The Federal Court has allowed an appeal by the Commissioner in a decision examining whether fringe benefits tax applied to directors of a corporate trustee.

Last week, the Federal Court overturned a decision by the Administrative Review Tribunal, which concerned non-monetary benefits granted to three directors of a corporate trustee of a discretionary trust.

The taxpayer in the case, the corporate trustee, was engaged in significant commercial operations, involving petrol stations, convenience stores, fast food and tobacco outlets and gift shops.

The three directors and shareholders of the corporate trustee were brothers and had exclusive, personal use of over 40 luxury and high-performance motor vehicles.

The brothers were among many eligible beneficiaries of the trust, which included extended family. They alone, of the eligible beneficiaries, played an active hands-on role in the businesses run through the trust.

They did not receive salaries but instead benefited in two ways. Firstly, they shared the business profits through an informal arrangement that was reached between the brothers, with the profits being distributed to each of the brothers’ family trusts and eligible beneficiaries.

Each brother also had the exclusive use of luxury and high-performance motor vehicles purchased in the name of the corporate trustee. Each brother used the motor vehicles allocated to him for both business and personal uses over the relevant FBT years.

The expenses associated with the motor vehicles were debited to their mother’s loan account with the trust. The loan was fully repaid from the income of the trust distributed to the mother grossed up to provide an amount sufficient to clear her loan account and to pay the income tax payable by her on the amount of that distribution.

In the previous decision, the ART had determined that the brothers were not employees, but even if they had been, the non-cash benefits were not conferred in respect of employment.

The Commissioner of Taxation put forward four grounds of appeal. The Commissioner claimed that the ART had erred in concluding that the three individuals, who together comprised all the directors of the taxpayer's trustee's trust board during the relevant FBT years, were not employees of the taxpayer.

The Commissioner said that the tribunal should have concluded that the individuals were “employees” of the taxpayer, having regard to the facts and the uncontroverted evidence before the tribunal.

The ATO also said that the ART had erred in concluding that the non-cash benefits in the form of the exclusive use of the motor vehicles were not provided to the individuals “in respect of” their employment having regard to the facts as found and the additional factual findings.

It noted that the individuals worked in the business without wages and regarded themselves as the persons ultimately entitled to the taxpayer's profits.

It also outlined that there was no resolution by the trustee board giving the individuals access to the motor vehicles in their capacity as beneficiaries of the trust.

The ATO also highlighted that the taxpayer made funds available to meet the individuals’ private expenses, including: school fees; the purchase of real estate; the payment of phone bills and travel costs; and the payment of medical expenses. The payments of these funds were debited to the mother’s individual beneficiary account maintained by the Taxpayer.

The Tax Office said the tribunal should have concluded that the non-cash benefits in the form of the exclusive use of the vehicles were provided to the individuals “in respect of” their employment having regard to the facts as found and the uncontroverted evidence.

The Federal Court outlined that the fridge benefits tax legislation recognises situations where a benefit is provided to a person who may not qualify as an employee in the conventional sense.

"The FBTAA provides a comprehensive and self-contained definition of employee and expressly incorporates a statutory deeming provision in s 137(1) to broaden the concept of employment," it stated.

"Applying section 137, each of the three directors:

(a) Received a benefit in the form of motor vehicles provided by the Trustee, thereby satisfying section 137(1)(a);

(b) But for section 137, the benefit would not be regarded as having been provided in respect of their employment thereby satisfying s 137(1)(b).

(c) If the benefit was provided by the trustee by way of a cash payment to the directors, the payment would constitute a salary or wages paid by the trustee to the directors. When taken with the definition of salary or wages in section 136(1), and the table contained within that provision, section 137(1)(c)(i) is satisfied; and

(d) Under those circumstances, the definition of employee in s 136(1) applies as if the benefit, i.e. the provision of the motor vehicles for exclusive, personal use was salary or wages paid to each of the directors by the trustee, thereby satisfying s 137(d)."

Applying the provisions of the FBTAA, the Federal Court concluded that each of the directors was an employee within the meaning of, and for the sole purpose of, the FBTAA.

"Further, on the facts as found and/or on the uncontroverted evidence, only one conclusion was open to the Tribunal had it applied those facts to the legislative provisions," it said.

"In relying on common law concepts of employment and for characterisation of an employment relationship, the Tribunal erred in law in that its conclusion was not based upon the application of established facts to the legislation but was based upon erroneous concepts."

The Federal Court also concluded that the non-cash benefits conferred on each of the directors were provided in respect of their employment within the meaning of the FBTAA.

On this basis, the court allowed the appeal. Justice O'Sullivan said that the court would make orders to set aside the ART's decision and affirm the objection decision by the Commissioner.