Background

SEPL Pty Ltd was the corporate trustee of the SFT Trust, which carried on a large business involving petrol stations, convenience stores, fast food and tobacco outlets, and gift shops. The three brothers were shareholders and directors of SEPL. They were also beneficiaries of the trust and held powers under the trust deed to appoint or remove the trustee and appoint discretionary objects of the trust.

As trustee, SEPL owned a variety of luxury motor vehicles and made them available to the brothers for business and personal use. The costs of personal use were debited to the matriarch’s beneficiary account and then cleared through trust distributions.

The Commissioner assessed SEPL for FBT on the private use of those vehicles.

The taxpayer succeeded before the Tribunal, but that outcome was overturned in the Federal Court.

Key Issues

The appeal to the Full Federal Court concerned the same two issues considered at first instance:

1. were the brothers “employees” within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (Cth) (FBTAA)?
2. if the brothers were employees for FBT purposes, was the private use of the vehicles provided “in respect of” their employment?

Key Findings

On the first issue, the Full Court held that it was open to the Tribunal to find that the brothers were not employees of SEPL for FBT purposes. Accordingly, the Federal Court should not have disturbed that finding.

The Full Court held that the Federal Court had misapprehended the statutory scheme in several respects. Most importantly, the Full Court held that the inquiry turns on the meaning of “employee”, not “employment”, and that section 137 of the FBTAA has a confined operation. It does not deem every person who performs functions for a company and receives a non-cash benefit to be an employee for FBT purposes.

The Court also rejected the Federal Court’s conclusion that common law concepts had “no role to play”. The Tribunal was entitled to consider common law indicia of employment in working through whether any hypothetical cash payment would have been made to the brothers “as employees”.

On this basis, it was open to the Tribunal to take into account matters such as the absence of written employment contracts, the absence of board resolutions suggesting employment contracts, the absence of wages and employment-type entitlements such as leave, the presence of employed managers for relevant business functions, and the fact that the brothers’ conduct was more consistent with control as proprietors than service as employees.

On the second issue, the Full Court held that the Tribunal had applied the correct test. The statutory phrase “in respect of” is broad, but it still requires a sufficiently material or meaningful connection with employment, consistently with J & G Knowles & Associates v Commissioner of Taxation [2000] FCA 196.

The Court also emphasised that a benefit may be provided for multiple reasons. The fact that a benefit may be connected in some way with employment does not, by itself, answer the statutory question. Equally, the existence of another explanatory relationship does not automatically place the benefit outside the FBT regime. The real question is whether employment explains the benefit in a sufficiently material way.

The Full Court held that it was open to the Tribunal to conclude that it did not. The Tribunal was entitled to regard the better explanation for the benefits as the brothers’ positions as beneficiaries, owners and controllers within the trust structure. Their access to the vehicles was woven into those capacities, and the private use was recorded and funded through trust mechanisms by debiting the matriarch’s beneficiary account and clearing it through trust distributions. The Tribunal was also entitled to take into account the absence of evidence that the vehicles were provided in lieu of remuneration.

In those circumstances, it was open to the Tribunal to conclude that the benefits were not provided in any sufficiently material way by reason of employment. Accordingly, the Federal Court should not have disturbed that finding.

Takeaways

• Controllers and proprietors of family and private businesses are not automatically “employees” for FBT purposes. That inquiry remains highly fact specific and will turn on the structure, evidence, and records.
• Even if an individual is an employee for FBT purposes, the further question for assessment of FBT is whether the benefit was provided in respect of that employment in a sufficiently material way.
• SEPL reinforces that the phrase “in respect of” is broad, but not boundless. Consistently with J & G Knowles, there must be a material and meaningful connection between the benefit and the employment relationship.
• For private and family groups, mixed-use assets should be reviewed carefully. The capacity in which the benefit is provided and received, and the way it is funded, accounted for and recorded, may be critical to the FBT outcome.
• It is worth noting that if the same arrangement had been implemented through a private company rather than a trust, Division 7A would also need to be considered. The private use of company assets by shareholders or their associates may be treated as a payment or deemed dividend, particularly where the benefit is provided in a non-employee capacity.

To discuss the FBT treatment of trust and company owned assets, private use arrangements, or family group structures, please contact Velocity Legal’s tax team.