TRUST BENEFITS TAXED AS WAGES IN AUSTRALIA

In Commissioner of Taxation v SEPL Pty Ltd as trustee of the SFT Trust [2025] FCA 581, Trustee directors were held to be employees for FBT purposes.

The Federal Court has held that the sole directors (three brothers) of a corporate trustee were employees of the trustee and that they received non-cash benefits in respect of their employment for FBT purposes.

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The brothers and their extended family were all beneficiaries of the trust. However, only the brothers had an active ‘hands on role’ in the trustee’s business, yet did not receive a salary. Instead, they shared in the profit of the business through an informal arrangement and had exclusive use of the trustee’s luxury and high-performance motor vehicles.

In reaching its decision, the Court held that the Fringe Benefits Tax Assessment Act 1986 provides a comprehensive and self-contained definition of employee and expressly incorporates a statutory deeming provision in s 137 to broaden the concept of employment for FBT purposes by applying a hypothetical test: if the benefit had instead been paid in the form of a cash payment, would it constitute a salary or wages for the purposes of the Taxation Administration Act 1953.

After confirming the brothers were employees, the Court held that based on the facts, the exclusive use of the motor vehicles was conferred in respect of their employment by the trustee. After confirming the brothers were employees, the Court held that based on the facts, the exclusive use of the motor vehicles was conferred in respect of their employment by the trustee.

The taxpayer has filed an appeal to the Full Federal Court.

https://www8.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2025/581.html

The central in-principle reasoning of the Court follows here:

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33. The Tribunal observed there was no clear evidence that the private use benefits were provided to the Directors in lieu of fees or remuneration and that the Trust Deed permitted the Trustee to provide an eligible beneficiary with access to Trust Property (cl 5(f)), such as motor vehicles.
34. The Tribunal Member continued by noting that there was limited evidence of a decision being made by the Trust to supply motor vehicles to the Directors in their capacity as beneficiaries. Further, there was no record of any resolution, or in the accounts of the Trust, of the motor vehicles being a distribution to the individual Directors.
35. The Tribunal referred to Mr Smith’s evidence that no payment of any direct salary or wages were made to the brothers in the relevant years. Further, none of the brothers received distributions from the Trust in their own name. Instead, distributions were channelled into their respective family trust accounts.
36. In considering whether the provision of the motor vehicles was a benefit “in respect of” the employment of an employee, the Tribunal drew support from J & G Knowles and Associates Pty Ltd v Commissioner of Taxation [2000] FCA 196; (2000) 96 FCR 402 (Heerey, Merkel and Finkelstein JJ). The Tribunal noted that in that matter, the directors received benefits not as a reward for services rendered as employees or directors, but from a genuine belief that they were entitled to those benefits as beneficiaries.

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83. So it is that the FBTAA sets out the means by which, for the singular purpose of the FBTAA, it is able to be ascertained whether a person is an employee or employer within the meaning of that Act.
84. Accordingly, the legislation recognises situations where a benefit is provided to a person who may not qualify as an employee in the conventional sense.
85. The Taxpayer submits that the definition of employment in s 136(1) does not expand the meaning of employee beyond its common law meaning.
86. I do not accept that submission. Section 137(1) of the FBTAA operates as a statutory deeming provision that assists in determining whether a person should be treated as an employee. It does so by applying a hypothetical test: if the benefit had instead been paid in the form of a cash payment, would it constitute a salary or wages for the purposes of s 12-35 or s 12-40 of Schedule 1 to the Taxation Administration Act 1953? If the answer is yes, the recipient of the benefit is deemed to have received a salary or wages, which results in the recipient coming within the definition of “employee” for the purposes of the FBTAA.
87. To that extent, 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.
88. Applying s 137, each of the three Directors:

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

(b) But for s 137, the benefit would not be regarded as having been provided in respect of their employment thereby satisfying s 137(1)(b). I deal with the question of “in respect of” their employment later in these reasons, but I am satisfied the benefit has been provided to each of the Directors in respect of their employment;

(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 s 136(1), and the table contained within that provision, s 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).

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111. On appeal, the Full Court observed that the words “in respect of” are capable of having a very wide meaning, denoting a relationship or connection between two things or subject matters, but must be given a meaning depending on the context in which the words are found: at [22].
112. The Full Court considered: at [23] that what was required is a sufficient link for the purposes of the particular legislation and that “... it could not be said that any causal relationship between the benefit and the employment is a sufficient link so as to result in a taxable transaction.” It continued:

For example, a discretionary trust with a corporate trustee might be established to purchase a family home for the benefit of its directors and their family. It does not follow that the rent-free occupation of that home on the authority of the directors is a benefit provided ‘in respect of' their employment for the purposes of the Act. While there is a causal relationship between the provision of the benefit and the employment it is not a sufficient or material relationship. The rent-free occupancy arises because the trust was established for that purpose; a reason extraneous to the employment of the directors.

113. After considering the High Court’s decision in Smith v Commissioner of Taxation (1987) 164 CLR 513, the Full Court observed that the differing approaches by the justices of the High Court in that matter illustrated the difficulty in stating a test to determine whether the requisite relationship or connection exists. The Full Court said: at [26] that whatever the question to be asked, what must be established is whether “... there is a sufficient or material, rather than a, casual connection or relationship between the benefit and the employment.” (emphasis in original).
114. The Full Court continued: at [27] that the question of whether there is a sufficient or material connection or relationship between a benefit and employment is assisted by having regard to the purpose or object of imposing fringe benefits tax on employers. Referring to the second reading speech by the then Treasurer, the Court noted that the purpose of the legislation was to “ensure that all forms of remuneration paid to employees bear a fair measure of tax ...” (citation omitted).
115. The Full Court held: at [30] that the Tribunal had failed to consider whether notwithstanding a causal link between the loans and employment, there was “... a sufficient or material relationship or connection between the loans and the employment.”
116. At [33] the Court put the position in the following terms:

Whether or not there is a sufficient connection between each director's employment and the loans to the unitholders to attract FBT was a question of fact for the Tribunal to determine. The material before the AAT pointed in two directions. The first was that the directors drew upon the assets of the unit trust because ultimately the trust was established, and its assets were to be held and applied, for their benefit and that of their families. The second is that it was agreed between the directors that, as an incident of their directorship, each of them were entitled to draw upon the appellant's funds by way of loans for their personal benefit. In the first case it is unlikely that there would be a sufficient connection with the employment, while in the second the loans are likely to be an incident or product of it.

117. Each of the Taxpayer and the Commissioner has pointed to factual findings of the Tribunal said to support their case.

144. As to the statutory definition of the phrase “in respect of” the employment of an employee, the phrase is used in a number of locations in the FBTAA, but primarily for the purposes of this matter, ss 7(1), 137(1)(b) and 138B. It is defined in s 136(1) in the following terms:

in respect of, in relation to the employment of an employee, includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.

145. I have set out the relevant terms of ss 7(1) and 137(1)(b) above.
146. Section 138B provides:

A reference in this Act to a benefit provided in respect of the employment of an employee is a reference to a benefit provided, or originally provided, as the case may be, in respect of that employment.

147. The question is whether the benefit comprised of the supply and exclusive, personal use of motor vehicles was “by reason of, virtue of, or for or in relation directly or indirectly” to, the employment of the brothers: ss 136(1), 7(1) and 137(1)(b).
148. Applying J & G Knowles, that question is determined by whether there is a sufficient or material relationship rather than a causal connection or relationship between the benefit and employment.

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150. …On the facts as found by the Tribunal and on the uncontroverted evidence only one conclusion was open to the Tribunal. Applying the ordinary meaning of the words in the definition of “in respect of”, the personal and exclusive use of the motor vehicles arose: “by reason of”, alternatively “by virtue of”, alternatively “in relation directly to”, alternatively “indirectly to”, the employment of the brothers as employees in the business of the Trust.
151. It follows that grounds 3 and 4 succeed and that the answer to the fifth question of law is that on the facts as found by the Tribunal and/or the uncontroverted evidence, the non-cash benefits conferred on each of the three Directors were provided to the individuals “in respect of the employment of an employee” within the meaning of the FBTAA.

CONNECTION NOT CAUSATION

113. whatever the question to be asked, what must be established is whether “... there is a sufficient or material, rather than a, casual connection or relationship between the benefit and the employment.” (emphasis in original).

Here is primary tax legislation about an elemental matter: pay for work by an employee/director.

• Having the office of director imposes fiduciary duties which are extensive: some statutory, some imposed by common law.
• Being an employee confers employment law rights on the individual, and employment law duties on the employer.

It is therefore an elementary matter of categorization to decide whether an individual is a director and/or employee.

“Causation” is not a useful concept here.

• Being a dog does not cause its owner to give it dog food.
• Rather it is that – there being a canine-owner situation – the dog’s need for food causes the owner to respond appropriately.

Trying to use causation as an explanatory factor thus inevitably leads to category error: it confuses whatever is the factor engaging an act, with the status of the actors.

The status of the actors is equally the only objective basis upon which movements of value from employer to that individual can be categorized for taxation purposes. Once some other set of arbitrary relationships is hypothesized, no objective yardstick remains. All is arbitrary speculation.

PARALLEL WITH THE UK

We can see this arbitrary “connecting factors” game play out in similar manner over in the UK. A recent case has come out from their Court of Appeal: Marlborough DP Limited v Commissioners for HMRC [2025] EWCA Civ 796

4. The first main issue on this appeal concerns the interpretation of the phrase “in connection with … employment” in section 554A(1)(c) of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”), which is in Part 7A of ITEPA, which was introduced by the Finance Act 2011. The other main issue, which arises in the alternative, concerns the deductibility of certain expenses for the purpose of corporation tax on the ground that they were incurred “wholly and exclusively” for the purposes of the trade of MDPL.

50. Furthermore, other parts of the statutory wording which set out the context in which the phrase “in connection with” appears need to be carefully considered and applied. They impose a number of different, cumulative requirements and are objective conditions which must be satisfied before the charging provision in Part 7A can apply. For example, section 554A in more than one place uses the phrase “reasonable to suppose”, in other words it does not actually require a certain state of affairs to exist but nor is it sufficient that HMRC subjectively consider that it exists: the legislation requires that it is reasonable to suppose that that state of affairs exists. As was explained by Nugee LJ in Dolphin Drilling Ltd v HMRC [2024] EWCA Civ 1; [2024] Ch 255, at para 60, when construing the phrase “reasonable to suppose” in the context of section 356LA(3) of the Corporation Tax Act 2010, that wording “requires an objective assessment”.

It is the same type of enquiry as under Australian federal tax law:

whether “... there is a sufficient or material, rather than a, casual connection or relationship between the benefit and the employment.”

It’s like looking at a hectare of land, upon which are 3 trees, lots of grass, lots of wild flowers, and a through which runs a stream. Then saying “this has trees in it, so it is an arboreal field.” In fact, there is a farmer who is farming it for the wild flowers. But that essential relationship is left out of account, when seeking to tie elements of the landscape to an arbitrary concept which is not derived from the actual relationships in which that landscape was created.

It would be more transparent of tax authorities to procure legislation which says simply that any payment can be taxable as deemed employment income if the tax authority so decides.