Taxpayer wins appeal in FBT decision by full Court

A taxpayer has been successful in a recent appeal case before the full Court of the Federal Court of Australia, which examined whether the provision of luxury vehicles for personal use by three brothers was considered a fringe benefit under the Fringe Benefits Tax Assessment Act 1986.

The appellant taxpayer in the case, SEPL Pty Ltd, was a corporate trustee engaged in business involving petrol stations, convenience stores, fast-food outlets, tobacco outlets, and gift shops.

The shareholders and directors of SEPL were three brothers who were also beneficiaries of the SFT Trust, of which SEPL was a trustee.

Under the trust deed, the three brothers had the power to appoint or remove the trustee, and to appoint discretionary objects of the trust.

As trustee of the SFT Trust, SEPL owned a number of luxury motor vehicles which it made available for the brothers’ business and personal use. The costs of personal use were debited to the matriarch’s beneficiary account, which was then cleared by trust distributions.

The Tax Office assessed FBT on the brothers' personal use of the vehicles. SEPL objected to the assessment under Part IVC of the Taxation Administration Act 1953. The objection was then disallowed.

The Commissioner's objection decision was then set aside by the Administrative Appeals Tribunal in May 2024.

The tribunal examined whether each of the three brothers was an employee under the definition in section 136(1). It concluded that the brothers were not employees because there were no written employment contracts for them, they were not paid wages, and they had no other employment entitlements, such as leave.

It also said that the brothers' conduct was consistent with control as proprietors.

The tribunal also held that the luxury cars were not provided “in respect of” the assumed employment because there was no sufficiently material connection between the benefit and any such employment

However, the Federal Court then allowed an appeal brought by the Commissioner of Taxation, affirming the Commissioner's objection decision.

The primary judge ruled that the statutory definitions of employment were exhaustive, that common law concepts of employment had “no role to play”, and that the tribunal erred because its conclusion was not based upon the application of established facts to the legislation, but was based upon erroneous concepts.

The primary judge also concluded that the motor vehicles were used in respect of the brothers' employment in the trust's business.

The Federal Court said the primary judge had treated section 137 as if it were a mechanism that expanded the category of employee by deeming persons performing functions relevant to the company to be employees whenever they received non‑cash benefits.

"That was an error," Justices Perry, O'Callaghan and Thawley said.

The Federal Court confirmed the tribunal position that common law concepts remain relevant for construing the statutory definition of employee and that section 137 is a narrow hypothetical test, not a "free-standing deeming provision" that converts every non-cash benefit to a person performing work into salary or wages.

The court explained that section 137 of the FBTAA has a limited function.

"It relates to salary or wages but does not itself create or deem an employment relationship," it said.

"The Tribunal approached section 137 on the basis that it did not itself supply the meaning of employee, that the answer to the hypothetical question posed by section 137(1)(c) depended upon whether a cash payment would have been made to a person as an employee, and that this permitted consideration of the ordinary, common law, meaning of the word employee. That approach was correct."

The court also said that even if the brother had been considered to be an employee, the vehicles were not provided in respect of their employment. It agreed with the tribunal's conclusion that the benefit arose from the brothers’ relationship to the trust, not from any relationship of employment.

The court found that any employment-related explanation for the use of the cars was not sufficiently material.