income a deduction to Walstern of $1,000.000. (2) Alternatively whether in the 1997 income tax year the amount of $1,000,000 said to have been paid to a non-complying fund in that year was an allowable deduction under s 51(1) of the 1936 Act and whether in the 1998 income tax year the amount of $1,000,000 said to have been paid to a non-complying fund in that year was an allowable deduction under s 8-1 of the 1997 Act in the 1998 year. (3) Whether in the 1997 year the amount of $1,000,000 was an allowable deduction under s 78(11) of the 1936 Act. (4) Whether penalty tax imposed by the Commissioner in the assessments for each year of income was validly imposed pursuant to s 226K of the 1936 Act. 45 In respect of fringe benefits tax the following issues arise: (1) Whether a fringe benefit was provided in each of the FBTA tax years that benefit being provided at the time Walstern made the payments to the non-resident and thus non-complying superannuation fund. (2) Whether a fringe benefit was provided in each of the FBTA tax years, that benefit being provided at the time allocation was made of monies in the superannuation fund in respect of each of Mr Ronald and Mr Roy Medich (3) If the answer to either of the first two issues is in the affirmative, how the relevant fringe benefits was to be valued. (4) If the answer to either of the first two issues is in the negative, whether the provisions of s 67 of the FBTA Act authorised the Commissioner to increase the fringe benefits tax amount applicable to Walstern in each of the FBTA tax years and thus the amount of fringe benefits tax payable. (5) Whether the penalty tax imposed by the Commissioner in the assessments for each fringe benefits tax year was validly imposed. The submissions: 46 Each party made detailed submissions in writing in support of their cases. Rather than set the totality of those submissions out here it is more convenient to deal with the submissions under headings dealing with each issue. Deductibility under s 82AAE of the 1936 Act. 47 For the Commissioner it was submitted that the amounts paid by Walstern in the two income tax years were not deductible either because: 1 The ATC Superannuation Fund and, to the extent that the contribution in the second year was made to a different fund, the FPM Superannuation Fund were not superannuation funds, and thus not non-complying funds because they did not have as the sole purpose the provision of superannuation benefits to members. 2 Alternatively, the purpose of Walstern in making each contribution was other than the purpose stipulated for in s 82AAE. It was submitted that the relevant purpose of Walstern in making the contributions was not the provision of superannuation benefits for eligible employees but to enable each of the Messrs Medich to share in the profits of Walstern in a tax effective way. 48 It is a requirement of the operation of s 82AAE that the contribution be to a non-complying superannuation fund. To be a non-complying superannuation fund the relevant fund must be a 'fund' which at all times in the year of income is a 'provident, benefit, superannuation or retirement fund'. 49 There is an argument, although it was not sought to be made by senior counsel for the Commissioner, that there could be no 'fund' in the year of income unless at the time the contribution was made there was actually money or other property held in trust or otherwise subject to legal requirements of a kind which would make the fund a provident benefit superannuation or retirement fund. In Scott v Federal Commissioner of Taxation (No 2) (1966) 177 CLR 514 Windeyer J at 351, expressed the view (as what his Honour there referred to as a 'general description' and not a 'definition') that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income therefrom being capitalized.' For present purposes, the point is the need for 'money' or 'other property' to constitute a fund. 50 A similar view was taken by Owen J in Mahoney v Federal Commissioner of Taxation (1965) 13 ATD 519 where has Honour said at 525: 'In order to succeed the appellants must in the first place show that a fund was established. That, it seems to me, they have done by producing the deed of trust and proving that L500 was paid by the Company to the trustees to be dealt with by them in accordance with the trusts declared in the deed.' 51 Prima facie it may be that where there is, what may be referred to as a master fund to which separate contributions are to be made, which contributions are to be kept separate from other contributions, it might suffice if there was any contribution at all made which could bring about the result that there was a fund, even if that contribution was made by another employer and was allocated separately from the contributions to be made by a taxpayer. The evidence does not permit me to say whether at the time the original contribution was made to the ATC Fund by Walstern the trustees in fact held any property upon trust in the master fund. Mere signature of a trust deed, without assets held in trust would not create a fund. The case of Driclad Pty Ltd v Federal Commissioner of Taxation (68) 121 CLR 45 went further and suggested that when a superannuation deed was such that there were sections to which contributions were to be allocated, each section of the fund was to be considered as a separate fund and to be considered separately to determine whether it was formed for the requisite purpose. I think this is the preferable view. 52 The argument, although not pressed by the Commissioner, has importance when the question arises as to the significance of there being no beneficiary (other than Walstern itself) at the time it made its contribution. I will return to that matter shortly. 53 Whatever the correctness of the argument referred to in the last paragraphs it is obvious that the fund, if there be one, must satisfy one of the four descriptors, namely that it be a 'provident, benefit, superannuation or retirement fund'. None of these descriptors is the subject of definition. Their meaning must be determined from the context. 54 The Commissioner's submission depends upon what was said by Windeyer J in Scott v Federal Commissioner of Taxation (No 2) (1966) 14 ATD 333 at 352. There, his Honour said: 'There is no definition in the [Income Tax Assessment] Act of a superannuation fund. The meaning of the term [superannuation fund] must therefore depend upon ordinary usage, the attributes of a thing thus denominated being those which things ordinarily so described have … the connotation of the phrase in the Act must be determined by one's general knowledge of the extent of the denotation of the phrase in common parlance … I have come to the conclusion that there is no single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age.' 55 At the time Walstern made each of its contributions there was no reason to conclude that, assuming there was a fund, it could not properly be said to be a superannuation, provident benefit or retirement fund within the meaning of those words. The comments of Windeyer J must be seen against the facts of the case before his Honour, where a document which on its face could qualify as a deed which governed the terms of a superannuation fund was part of an elaborate façade. Indeed, his Honour held that the language of the trust deed was intended to be disregarded and activities were to be carried on not directed to the stated purposes in the deed. That is not the case here. 56 A similar view as to the meaning of the words 'provident, benefit or superannuation fund' was expressed by Kitto J in Mahony v Commissioner of Taxation (1967-8) 41 ALJR 232 where his Honour said: 'There was no definition in the Act of 'a provident, benefit or superannuation fun', and the meaning of the several expressions must therefore be arrived at in light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words 'provident', benefit' and 'superannuation' must be taken to have connoted a purpose narrower than the purpose of conferring benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. All that need be recognized is that just as 'provident' and 'superannuation' both referred to the provision of a particular kind of benefit' – in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employment, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility – so 'benefit' must have meant a benefit, not in a general sense, but characterized by some specific future purpose. A funeral benefit is a familiar example.' 57 Once monies contributed by Walstern became subject to the trusts of the deed they were to be held on those trusts. And the trusts in the deed are such as properly to qualify any fund created as a fund to provide superannuation or retirement benefits for persons who are employees. 58 Nor is the case one such as considered by the High Court in Driclad Pty Ltd v Federal Commissioner of Taxation (1968) 121 CLR 45 at 67 where it was said that a fund established not only for the purpose of providing benefits for employees but for 'another purpose as well, eg to return to the company as loans payments made by the company to trustees' would not fall within the then s 23(j) of the 1936 Act which exempted the income of a provident, benefit or superannuation fund' from tax. 59 In Raymor Contractors Pty Ltd v Federal Commissioner of Taxation (1991) 91 ATC 4259 I analysed the cases to which I have made reference here in some detail and concluded that in determining whether a fund was a superannuation fund etc (except where the deed was, as in Scott a sham) regard was not to be had to the motives of any person, but rather to the terms of the trust deed itself. That was expressly the view of Owen J in Mahoney where his Honour at 239 said: 'If upon examination of the deed it is found to answer the statutory description than that is the end of the matter and, provided the fund is being applied for the purpose for which it was established (a separate test in the then s 23(j) (i) of the 1936 Act) its income will be exempt from tax whatever the motives its founders had.' 60 I pointed out, however, that the Full High Court in Driclad had taken a contrary view. 61 In Raymor Davies J, with whom Wilcox J in a separate judgment agreed, said that the question whether a fund was one established for a particular purpose required regard to be had 'primarily' to the terms of the trust deed, for it was from the terms of the trust deed that the purpose of the trust could be determined. 62 In the legislative scheme now under consideration the question whether regard should be had to anything other than the terms of the trust deed in determining the character of the fund is not a significant matter, at least in a case such as the present, if only because s 82AAE itself requires that attention be paid to the purpose for which the contribution is paid by the employer. Hence, the second submission has more substance. 63 For an amount to be deductible under s 82AAE the contribution must be 'for the purpose of making provision for superannuation benefits for an eligible employee'. Hence, while the fund to which a contribution is made may properly be characterised as a superannuation fund by reference to the terms of the fund deed, it does not follow that contributions are made to it for the purpose of making provision for superannuation benefits for an eligible employee. Some other purpose may exist. 64 In Raymor the Full Court upheld unanimously the finding of the Primary Judge that the purpose of the contributions was not such as to fall within the then s 82AAC, that is to say, not such as to be 'for the purpose of making provision for superannuation benefits for, or for dependants of, an eligible employee' In that case the fund was being maintained to provide taxation deductions and low interest loans to employer companies with benefits being forfeited and flowing ultimately only to a few key personnel. This meant that the fund was not being maintained for the benefit of employees. Davies J did not, in that case, address the question whether 'purpose' was 'dominant purpose' or 'sole purpose', presumably because in that case the distinction would have made no difference. I pointed out in my judgment that there was a distinction between purpose and motive, although motivation was a matter which was relevant to the finding of purpose. I said at 4270: 'In the context of s 82AA, purpose is the object which the taxpayer has in view or in mind. … Generally speaking a person will be said to intend the natural and probable consequences of his acts and likewise his purpose may be inferred from them. In the present case the taxpayer's purpose in making the payments in each year of income may be inferred from the objective evidence that in the year of income in question benefits were continually being forfeited and only one person was in fact paid out, that person being a director of the appellant' Coupled with the fact that virtually the whole of the contributions were lent back to the contributing companies these facts suggest that the appellant's purpose was not to benefit those persons who were members of the fund; or certainly that that was not the sole or dominant purpose in making the contributions in the years in question.' 65 While I do not think it makes any difference in the present case either, I am inclined to the view that 'the purpose' as used in s 82AAE refers to sole rather than dominant or principal purpose. This is the view that was accepted also by Pincus J in Federal Commissioner of Taxation v Roche (1991) 105 ALR 95 at 103. However, I do not think that a deduction would be lost if the directors of a taxpayer/employer took into account in making a contribution, but incidentally, the taxation benefits which the Act makes available where a contribution is made to a fund. The answer may well lie in the fact that the taxation deduction will not, in such a case, be an object of the contribution; rather it will be a consequence of the contribution. 66 It is submitted for the Commissioner that the purpose of Walstern making the contributions in the present case is to be found not from the terms of the fund deed itself, nor from the way in which the fund was applied, but from other circumstances and particularly from the evidence of Mr Medich himself. As already noted the directors of Walstern had for years neither paid themselves much in the way of salary nor paid out dividends. They preferred to retain monies in the company presumably to provide working capital for the company. In the years of income they wanted to take monies out of the company. They wanted to use the funds that had accumulated in the company for investment. They were able to take money out of the company in any way they wished, including by contributing for superannuation because they were the sole shareholders. They had, as alternatives, the possibility of paying themselves dividends or further salary. Walstern had already made contributions for superannuation in previous years and indeed did make contributions for superannuation in the years of income in question to a complying superannuation fund. It can be assumed, that the contributions made to the complying superannuation fund were, at least generally, calculated in accordance with the maximum amounts for which Walstern would obtain a tax deduction. It may be assumed that those contributions were made by Walstern to provide superannuation benefits to each of Mr Ronald and Mr Roy Medich. However, the contributions proposed to be and in fact made to the non-complying superannuation fund stood in a different position. The Medichs chose to make those contribution to give effect to their desire to take money out of Walstern to invest for their benefit. 67 So, it was submitted, the purpose of making these contributions was to be found not in providing for superannuation for Mr Ronald and Mr Roy Medich in their capacity as employees, that had already been provided for by the contributions made to the complying superannuation fund. Rather, the purpose was to benefit them in their capacity as shareholders and also obtain, in doing so, a substantial taxation deduction. As it was put by senior counsel for the Commissioner, the purpose of the contributions was to benefit the Medichs as shareholders, not as employees, and so as to take out profits of Walstern 'in a tax effective way'. 68 There is also the fact that as soon as each contribution was made by Walstern the trustee used it to lend to each of Mr Ronald and Mr Roy Medich to enable them to make the qualifying contribution. It is true that the qualifying contribution was immediately deposited with the fund as a form of loan attracting interest and ultimately repaid. However, I agree with the submission of the Commissioner that this fact, when added to the other matters to which reference has been made leads to the conclusion that the sole purpose of the contribution was not to provide superannuation benefits for persons who were employees. It follows that the deduction was not available to Walstern for the contributions it made in either year of income under s 82AAE. 69 There is another problem for Walstern under s 82AAE. At the time Walstern made the contribution there was no person who was a member of the fund. In law the trustee of the fund held the contribution upon resulting trust for Walstern pending nomination of an employee as member and ultimate acceptance of the person as member after payment of the qualifying contribution. It is true that a deduction would be allowable for a contribution to a fund where there were members of the fund, notwithstanding that at the time the contribution was made there had been no allocation among the members. That was decided in Raymor. But the present case goes beyond the issue of allocation which arose in Raymor. The fact is that unless and until any person became a member (and this did not happen until the later year of income) it simply was not correct to say that Walstern had made a contribution to a fund for the benefit of a person who was an eligible employee. It remained within the power of Walstern to have the contribution repaid to itself as owner in equity of the money, unless it took the further step of nominating a person as a member. Section 51(1) of the 1936 Act and s 8-1 of the 1997 Act. 70 Senior counsel for the Commissioner relied upon the decision of Kiefel J in Essenbourne Pty Ltd v Commissioner of Taxation (2002) 2002 ATC 5201 in submitting that there was not the requisite connection with assessable income or the business ends of Walstern for the contribution to be deductible under s 51(1) of the 1936 Act or its equivalent s 8-1 of the 1997 Act and, in any event the contributions were each precluded from deductibility because they were capital or of a capital nature. 71 I would, as a matter of comity, follow the decision of Kiefel J unless it was distinguishable or unless I was of opinion that it was clearly wrong. 72 As to whether the contribution qualified for deductibility that is, essentially, a factual matter and the decision of Kiefel J can be distinguished on its facts. In Essenbourne the taxpayer, which carried on a motor dealership contributed sums to an employee incentive trust. It was held that there was not the necessary connection in the circumstances of that case with the taxpayer's business but rather the advantage sought was to benefit the principals of the business in the future. It is clear that the facts do differ and can be distinguished, although there are some similarities. 73 There was some discussion in the written submissions of the Commissioner as to the relevance of purpose in s 51(1) and s 8-1 having regard to the factual matters to which reference is made in the preceding discussion of s 82AAE. 74 There will be cases where matters of subjective purpose may assist in the process of characterisation which s 51(1) requires. The matter is discussed in some detail in Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1. As that case makes clear ordinarily whether an outgoing meets the tests of either subsection will turn upon the objective circumstances, although there will be cases where evidence of subjective purpose may be relevant. In that case it was clear that if the arrangement was to be brought to an end so that the taxpayer would not derive any assessable income no deduction would be available. It was for that reason that the matter was remitted to the Administrative Appeals Tribunal to make a finding on the matter. I have in some detail discussed the question of purpose in Hart v Commissioner of Taxation (2002) 121 FCR 206 and do not repeat that discussion here. It suffices here to say that the test to be adopted is still that set out in the judgment of the Full Court of this Court in Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183. An outgoing will be deductible where, objectively, it is reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business of the taxpayer and those responsible for carrying on the business so saw it. 75 The objective circumstances do not, with respect to the Commissioner's submissions, suggest that the contributions were not reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of Walstern. Nor, subjectively, did the directors of Walstern see it otherwise. I see no reason why, on the facts of the present case, the contributions would not be characterised as outgoings incurred in gaining or producing the assessable income of Walstern or in carrying on Walstern's business, which was clearly carried on for the purpose of gaining or producing assessable income. The fact that the provision of superannuation benefits to the Medichs as employees was not the sole or perhaps dominant purpose of the making of the contributions does not negate that conclusion. 76 The question whether the outgoings were of a capital nature is more difficult. It seems that the judgment of Kiefel J in Essenbourne relied upon the English decision of British Insulated & Helsby Cables Ltd v Atherton [1926] AC 205 where it was held that an initial contribution to a superannuation fund to benefit employees was not deductible because it was capital, although regular contributions would stand in a different position. The basis of the decision was that the initial contribution was made once and for all and 'with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade.' British Insulated was cited with approval by Dixon J in Associated Newspapers Ltd and Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 at 360 – 361 and finds echo in the three matters which his Honour regarded as significant in determining whether an outlay was on capital account. 77 It was submitted by senior counsel for Walstern that the question whether a payment is a one-off payment has been rejected as indicative of the capital character of amounts made by way of remuneration. Reference is made to W Nevill & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290. That may be so. However, it cannot be said that the question whether a payment is a one-off payment or whether it is a recurrent payment is a matter irrelevant to whether the outgoing is capital. In a case such as the present where the payment operates to create the capital of a trust fund the outlay will ordinarily be seen as capital both because of the lasting qualities enjoyed and the fact that what is being made is a final payment to secure future benefits. However, if a contribution is one of a number of 'recurrent' contributions for employees, so that it can be seen to be part of the ordinary flow of business expenditure of a taxpayer, the character of the outlay will take on a different complexion. It is important to bear in mind that the evidence of Mr Medich was that he and his brother wanted to draw money out of Walstern and establish a fund for investment and that it was decided to do so by contributing two amounts of $1,000,000. This evidence is highly significant in determining whether the contributions were recurrent or really represented a once and for all contribution of $2,000,000 to set up a fund although made in two annual instalments each of $1,000,000. 78 It was submitted that British Insulated no longer represented the law in the United Kingdom. This is not so. In Heather v PE Consulting Group Ltd [1973] 1 All ER 8 the distinction between the payment which represented the 'nucleus' of the fund and the recurrent expenditure was emphasised and accepted. The fact that the contribution was one of a series of annual contributions was essential to the deductibility of the outgoing in that case. In Jeffs (Inspector of Taxes) v Ringtons Ltd [1986] 1 All ER 144, Scott J of the Chancery Division, allowed a deduction for one of a series of payments and thus distinguished British Insulated. Neither case suggested that British Insulated was in any way overruled. 79 A different conclusion might be reached here if the two contributions were factually not to be seen as a one-off payment (in two instalments) establishing a fund, but rather as one of a continuing number of recurrent payments, to be made, presumably, depending upon the availability of profits. I think that the latter is not the correct characterisation here, any more than it was in Essenbourne. It is relevant here too that it can be inferred that Walstern would only have made a contribution in 1998 (or for that matter any later year) if the tax advantages continued. It seems that no contribution was made in 1999 when the issue of a tax deduction for contributions had become the subject of dispute with the Commissioner. The decision to make the second instalment of $1,000,000 in the 1998 year followed only upon the directors of Walstern receiving the 'kit' soliciting contributions. So far as it matters the trust deed for the ASP Fund really did not provide for subsequent contributions and it was for this reason that it became necessary to amend the deed, or create a new deed to permit the scheme to be repeated in the second income tax year. However, on the facts of the present case, where there had been a decision to establish a fund of $2,000,000 by two separate contributions of $1,000,000 the provisions dealing with repeat contributions are not really relevant. 80 In the circumstances, therefore, I would follow the approach taken by Kiefel J and disallow the deduction in each year on the ground that each contribution was capital or of a capital nature. 81 There is another difficulty with the deductibility of the contributions under s 51(1) or 8-1. In the year of income in which each contribution was made Walstern was, as I have indicated, the sole owner in equity of the monies it had contributed. That is to say, as at the end of the year of income it can be argued that no real contribution had been made by Walstern, or, put in terms of the language of s 51(1) the outgoing did not at that time answer the description of being incurred in gaining or producing assessable income or necessarily incurred in carrying on the business of Walstern . The outlay was clearly still monies owned by Walstern. The description that an amount had been incurred by Walstern in gaining or producing its assessable income was only answered in the next income year when the Medichs each became members, having been nominated and having made the necessary qualifying contributions. It was only then that the monies ceased to be owned by Walstern. However, in that next tax year the amounts were not incurred. They had already been incurred in the previous tax year. They did not satisfy the prerequisite of deductibility in the year in which they were incurred. 82 In my view the contributions were not deductible under either s 51(1) or s 8(1) depending on the income tax year in question. Section 78(11): 83 Little need be said of the suggestion that the contributions were deductible under this subsection. It was only faintly argued. With respect, neither contribution fell within the language of the subsection and accordingly the claim to deduction under it must fail. Fringe Benefits Tax: 84 For the Commissioner it was submitted, but it was not the primary submission, that a fringe benefit arose at the time the contributions were made by Walstern to the fund in each fringe benefits tax year. 85 It will be recalled that at the time of the making of each contribution no allocation of the contribution to the provision of benefits to any person had been made. Indeed, as already noted, until the time of allocation the trustee held each respective contribution upon a resulting trust in favour of Walstern. 86 On behalf of Walstern it was submitted that it was apparent, not only from the definition of fringe benefit but indeed from the very structure of the FBTA Act itself that there could be no fringe benefit unless it was possible to identify the employee for whom the benefit had been provided or an associate of the employee where the benefit was provided to an associate. Walstern relied also upon the judgment of Kiefel J in Essenbourne in support of its submission. 87 As I have already noted, I would, as a matter of comity, follow the decision of Kiefel J in Essenbourne unless the case was either distinguishable or I was of the view that the decision was clearly wrong. On this point the case is not distinguishable. Further, far from being of the view that her Honour was clearly wrong, I am of the view that her Honour was clearly right. The definition of 'fringe benefit' in s 136(1) of the FBTA Act makes clear the importance of identification of the employee. The benefit itself is one which is said to be 'in relation to an employee'. The benefit is required to have been provided to the employee (or associate of the employee) and is required to be in respect of the employment of the employee. The definition of 'property fringe benefit', (if that is the kind of benefit relied upon) requires relevantly provision of property to a particular person there referred to as 'the recipient'. The valuation formula relevantly here requires that there be a benefit provided 'to a person' in respect of the employment of an employee. Any contribution made by an individual employee is taken into account in determining the taxable value of the benefit. Although not relevant in the present case, the exclusion of a benefit otherwise deductible to an employee contemplates taking into account the specific circumstances of the employee himself or herself. 88 It is not surprising that the legislation requires a link between the benefit and a particular employee (or associate of a particular employee) because historically the purpose of the Fringe Benefits Tax Act is to provide a specific means of taxing benefits which are a substitute for income to an employee and in respect of which the provisions of the 1936 Act and particular s 26(e) were thought to be defective. Income tax is a tax upon the taxable income of a particular employee. While fringe benefits tax is a tax for which a employer is made liable and is payable at the maximum personal income tax rate, the theory of fringe benefits tax legislation is that it operates as a final withholding tax payable by the employer on amounts that essentially are or would be income of the employee: see Kumagai Gumi Co Ltd v Federal Commissioner of Taxation (1999) 90 FCR 274 and National Australia Bank Ltd v Federal Commissioner of Taxation (1993) 46 FCR 252 at 262 per Ryan J. 89 The primary submission of the Commissioner is that there is a fringe benefit provided to each of Mr Ronald and Roy Medich at the time allocation is made by the trustee of the Walstern contribution in each fringe benefits tax year equally to each of Mr Ronald and Roy Medich. The submission is that the trustee is 'an arranger' as that expression is used in paragraph (e) of the definition of 'fringe benefit' with the consequence that at the time of allocation there is in relation to each of the Medichs a benefit provided to him by the trustee under an arrangement that existed between Walstern and the trustee, that is in respect of the employment of each of the Medichs. 90 The existence of such an arrangement is abundantly clear in the evidence. Everything was preplanned or prearranged and the arrangement in question was one which involved Walstern making the contribution on the understanding that all relevant steps would be taken culminating in the trustee ultimately allocating the contribution equally to each of the Medichs. 91 It follows in my mind that at the time of allocation there was the provision of property, namely the benefit in the trust fund constituted by the money which was tangible property, so that there was a property benefit as defined in the Act. As already indicated, it is not of any significance whether it is correct to classify the benefit as a property benefit or as a residual benefit because the valuation formula is the same. 92 It is then necessary to turn to the question of the value of the benefit made in each fringe benefit tax year at the time of allocation. Evidence was adduced both on behalf of Walstern and on behalf of the Commissioner from accountants seeking to value the interest in the fund in the event that there was a fringe benefit. 93 By way of example, Mr Banks, a chartered accountant and consultant to the firm of KPMG gave evidence on behalf of Walstern producing a negative value of the interest of each of Mr Ronald and Mr Roy Medich immediately at the time the contribution was made and even after allocation. By contrast, Mr Churchill, a chartered accountant and partner in the firm of Price Waterhouse Coopers, corporate finance and recovery practice, valued the interest at $500,000 each at both points of time. 94 It is obvious that the difference between the valuers turned upon what it was that each valued. Specifically Mr Banks purported to be valuing the rights and expectations of each of Mr Ronald and Mr Roy Medich under the fund taking into account their ages. He took the view that at least until allocation, the rights of each of the Medichs was like that of a beneficiary in a discretionary trust, such that no arms length purchaser would pay anything for the interest without at least a guarantee that an allocation would, in due course, take place in favour of the employee whom it was intended to benefit. He made alternative valuations, depending upon whether a tax deduction was allowable for the contribution and appears to have taken into account the consequences to Walstern and its cash flow arising from the making of the contributions. 95 Ultimately there is no need to discuss the valuation evidence. The first question and ultimately the only question which arises is the proper construction of the valuation formula. Once that is determined then there will be no need to turn to an expert to make a valuation. 96 As already noted, the valuation formula depends upon the 'notional value' in relation to the provision whether of property or of a benefit to each of the Medichs. From the definition it follows that the question to be asked is what is the amount that each of the Medichs could reasonably be expected to have been required to pay to obtain the benefit from the provider under an arms length transaction. The provider in the present case is Walstern. Hence the question in relation to Mr Ronald Medich, is how much he could reasonably be expected to have been required (ie by Walstern) to pay to Walstern to obtain the interest obtained by him in the fund, assuming the transaction between Walstern and him to be at arms length. The question is not what the value of Mr Medich's interest in the fund was at any relevant point of time. Obviously if that was the question and the relevant point of time was the making of the contribution, it may well be that the value of the benefit was nil. 97 The benefit, ie the interest under the fund as provided by Walstern, cost Walstern $500,000. Obviously Walstern would expect to be paid that amount by Mr Medich before it would make the contribution resulting in Mr Medich having the benefit under the fund. In my mind no conclusion is open other than that the notional value of each of the benefits provided to Mr Ronald Medich and Mr Roy Medich is $500,000 with the consequence that the valuation of Mr Banks has no relevance for what he valued was not what the statute requires. 98 The result should not be seen as extraordinary. Although the valuation formulae differ from fringe benefit to fringe benefit and the values are sometimes concessionary in favour of the employee, there is to be found in the valuation formulae generally the concept that the benefit is to be determined by reference to the cost to the employer of the benefit. In Queensland v The Commonwealth (1987) 162 CLR 74 Gibbs CJ described the subject of fringe benefits tax as being (see at 83): 'the value of the benefits provided by the employer, and not the value of the benefits received by the employee; a benefit to the employee within the meaning of the Assessment Act will have been provided notwithstanding that the benefit was surplus to the needs or wants of that employee and notwithstanding that the benefit is offset by some inconvenience or disadvantage.' 99 In Kumagai Gumi I noted at 282 that it was generally true that the statutory valuation formulae arrived at a figure which more or less represented the cost of the benefit to the employer. I recognised the danger of taking comments such as those made by Gibbs CJ in Queensland v Commonwealth or for that matter by me in Kumagai Gumi as expressing questions of law when they are no more than general statements expressed without reference to the qualifications which might need to be made before they could be said to be accurate. Indeed in Kumagai Gumi I pointed out that the valuation rules often differ from the cost to the employer and I referred to the rules for calculating the value of loan fringe benefits in s 18 which clearly were intended to favour an employee at least in a case where the employer borrowed at an interest rate in excess of the bench rate adopted for fringe benefits tax. Indeed I rejected and I still would reject a legal proposition that suggested that absent a specific valuation rule some general principle of cost to the employer should be used to calculate fringe benefits. However, the fact that the valuation arrived at by a construction of the valuation formula amounts to the same figure as the cost to the employer could not be said to be surprising. 100 It follows that in each fringe benefits tax year Walstern was liable to pay fringe benefits tax and that the value of the fringe benefits tax amount pursuant to which the fringe benefits tax is calculated was in each case $500,000 and that the assessment of fringe benefits tax in each year were therefore correct. 101 It is unnecessary therefore for me to consider whether s 67 of the FBTA Act was applicable. Penalty – Income Tax 102 Penalty tax was imposed by the respondent in the income tax assessments under s 226K of the 1936 Act. That section provides: 'Subject to this Part, if (a) a taxpayer has a tax shortfall for a year; and (b) the shortfall or part of it was caused by the taxpayer, in a taxation statement, treating an income tax law as applying in relation to a matter or identical matters in a particular way; and (c) the shortfall or part, as the case may be, so caused exceeded whichever is the highest of: (i) $10,000; or (ii) 1% of the taxpayer's return for that year; and (d) when the statement was made, it was not reasonably arguable that the way in which the application of the law was treated was correct; the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall or part.' 103 Section 222C of the 1936 Act defined the expression 'reasonably arguable' relevantly as follows: '(1) For the purposes of this Part: (a) the correctness of the treatment of the application of a law; (b) … is reasonably arguable if, having regard to the relevant authorities and the matter in relation to which the law is applied …, it would be concluded that what is argued for is about as likely as not correct.' 104 The word 'authority' is defined to include the relevant income tax act, intrinsic material able to be taken into account in interpreting the income tax act, court, tribunal or board of review decisions or public rulings. 105 The question which arises, therefore, is whether at the time Walstern lodged its return (that being here the relevant taxation statement) in which it claimed a deduction for the superannuation contributions it said it had made, it was about as likely as not correct that a deduction was allowable for those contributions, having regard to the language of the 1936 Act, any extrinsic materials, case law and public rulings. 106 Section 222C was introduced in 1992 as part of a number of amendments designed to improve the system of self-assessment. Among those amendments was s 226G which imposed by way of penalty additional tax equal to 25% of the tax which should have been paid where the taxpayer failed to take reasonable care to comply with the Act. It is clear from the Second Reading Speech to the Taxation Laws Amendment (Self Assessment) Bill 1992, which introduced the amendments that while all taxpayers would be penalised if they failed to exercise reasonable care it was thought appropriate (apparently the initiative came from a study of experiences in the United States of America where a similar system operates) for taxpayers who made large claims, generally in excess of $10,000 to exercise greater care and thus to pay a greater penalty – a further 25%. The Minister assisting the Treasurer, Mr Baldwin said, inter alia: 'The whole idea of the new understatement penalties is to ensure that people do not get penalised when they have made an honest and genuine attempt to correctly determine their taxable income. … The government considers it appropriate that a more rigorous standard apply where the item at issue is very large. … Where the interpretation of the law for such large items is in issue , we expect taxpayers to exercise more care; that is, the taxpayer must have a reasonably arguable position on the matter. The crux of the standard is that taxpayers should not take positions at law which, at the time taken, are not about as arguable as an alternative position. All said and done, the standard is about analysing the law and its application to the facts. If there is a strong argument to support the taxpayer's position, that may be enough. However, the Government does not want taxpayers to take positions which are not defensible or which do not have reasonable prospects of success.' 107 In the Explanatory Memorandum to the Bill it is said: '…In other words the position must involve a clearly contentious area of law, that is, one where the relevant law is unsettled or where, although the principles of law are settled, there is a serious question about the application of those principles to the circumstances of the particular case. The test does not require the taxpayer's position to be the 'better view'; the standard is 'about as likely as not' and not 'more likely than not'. However, the reasonably arguable position standard would not be satisfied if a taxpayer takes a position which is not defensible, or that is fairly unlikely to prevail in court. On the contrary, the strength of the taxpayer's argument should be sufficient to support a reasonable expectation that the taxpayer could win in court. The taxpayer's argument should be cogent, well grounded and considerable in its persuasiveness.' 108 The following conclusions can be drawn as to the correct approach to penalty under s 226K: 1. The test to be applied is objective, not subjective. This is clear from the use of the words 'it would be concluded' in par (1)(b) of the section. 2. The decision maker considering the penalty must first determine what the argument is which supports the taxpayer's claim. 3. That person will already have formed the view that the claim is wrong, otherwise the issue of penalty could not have arisen. Hence the decision maker at this point will need to compare the taxpayer's argument with the argument which is considered to be the correct argument. 4. The decision maker must then determine whether the taxpayer's argument, although considered wrong, is about as likely as not correct, when regard is had to 'the authorities'. 5. It is not necessary that the decision maker form the view that the taxpayer's argument in an objective sense is more likely to be right than wrong. That this is so follows from the fact that tax has already been short paid, that is to say the premise against which the question is raised for decision is that the taxpayer's argument has already been found to be wrong. Nor can it be necessary that the decision maker form the view that it is just as likely that the taxpayer's argument is correct as the argument which the decision maker considers to be the correct argument for the decision maker has already formed the view that the taxpayer's argument is wrong. The standard is not as high as that. The word 'about' indicates the need for balancing the two arguments, with the consequence that there must be room for it to be argued which of the two positions is correct so that on balance the taxpayer's argument can objectively be said to be one that while wrong could be argued on rational grounds to be right. 6. An argument could not be as likely as not correct if there is a failure on the part of the taxpayer to take reasonable care. Hence the argument must clearly be one where, in making it, the taxpayer has exercised reasonable care. However, mere reasonable case will not be enough for the argument of the taxpayer must be such as, objectively, to be 'about as likely as not correct' when regard is to be had to the material constituting 'the authorities'. 7. Subject to what has been said the view advanced by the taxpayer must be one where objectively it would be concluded that having regard to the material included within the definition of 'authority' a reasoned argument can be made which argument when contrasted with the argument which is accepted as correct is about as likely as not correct. That is to say the two arguments, namely, that which is advanced by the taxpayer and that which reflects the correct view will be finely balanced. The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer's view is ultimately seen to be wrong it is nevertheless 'about' as likely to be correct as the correct view. A question of judgment is involved. 109 Cooper J in Prebble v Federal Commissioner of Taxation (2002) 2002 ATC 5045 was of the view that the taxpayer had advanced a view of the law which was, at the time the claim was made, reasonably open on the language of the statute. However, there were, his Honour held, two reasonable constructions of s 82AAA and 82AAE open. The two constructions were open because of ambiguity in the language used. Having regard to the 'authorities' to which his Honour referred his Honour held that the taxpayer's construction was about as likely as not correct as the view his Honour ultimately adopted and accordingly the penalty under s 226K was not authorised. Although his Honour's decision on the merits of the taxpayer's case was ultimately affirmed on the appeal, the question of penalty was not the subject of argument on the appeal. 110 For Walstern it is submitted that there were, at the relevant time, no 'authorities' which were inconsistent with the claim for deduction. It is submitted that it is relevant, however, that Walstern took into account views as to the interpretation of the section advanced both by the accountants, and by Mr Gzell QC. Additionally, it is submitted, Walstern took into account views to the same effect, advanced by Mr Edmonds SC in an opinion, Mr Edmonds being also a highly respected and very experienced Senior Counsel advising on taxation matters. It is submitted that the views of these experts show that 'other reasonable minds construing the sections in question' came to the conclusion that a deduction should be available to Walstern. 111 For the Commissioner it is submitted that it is not enough that Walstern's position was reasonably open. The Court must be satisfied that there was a 'strong argument to support the contention that s 82AAE did have application to the facts.' That strong argument had to be, it was submitted, at least cogent, well-grounded and considerable in its persuasiveness. Here, it is submitted, the argument was not one 'fairly likely to succeed'. Further, it is said that it would be inappropriate to take into account the views of the accountants, Mr Gzell QC and Mr Edmonds QC for the following reasons. First, the test in s 222C does not mention the views of advisers and such views should be ignored in determining whether a position was reasonably arguable. Secondly, so far as the views of the accountants are concerned, those views were of a general nature only and preliminary and were not directed to the facts of the particular case. Finally, neither the opinion of Mr Gzell QC nor the opinion of Mr Edmonds SC, nor the substance of them, were in evidence so I could not take any account of them. 112 It is true that opinions of counsel are not referred to in the definition of 'authority'. On the other hand it may be said that the definition is inclusory so that recourse to the opinions of counsel is not necessarily ruled out by the definition. It is unnecessary in the present case to decide this question, although I am inclined to think that the opinion of eminent counsel practising in the field such as Mr Gzell QC and Mr Edmonds QC, if directed at the actual facts of a case, might well fall within the definition. I agree that the views of the accountants could, even if within the definition, not be taken into account because not directed to the facts of the present case. As the opinions of counsel were not in evidence it is impossible for me to take them into account. And anyway, it would seem from what I know of them that they were not directed to the facts in the present case. 113 It seems to me that the present case is quite different from Prebble. My decision is based not upon a particular construction of the relevant income tax law, being a construction as to which some other construction was reasonably open, but upon the particular facts of this case. My reason for disallowing the deduction depends upon the factual finding that the Medichs directed the contribution by Walstern because they wished to take money being in effect the profits that had built up over a long period of time, out of that company to use for investment and in a tax deductible or tax effective form and not because they wished to provide benefits to themselves in the event of retirement or to their families in the event of their deaths before retirement. 114 In the circumstances of that factual finding and because the question of purpose was one peculiarly within the knowledge of the Medichs and through them of Walstern it follows in my view that the position advanced by Walstern can not be said to be one that within the meaning of s 222C was 'reasonably arguable'. I do not think that the question whether the contributions were on capital account was one that was sufficiently open as to be reasonably arguable. The challenge to the penalty accordingly fails. Penalty – Fringe Benefits Tax. 115 The legislation imposing penalties in the case of fringe benefits tax assessments is quite different. Penalties are imposed either under s 114 or s 116 of the FBTA Act. Section 114 is concerned with the case where an employer fails to lodge a fringe benefits tax return. Section 116 is concerned with the case where a determination is made under the anti-avoidance section, s 67. The penalty imposed is 200%. However s 117(3) of that Act gives to the Commissioner in either case, a discretion to remit the penalty from 200% to 40% of the tax payable plus a per annum component. 116 It is not in dispute between the parties that s 114 of the FBTA Act operated in the present case to impose a penalty. On the view I have taken s 116 of the FBTA Act did not operate to impose a penalty, because the assessment of fringe benefits tax did not depend upon the Commissioner being authorised to make a determination under s 67. Indeed he was not so authorised because fringe benefits tax was payable irrespective of any scheme entered into. 117 In evidence was an audit report which the Commissioner accepts records matters taken in account in remitting the penalty. A perusal of that report shows that it was the view of those who wrote it that s 67 applied and that the appropriate section imposing a penalty was s 116(1). It is true that the authors of the report considered both s 116 and 114 applicable and purported to consider the question of remission of penalty on the basis that either of these sections applied. They did so, however, on the basis that the arrangement involved a fringe benefits avoidance scheme. 118 It is submitted for Walstern that the Commissioner's exercise of discretion under s 117(3) miscarried either because the Commissioner took into account an irrelevant matter, that being the need for consistency with penalties under the income tax law or failed to take into account a relevant matter that is to say the fact that with effect from 22 December 1999 Division 284 of the Taxation Administration Act 1953 (Cth) ('the Administration Act') was inserted with the object of establishing a uniform administrative penalty regime for all taxation laws administered by the Commissioner. 119 Walstern submits that the person making the remission decision purported to take into account guidelines to be found in TR 95/4 in determining the amount by which the penalty tax was to be remitted. The decision maker noted that TR 95/4 (a public ruling for the purpose of Part IVAAA of the Administration Act and s 74A of the Fringe Benefits Tax Act) did not specifically address tax avoidance schemes. However, the decision maker then went on to say: '… in order to maintain consistency with penalties imposed under the Income Tax regiume the Commissioner will remit the additional tax payable from the rate of 200% to 50% and a per annum component as set out in TR 95/4.' 120 It is said that the decision–maker did not properly consider whether it was appropriate to simply adopt a policy which had been developed in relation to income tax matters in the context of fringe benefits tax. Hence it is submitted the decision maker both failed to take into account the appropriateness of that policy and also took into account an irrelevant consideration, presumably being that policy itself. Further it is submitted that the decision maker, having adopted the view that the arrangements involved a 'tax avoidance scheme' failed to go on to consider other factors relevant to the exercise of discretion referred to in TR 95/4, these including (see para 26) taking a position in regard to a 'genuinely contentious item' where the culpability component should be remitted in full. The ruling suggests that an item will be contentious where the employer 'has a well-reasoned argument as to how the appropriate statutory provisions apply to the particular situation' which is as likely as not to be correct such that there is a reasonable expectation that the argument would succeed in court. 121 The Audit report which gave rise to the remission decision makes no reference to whether there is a genuinely contentious item such that the culpability penalty should be reduced to nil. 122 For the Commissioner it is submitted that the audit report makes it clear that the decision-maker had regard to TR95/4, noting that it did not specifically address tax avoidance schemes. Further it is said that the system of calculating penalties contained in TR95/4 was consistent with the system of penalties developed in relation to income tax, cf s 284-90 and s 284-160 of the Administration Act which replaced Part VII of the 1936 Act in relation to the 2000-2001 year of income and later years. So long as the authorised officer exercised his discretion in a logical and consistent manner in the light of the circumstances of the case the discretion should not be interfered with. Particularly it is said that it was appropriate that the decision maker maintain consistency with penalties under the income tax regime. 123 I agree with this submission. Ultimately the fringe benefits tax legislation is supplementary to and protective of the income tax legislation. There is no reason why there is any error of principle in the decision maker adopting a penalty regime consistent with that applied in income tax cases. In doing so in the present case the decision maker has neither been shown to have failed to take into account a relevant consideration (the appropriateness of the policy – and it is far from clear that the decision maker did fail to take this into account – indeed it may be assumed the decision maker did) nor has it been shown that the decision maker took into account an irrelevant consideration. 124 Further, the matters in paragraphs 27 and 28 of TR 95/4 do not necessarily relate to considerations relevant to the remission of penalties imposed under s 114 or s 116 but rather arguably deal with when it is appropriate to remit penalties under s 115. Even if the decision maker were bound to take these matters into account, it is submitted for the Commissioner that it could not be assumed that these matters were ignored. Rather it is said that the 50% penalty arrived at after remission was the rate appropriate to a case where a taxpayer did not have an arguable position on an income tax question. It is said that the taxpayer here did not have an arguable issue and thus there was not a genuinely contentious item. In other words, it is submitted that it cannot be said that Division 284 was ignored. 125 The real difficulty with the taxpayer's submission is , it seems to me, that the taxpayer wishes to challenge the merits of the remission decision, yet it is clear that the Court has no power to consider the merits of that decision. While I think that it is correct to say that on the fringe benefits tax questions involved the taxpayer did have a well reasoned argument that was as likely as not correct that is not a matter for my consideration, it is a matter for the decision maker. The fact that the decision maker may have taken a different view does not demonstrate legal error. Nor can it be shown merely from the fact that no reference was made in the Audit Report to Division 284 that the Division was ignored. No doubt it was open to those advising Walstern to call the decision maker and clarify what matters were taken into account and what were not. They chose not to do so. I do not think I should simply infer that a matter was not taken into account. 126 However, I think that it is clear from a perusal of the Audit Report that while the decision maker accepted that either s 114 or s 116 authorised the penalty the whole issue of remission proceeded upon the basis that the case was one where the substantive liability arose under s 67 and not the general provisions of the FBTA Act. This is clear from the reference to avoidance schemes when the matter is considered under s 114(1). Since the matter was not one which fell within s 67 of the Act, and thus was not to be considered as an avoidance scheme I think that the exercise of the discretion to remit miscarried because it proceeded upon the basis that the case was one which fell within s 67, even if the question of penalty could be considered either by reference to s 114 or s 116. I would, accordingly, set aside the penalty and remit the assessment to the Commissioner to consider the question of remission but on the basis that the present is not a case to which s 67 applies. Conclusion. 127 I would dismiss the application so far as concerns income tax but set aside the objection decisions so far as they concern fringe benefits tax and direct that the object decisions be allowed in part, that is to say, by setting aside the penalties imposed. I would remit the assessments to the Commissioner to reconsider the question of the remission of penalty tax having regard to these reasons. 128 Walstern has been only partly successful and on an issue to which little attention was given. However, to reflect that success, I would order that Walstern pay only 95% of the Commissioner's costs of the proceedings. I certify that the preceding one hundred and twenty-eight (128) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill. Associate: Dated: 8 December 2003 Counsel for the Applicant: D Russell QC with P Fraser Solicitor for the Applicant: Kevin Munro and Associates Counsel for the Respondent: GT Pagone with J Davies Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 18 September 2003 and 19 September 2003 Date of Judgment: 8 December 2003