A benefit to an employee in respect of employment (or not?)

We don’t see too many decisions involving Fringe Benefits Tax (FBT) and in recent years, decisions have dealt with how the law applies in relation to car parking fringe benefits.

So it was interesting to see the recent decision in BQKD and Commissioner of Taxation (Taxation) [2024] AATA 1796 (10 May 2024) with the subject matter taking us to the core of the FBT system.

In short, the case considered whether three directors (brothers) of a trustee company of a discretionary family trust were employees for FBT purposes and, if so, whether the use of vehicles owned by the company were benefits provided in respect of their employment.

The decision found for the taxpayer on the grounds that despite being directors, the brothers were not taken to be employees and, even if they were employees, any benefit arising from the use of vehicles was not provided in respect of their employment.

Background

The taxpayer is the corporate trustee of a discretionary family trust.

The ATO sought to assess FBT on the value of non-cash benefits provided to three directors in the 2016-2020 FBT years. The benefits related to access to luxury motor vehicles. The vehicles were purchased in the company name and made available for use by the three directors. It was accepted each director used the vehicles allocated to him for business and personal use. The ATO included the taxable value of the private use of the cars in amended FBT assessments, to which the taxpayer objected.

The three brothers were eligible beneficiaries under the relevant family trust.

The expenses associated with their private use of the vehicles were debited through the trust against their mother’s account, who was also an eligible beneficiary under the trust.

It is not clear from the decision how the expenses associated with private use were determined nor matters like what type of use was treated as private use and whether, for instance, a log book recording business use was maintained.

The Tribunal member (BJ McCabe) preferred the position advocated by the taxpayer including the evidence provided by one of the brothers when finding that the evidence positively established the directors were not employed. Even if they were employees, they did not receive the benefits in respect of their employment.

Significant factors supporting the decision relate to the history of the business carried on under the discretionary family trust and the broader business operations undertaken by ‘hundreds of other entities’ subsequently established or acquired that formed part of the family group. The brothers were directors and shareholders of many of the other entities and hence the decision focused on the role played by the brothers both in respect to the business carried on by the trust and the broader ‘family group’ businesses.

Turning back to FBT, the definition of a fringe benefit requires identification of a benefit provided to an employee in respect of their employment

An employee?

The definition of an employee requires identification of a person who receives or is entitled to receive ‘salary or wages’

‘Salary or wages’ is defined as a payment from which an amount must be withheld under certain provisions in Schedule 1 of the Taxation Administration Act 1953. The Tribunal noted the core withholding provision, s12-35 as it applies to payments of “…salary, wages, commission, bonuses or allowances … to an individual as an employee”. No reference was made to s12-40 as it applies to payments by a company to an individual “…  as a director of the company, or as a person who performs the duties of a director of the company”.

The Tribunal considered it significant that:

• the trust deed afforded the trustee wide latitude to determine distributions to any eligible beneficiary;
• it also permitted the trustee to employ any beneficiary without the individual’s remuneration being regarded as a distribution. The Deed also confirmed the trustee company was expected to exercise its powers and discretions under the deed by passing a resolution of the board; and
• The Deed also permitted the trustee:

“…to allow any Eligible Beneficiary to occupy, have custody of, or use any immovable property or chattels for the time being forming part of the Trust Fund on such terms and conditions…as the Trustee shall think fit…”.

In terms of the role played by the brothers in relation to the business carried on under the discretionary trust of which they were directors of the corporate trustee taxpayer and in relation to other ‘group businesses,’ the decision confirms:

• hundreds of other companies had been established or acquired by the family subsequent to the original business undertaken by the taxpayer;
• the taxpayer was not a holding company for all of those other businesses;
• the directors met as a ‘group’ board each month and ran the various businesses and entities as if they were part of a corporate group but that the original business was the principal ‘trading business’ and employed most of the staff; and
• the brothers had decided the profits of the trust available for distribution should be shared amongst them equally.

The Tribunal also found it significant:

• there was no record of the board approving an employment relationship or seeking approval from the general meeting for any remuneration paid to any of the three directors;
• there was no written contract of employment for any of the three directors; and
• there was no record of any resolution to enter into such an agreement.

The Tribunal also considered traditional indicators of employment, including the right of one party to exercise control but was inclined to the view advanced that the directors regarded themselves as the owners of the family business and the persons ultimately entitled to the profits of the business.

Other relevant considerations in determining that despite being directors the brothers were not employees included:

• the brothers behaved like owners; they did not expect to be subject to supervision or control in the way they discharged their responsibilities, with such responsibilities extending beyond the immediate business activities of the taxpayer; and
• the brothers had never been paid wages or salary, received no regular income and had no entitlement to leave under the company’s leave policy.

The Tribunal then determined that even where one or more of the individual directors were found to be in an employment relationship there was no clear evidence that the private use benefits were provided to the individual directors in lieu of directors’ fees or remuneration. Instead, the provision of motor vehicles was effectively an exercise of that power as a director of the trustee or a distribution under the trust. This argument was noted as being complicated by the fact there was limited evidence of a decision being made by the trust to supply the motor vehicles to the directors in their capacity as beneficiaries, and the value of the private use of the property was not recorded in any resolutions or in the accounts as a distribution to the individual brothers.

Ultimately the decision appears to align with the earlier case, J &G Knowles and Associates Pty Ltd v Commissioner of Taxation [2000] FCA 196 which considered similar questions and identified two possible conclusions that may arise in this type of scenario, either:

• the directors felt entitled to apply the assets of the trust for their benefit because they were beneficiaries under the trust and their employment as directors was only relevant to the extent it provided the occasion for them to help themselves; or
• the directors agreed among themselves that each of them was entitled to draw and apply the company’s funds for their benefit as an incident of their directorship.

The decision in J&G Knowles supports an outcome that there is unlikely to be a sufficient connection with employment in the first scenario, but there would be a sufficient connection in the second.

In this matter, the Tribunal, in weighing up the evidence, has essentially accepted the position put by the brothers that they had devoted most of their lives to their work directing the taxpayer’s and other ‘group’ businesses. However, they did not undertake that work as (remunerated) employees. Despite playing an active ‘hands-on’ role in the management of the businesses, they did so by virtue of their role as directors of the corporate trustee, or as owners or beneficiaries under the trust, not as employed managers.

A curious outcome but a closer look at the facts gets us to a position where the decision appears reasonable in the circumstances. As to how much support it provides to other taxpayers who might seek to take the view that private use of a motor vehicle by a director of a corporate trustee does not give rise to an FBT issue remains to be seen.

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