Understanding Fringe Benefits Tax in Family Businesses

FBT is applied to non-salary benefits that employers may provide to
their employees or their employees’ associates (such as family
members):
1. These fringe benefits commonly include cars, loans,
  entertainment expenses, or housing.
2. FBT is generally calculated on the taxable value of the
  provided. The tax is paid by the employer, not the employee.

Who Are FBT Employees?

The critical piece is understanding who is an employee and who is
not. This is important in the context of family businesses.
1. For the purposes of the FBTAA:

Employee

an employee is defined as:^[1](a) a current employee;(b) a future employee; or(c) a former employee.

Current Employee

current employee means:^[2]means a person who receives, or is entitled to receive, salary or wages.

Salary and Wages

salary and wages are defined as:^[3](a) a payment from which an amount must be withheld (even if the
amount is not withheld) under a provision in Schedule 1 to the Taxation
Administration Act 1953 listed in the table, to the extent that the
payment is assessable income; and

TAA

the TAA provides a summary table of withholding payments;^[4]

Interpretation

the difficulty is that there is sometimes a misinterpretation of the
specifically the definition of salary and wages:
1. the FBTAA deems a salary or wage to be a payment from which an
  amount must be withheld:
  1. the legislative test is therefore whether there is an
    obligation to withhold an amount, the test is
    not whether an amount is actually withheld.
    Put alternatively, the critical factor is the exitance of an
    obligation to withhold. Whether an amount is actually
    withheld is not the test;
  2. this accords with the next piece of the definition which
    states (even if the amount is not withheld), the
    legislation does not concern itself with what actually
    happened as regards to what amount (if any) was withheld;
  3. the definition is an amended definition, brought in to be
    consistent with the relevant PAYG system in 1999;^[5]
  4. the explanatory memorandum confirms the view that the
    provisions were to apply to when the circumstances that
    arise under division 12 of schedule 1 of the TAA:^[6]

1.190 The FBT law refers to, and relies for its operation on, a number
of interrelated concepts in Part VI of the ITAA 1936, namely employee,
employer and salary or wages. The relationship between the application
of the FBT law and the withholding collection system is defined
primarily through the operation of the definition of salary or wages.

1.191 FBT will only apply to circumstances to which the withholding
events that correspond to the old PAYE provisions apply and where
payments of fringe benefits may arise. Therefore the FBT law will apply
to circumstances covered by new sections 12-35, 12-40, 12-45, 12-115 and
12-120 in the new PAYG withholding system. [Item 81]

Issues

often position papers issued by the Commissioner do not address this
test as written, what is required is:
1. the Commissioner has not set out that there is an obligation to
  withhold;
2. in setting out whether there is an obligation to withhold an
  amount, the Commissioner must set out the very nature of the
  payment and its underlying causal relationship, which is often
  not done;
3. the Commissioner must set out the basis for a withholding
  obligation under the TAA;
4. the Commissioner must set out the reasoning as to why the person
  was paid;
the correct approach to take is to view the very nature of the
payments made to the purported employee;
this in turn goes to the very nature of any benefits given;

the most common scenario is where there is a family business. In
such situations parents will have their children work in the family
business. This asks the question, what is the nature of the payment
to the children. Is it in the capacity as employee or is it in the
provision of living expenses from parent to child?

Case Law

for a person to be paid salary and wages they must be an employee.
Whether they are an employee goes direct to the nature of the
arrangement between the parties. Several cases discuss this:

Branir

in the case of Branir the Full Federal Court formed the view that
the true formation of a contract does not need to be mechanical.
Mutual assent, circumstances and actions of the parties are relevant
when determining the true nature of relations between parties:^[7]

On the contrary, a number of authorities discuss the need not to
constrict one’s thinking in the formation of contract to mechanical
notions of offer and acceptance. Contracts often, and perhaps generally
do, arise in that way. They can also arise when business people speak
and act and order their affairs in a way without necessarily stopping
for the formalities of dotting “i”s and crossing “t”s or where they
think they have done so. Here, the “i”s were not dotted and the “t”s
were not crossed because of Mr Graham’s conduct. Sometimes this failure
occurs because, having discussed the commercial essentials and having
put in place necessary structural matters, the parties go about their
commercial business on the clear basis of some manifested mutual assent,
without ensuring the exhaustive completeness of documentation. In such
circumstances, even in the absence of clear offer and acceptance, and
even without being able (as one can here) to identify precisely when a
contract arose, if it can be stated with confidence that by a certain
point the parties mutually assented to a sufficiently clear regime which
must, in the circumstances, have been intended to be binding, the court
will recognise the existence of a contract. Sometimes this is said to be
a process of inference or implication. For my part, I would see it as
the inferring of a real intention expressed through, or to be found in,
a body of conduct, including, sometimes, communications, even if it be
the case that the parties did not consciously advert to, or discuss,
some aspect of the relationship and say: ‘and we hereby agree to be
bound’ in this or that respect. The essential question in such cases is
whether the parties’ conduct, including what was said and not said and
including the evident commercial aims and expectations of the parties,
reveals an understanding or agreement or, as sometimes expressed, a
manifestation of mutual assent, which bespeaks an intention to be
legally bound to the essential elements of a contract. The authority for
the above can be found in, at least, the following: Meates v A-G
[1983] NZLR 308, 377 per Cooke J (as his Lordship then was);
Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty
Ltd (1988) 5 BPR [97,326] at 11,117-118 per McHugh JA (Hope and
Mahoney JJA concurring); Vroon BV v Fosters Brewing Group [1994] VicRp
53; [1994] 2 VR 32, 81-3 per Ormiston J (as his Honour then was);
Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14
NSWLR 523,555 per McHugh JA (with whom Samuels JA concurred); Pagnan SpA
v Feed Products [1987] 2 Lloyd’s Rep 601, 611 per Bingham J (as his
Lordship then was) affirmed on appeal at p 615; Pobjie Agencies v
Vinidex Tubemakers [2000] NSWCA 105 [22-24] per Mason P (with whom
Meagher and Handley JJA concurred); Brambles Holdings Limited v Bathurst
City Council [2001] NSWCA 61 at [74] to [80] per Heydon JA; though
see Toyota Motor Corporation Australia Ltd v Ken Morgan [1994] VicRp
55; [1994] 2 VR 106, 178 per Tadgell J (as his Honour then was); and
in this context see also Electrical Enterprises Retail Pty Ltd v Rodgers
(1989) 5 NSWLR 473, 489 per Kearney J and Manzi v Smith [1975] HCA 35;
(1975) 132 CLR 671, 674.

Anglo American

in the Federal Court case of Anglo American Investments,^[8] Logan
J applied Allsop J’s reasoning to small business, in that there is
great informality in a small business affairs, particularly when the
relevant corporate actors are or are represented by the same
induvial(s) whose are close family members or business
associates:^[9]

In relation to small business, it is an unremarkable given (although,
with respect, the Commissioner’s submissions in this case suggest he is
unable or unwilling to accept or even understand this) that great
informality can and often does attend the formation of legal relations.
That is the point made in Branir v Owston Nominees. Even more this is so
where the relevant corporate actors are or are represented by the same
individual acting in different capacities or by individuals who are
close family members or business associates. Sometimes the only
documentary manifestation of that legal relationship may be a
transaction recorded in a ledger or perhaps just an annually prepared
profit and loss account and accompanying annotations. There may then, in
a taxation appeal, be related oral evidence of the individual(s)
concerned that the transaction was as so recorded, for example and
relevantly, a fee for the rendering of a managerial service by or on
behalf of one entity to another.

Hollis v Vabu

the High Court in Hollis v Vabu^[10] citing the earlier High Court
decision of Stevens^[11] formed the view that a Court will look at
the totality of the relationship between parties, not just the
contractual terms:

It would thus appear that the contractual relationship between Vabu and
its bicycle couriers, upon whom, as Ireland J correctly observed in the
taxation decision, Vabu imposed its work practices, was partly oral and
partly in writing, as evidenced by the third page of the employment form
and Documents 590 and 792. Document 590 was produced in May 1990, while
Document 792 was produced in July 1992. The latter appeared to supersede
the former but both were given to new drivers after July 1992. Some
important aspects of the contract, such as the rate of remuneration for
deliveries, were not recorded in the written documents. Further,
although Documents 590 and 792 both referred to annual and sick leave,
Vabu’s fleet administrator gave evidence that no payments of annual
leave or sick leave were given, and no superannuation deductions were
made by Vabu in respect of bicycle couriers in 1994. It should be added
that the relationship between the parties, for the purposes of this
litigation, is to be found not merely from these contractual terms. The
system which was operated thereunder and the work practices imposed by
Vabu go to establishing “the totality of the relationship” between the
parties; it is this which is to be considered

CFMMEU

the High Court subsequently upheld and clarified the view:^[12]

In Hollis, the “contractual relationship” pursuant to which Vabu
“imposed” its work practices upon couriers was partly oral and partly
in writing. The terms of the relationship between the parties had not
been committed comprehensively to a written agreement. Moreover, there
was no suggestion in any of the judgments in Stevens or Hollis that
their Honours entertained any misgivings as to the statements of
principle in Chaplin and Narich. Indeed, in Stevens, Mason J (with whom
Brennan J agreed) and Wilson and Dawson JJ referred to Chaplin with
evident approval. It is also noteworthy that Gleeson CJ, who followed
Narich in Connelly v Wells, was a party to the plurality judgment in
Hollis. As has been correctly observed, Hollis “does not alter or even
challenge the orthodox principle that courts are not concerned with what
has ‘actually occurred’ in a relationship, but rather with ‘the
obligations by which the parties [are] bound'”

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