The case emphasises that outcomes depend on how benefits are structured and documented, directly influencing remuneration design, governance practices, and a business’s overall tax risk. The court delivered its decision on 27 March 2026 in SEPL Pty Ltd as trustee of the SFT Trust v Commissioner of Taxation [2026] FCAFC 36, allowing SEPL’s appeal. The ruling is also relevant for trustees, directors, and advisers providing non‑cash benefits to working family members.

Key questions on FBT

SEPL Pty Ltd as trustee of the SFT Trust v Commissioner of Taxation is one of the most instructive FBT cases in recent years, tracing a path from the Administrative Appeals Tribunal (AAT), through to a single judge of the Federal Court, and finally to the Full Federal Court.

The litigation pivots on two deceptively simple questions:

• When are working owners of a family trust business ‘employees’ for FBT purposes?
• When is the provision of luxury motor vehicles a ‘fringe benefit’ rather than a benefit conferred by reason of ownership or beneficial entitlement?

The answers, it turns out, are far from straightforward.

The background: A large family business

SEPL Pty Ltd was the corporate trustee of the SFT Trust, a commercially substantial family business. The trust was established in 1987 and following the father’s death in 2009 and the mother’s retirement as director in 2014, control passed to three brothers who became the sole directors and shareholders of SEPL.

The brothers worked long hours in executive roles. Despite this, they received no salary. Instead, they benefited in two ways:

• profits were distributed to each brother’s family trust
• each brother had exclusive personal use of luxury motor vehicles owned by SEPL.

Over 40 such vehicles were held during the relevant FBT years (2016–2020).

Vehicle expenses were debited to their mother’s beneficiary loan account and subsequently cleared through grossed-up trust distributions to cover her resulting income tax liability. There were no board resolutions authorising the vehicles as distributions to the brothers individually, and no amounts were recorded as distributions to their personal beneficiary accounts.

The Commissioner issued amended FBT assessments on the basis that the brothers were employees and the vehicles constituted fringe benefits. SEPL objected, and on disallowance, applied to the AAT for review.

The AAT confirms the brothers were owners, not employees

The AAT set aside the Commissioner’s assessments. Applying what it described as a holistic analysis — informed in part by common law employment principles — the Tribunal concluded the brothers were not employees of SEPL for FBT purposes.

The Tribunal emphasised the absence of written employment contracts, formal remuneration, and board resolutions establishing employment. It also noted that the brothers operated at the apex of the business rather than within a conventional hierarchy. These factors pointed away from a contract of service and towards proprietorial control.

On the second issue — whether the vehicles were provided ‘in respect of’ any employment — the Tribunal also found in favour of SEPL. Drawing on the Full Federal Court’s reasoning in J & G Knowles and Associates Pty Ltd v Commissioner of Taxation [2000] FCA 196, the Tribunal held that the test requires a sufficient or material connection between the benefit and the employment, not merely a causal link. It concluded that the brothers accessed the vehicles as beneficiaries and proprietors of the family trust, reflecting their status as ultimate controllers of the business, rather than as remuneration for services rendered.

Federal Court affirms the FBT assessments

The Commissioner appealed, and Justice O’Sullivan allowed the appeal, setting aside the AAT’s decision and affirming the FBT assessments.

On the employment question, the primary judge held that the Tribunal had erred by importing common law concepts of employment into a statutory framework that provided its own complete definitions. The fringe benefits tax assessment act (FBTAA) was to be read on its own terms. The key provision was section 137, which the Court treated as a deeming mechanism: if a non-cash benefit, had it been paid in cash, would have constituted ‘salary or wages’, then the recipient is to be treated as an employee. Applying this test, the Court found the condition satisfied, noting that a cash payment of equivalent value would have engaged the withholding obligations, and therefore held that the brothers were employees.

On the ‘in respect of’ question, the Court rejected the Tribunal’s focus on the brothers’ subjective belief that they were entitled to the vehicles as beneficiaries. The correct inquiry was objective: was there a sufficient or material connection between the benefit and the employment? Given the brothers’ executive roles, their operational immersion in the business, and the absence of any resolution treating the vehicles as trust distributions, the Court found the connection clear. The appeal was allowed, and the assessments were reinstated.

Full Federal Court restores the AAT outcome

SEPL appealed. A Full Court allowed the appeal and restored the AAT’s outcome.

On the first issue, the Full Court identified four errors in the primary judge’s approach.

• First, the primary judge had focused on the definition of ‘employment’ in section 136(1) rather than the operative concept of ‘employee’. The Full Court explained that ‘employment’ is descriptive of what a person has once they are an employee — it does not expand or lead the inquiry into whether a person qualifies as one.

• Second, section 137 was misconstrued. The Full Court emphasised that section 137 is a confined hypothetical exercise, not a free-standing deeming mechanism. Before section 137 can operate to treat a benefit as ‘salary or wages’, the third condition in section 137(1)(c)(i) must be met: the hypothetical cash payment must constitute salary or wages paid to the person, which, via the definition of ‘salary or wages’ and the reference to section 12-35 of Schedule 1 to the TAA, requires that the cash would have been paid to the person ‘as an employee’. This inquiry necessarily invokes the ordinary, common law, meaning of ‘employee’. The Tribunal was therefore correct to consider common law principles in this context.

• Third, the primary judge treated section 137 as automatically converting every non-cash benefit received by a person performing work into salary or wages. That was an error. The provision does not deem an employment relationship into existence, it merely operates on the concept of salary or wages where all three statutory conditions are independently satisfied.

• Fourth, the primary judge had also relied on section 12-40 of Schedule 1 (relating to payments to company directors), even though the Commissioner had expressly disavowed reliance on that provision before the Tribunal and the primary judge, and it was not part of the questions of law that enlivened the Court’s section 44 jurisdiction. That reliance was not permissible.

Applying the proper statutory framework, the Full Court held that it was open to the Tribunal to conclude that any hypothetical cash payment would have been made to the brothers in their capacities as proprietors and beneficiaries, not as employees, and that the condition in section 137(1)(c)(i) was therefore not satisfied. The Tribunal’s conclusion that the brothers were not employees was not only available but also well-supported by the facts.

On the second issue, the Full Court confirmed the Tribunal’s approach. The ‘in respect of’ test requires a sufficient or material connection between the benefit and the employment; causation alone is insufficient. In this case, the brothers’ access to the vehicles was tied to their proprietorial and beneficial capacities: the mechanism of debiting vehicle costs to the matriarch’s beneficiary account and clearing those debits through grossed-up trust distributions was fundamentally inconsistent with a remuneration arrangement. The Full Court rejected the primary judge’s approach of treating operational involvement in the business as determinative without separately considering the materiality of the employment connection against the competing proprietorial explanation.

The Full Court confirmed that a benefit may be causally referable to multiple sources. The presence of an employment relationship does not compel a finding that the benefit is provided ‘in respect of’ that employment if a sufficiently material explanation lies elsewhere, in this case, in the brothers’ ownership and beneficiary status.

Key takeaways

Common law still matters under the FBTAA. To apply section 137, you must ask whether a hypothetical cash payment would have been made to the person as an employee. That question calls for the ordinary common law meaning of the term. The statute does not fully define it away.

Section 137 has a limited and targeted role and is not a mechanism that converts all non-cash benefits into remuneration. Each of the three conditions in section 137(1) must be independently satisfied, including, critically, that the hypothetical cash equivalent would have been paid to the person as an employee rather than as a proprietor or beneficiary.

The ‘in respect of employment’ test requires substantive connection, not mere proximity. Benefits that arise from ownership, family relationship, or beneficial entitlement may properly sit outside the FBT regime, even where the recipient also performs executive functions in the business.

Documentation matters enormously in family business contexts. The absence of resolutions recording vehicle access as a trust distribution — while ultimately supporting SEPL’s case — created the ambiguity that drove three rounds of litigation. Clear and consistent documentation of the basis on which benefits are provided will always reduce exposure.

Where business is conducted through a company rather than a trust, Division 7A may also be relevant. If a private company provides a non-cash benefit to a shareholder-director, it is necessary to consider whether that benefit constitutes a deemed dividend under section 109CA of the ITAA 1936, noting that Division 7A operates to the exclusion of FBT in relation to loans and forgiven amounts (section 109ZB, ITAA 1936).

How SW can help

The SEPL decision provides welcome clarity on the limits of FBT in family trust structures, but it also highlights how finely balanced these issues can be. Outcomes will continue to turn on facts, characterisation, and documentation. Engaging our experts early will help you navigate complex FBT rules with confidence, protect family business arrangements, minimise FBT exposure, and reduce the risk of prolonged disputes.

Please contact your SW advisor for tailored support from our team.

Contributors

Rahul Sanghani

Natalie Wang

The post SEPL case update: Ownership vs employment implications for fringe benefits tax appeared first on SW Accountants & Advisors.

The decision by the full Federal Court makes clear that informal arrangements and internal accounting entries are not enough to support deductions for related-party transactions. This case has particular significance to taxpayers who enter related party transactions with specific relevance to family groups that may currently lack the requisite written documentation. This case also has potential ramifications for corporate groups that are not consolidated for income tax purposes and cross border related party transactions.

The background

Two companies in the S.N.A Group entered into agreements with two asset-owning trusts for the use of rent rolls, trademarks, and associated assets in 2005. The agreements covered the period from 2005 until 2015, at which point they lapsed and were not renewed. Despite this, the operating companies continued to use the assets and continued to make payments after the agreements had lapsed, claiming the payments as deductible service fees.

The primary judge found in favor of the taxpayer, concluding that the taxpayers were subject to a presently existing liability and that the fees were therefore deductible under section 8-1. The primary judge held that, although there was no longer a written contract, the terms could be inferred from the parties’ conduct. The primary judge was particularly sympathetic to the commercial practice of small businesses, where related-party transactions are not always documented.

However, the Full Federal Court held that, there was no objective evidence after 2015 of communications between the parties, their bookkeeper, or their external tax accountant indicating that the companies were subject to a liability for the use of the assets. Nor were any tax invoices issued by the trusts. Furthermore, the method for calculating the payments for the use of the assets, which was based on the unitholders of the trusts receiving a specified percentage return, was inconsistent with the fees ultimately paid.

The making of payments and recording those payments in the books of related parties is not sufficient to infer a request for the provision of services or assets. Taxpayers must be able to objectively support a liability when charging fees for services and the use of assets by related entities. They should ensure that agreements between related parties are properly documented and kept up to date so as to cover the relevant period for which deductions are claimed.

Practical implications

Taxpayers who do not have written agreements, or who are unable to objectively demonstrate the existence of a contract are at risk of having deductions denied for transactions with related entities.

Contemporaneous documentation for related-party transactions should be prepared and regularly reviewed so that it covers the relevant period of any deductions and clearly details the method of calculation. Where documentation is not available, taxpayers should identify and retain other evidence to support the existence of a contract, including emails, minutes, invoices, or workpapers.

How SW can help

The decision in Commissioner of Taxation v S.N.A Group Pty Ltd [2026] FCAFC 10 makes clear that informal arrangements and internal accounting entries are not enough to support deductions for related-party transactions. Groups with inter-entity dealings should take this opportunity to review whether their agreements are properly documented and supported by objective evidence.

SW can assist by reviewing your existing related-party arrangements, assessing the robustness of your charging methodology, identifying gaps in contemporaneous documentation, and helping you update or formalise agreements to ensure they withstand scrutiny. Taking proactive steps now can significantly reduce the risk of deductions being denied in the future.

Contributors

Stephen Peries

Richard Osborn

The post Full Federal Court denies deductions for transactions between related parties appeared first on SW Accountants & Advisors.

The Taxpayer was successful in arguing that the leased electricity infrastructure situated on owned and leased land did not constitute “real property situated in Australia (including a lease of land)” and accordingly the shares disposed were not “taxable Australian property” (TAP). However, the Commissioner has already lodged an appeal of this decision.  

Case background 

YTL Power, a Malaysian based company, and a foreign resident, sold their shares in ElectraNet in February 2022. ElectraNet an Australian resident company, operated South Australia’s electricity transmission network on land that is leased and land that it owned.  

The disposal of shares in ElectraNet triggered a $948 million capital gain which the ATO sought to tax. Under Australian law, foreign residents are only subject to CGT on gains from TAP. In YTL Power’s case, it was agreed that the gain would be taxable only if YTL Power’s ElectraNet shares was an “indirect Australian real property interest” under Item 2 of section 855-15. This essentially required ElectraNet’s underlying assets to be mainly Australian real property under the principal asset test in section 855-30. 

In raising the income tax assessments, the Commissioner considered the leased assets to be “indirect Australian real property interest” and therefore Taxable Australian Real Property (TARP). The Commissioner’s arguments centred on the proposition for Division 855 to be interpreted in the broader context of its predecessor provisions Division 136, to determine what is real property. Further, the Commissioner argued that ‘real property’ in Division 855 takes on its ordinary meaning. 

The Taxpayer argued that the network assets were legally severed from the land and should be classified as personal property, not real property. On this basis, the share should be non-TAP (NTAP) and not subject to income tax in Australia. 

Federal Court decision 

Hespe J agreed with the Taxpayer that the term ‘real property’ in Division 855 aligns with common law. This makes the state legislative severance rules critical in classifying the asset as real property or personal property. Importantly, this case was decided based solely on South Australian legislation. This could mean the same types of assets situated in another state may be real property depending on the state specific legislation. 

In reaching this conclusion, Hespe J noted that the inclusion of ‘a lease of land’ in the definition of TARP indicates that ‘real property’ in this context has its technical legal meaning, which by itself would not cover leasehold interests. It followed that if a right or asset isn’t literally an interest in land (under property law), it shouldn’t be swept in by a broad ‘ordinary’ meaning. 

We expect the Commissioner will appeal the decision given the amount of revenue at stake. 

The broader ATO position on Division 855 

Based on anecdotal evidence, the Australian Taxation Office (ATO) appears to have changed its view on whether infrastructure assets such as solar and wind infrastructure are considered to be real property, having previously regarded such assets as non-TAP. The ATO is also in a dispute with Newmont Canaca FN Holdings ULC regarding whether mining assets are real property. In Newmont, the Court rejected the Commissioner’s broad approach to the meaning of real property in another win for foreign resident taxpayers. 

Changes to Division 855 announced in the 2024-25 Federal Budget were expected to broaden the scope of the provisions. However, in the Commissioner’s view, the proposed amendments to Division 855 merely clarified the scope of assets within the capital gains tax (CGT) net rather than broadened the type of assets that are caught by Division 855. Whilst the decision in YTL Power was influenced by specific South Australian legislation, the case supports the position that non-resident entities disposing of shares in companies owning infrastructure assets might not be subject to capital gains in Australia.  

Importantly, comments made by Hespe J raise serious questions whether even the proposed amendments to Division 855 from the 2024-25 Federal Budget will be effective given the majority of Double Tax Agreements use the term immovable property rather than the extended meaning of real property in Division 855. Whilst the start date for the proposed amendments have already been pushed out, we would expect there to be further delays. 

Practical considerations for taxpayers 

In light of this decision, taxpayers should consider the below practical steps. 

Review asset classifications 

Documentation and valuation 

Be prepared for ATO’s approach 

Stay within anti-avoidance boundaries 

In summary, YTL Power clarifies the boundaries of what is taxable for foreign investors and should prompt a careful look at how your Australian investments are structured and defined in law. The case reinforces that clear, proactive planning, and understanding of legal definitions can prevent unintended tax exposure. 

How SW can help 

SW’s Corporate Tax team is experienced in advising foreign investors, infrastructure operators, and multinational groups on the evolving Australian tax landscape, particularly where complex asset classifications or cross-border issues arise.  

In light of the YTL Power decision and the uncertainty surrounding Division 855 reforms, we can support you by: 

Whether you are planning a transaction, reviewing existing investments, responding to ATO scrutiny, or reassessing your tax governance framework, our team can help you navigate these developments with confidence. 

Reach out to your SW advisor for support from our Corporate Tax team. 

Contributors

Rahul Sanghani

Ned Galloway

The post Watt a relief! Capital gains relief for foreign investors in energy sector appeared first on SW Accountants & Advisors.

The Court found that annual salaries cannot be used to offset overtime and penalties across pay periods, and that employers must meet award obligations in each pay cycle with accurate time records. 

What has happened 

On 5 September 2025, the Federal Court handed down its verdict in Fair Work Ombudsman v Woolworths Group Limited; Fair Work Ombudsman v Coles Supermarkets Australia Pty Ltd; Baker v Woolworths Group Limited; Pabalan v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092. 

The Court examined a range of issues and found both Coles and Woolworths breached workplace laws. The headline issue was clarified regarding the interaction between annual salaries and award entitlements under the Fair Work Act. It was ruled that annual salaries cannot be used to offset overtime, penalty rates, or allowances across multiple pay periods.  

Instead, employers must ensure each pay cycle independently satisfies the minimum conditions set out in the relevant award. This brings the effectiveness of annualised arrangements into question, as remediation payments may be required for any pay period in which award entitlements exceed the annualised salary. 

In addition to the offsetting matter, the Court considered a range of other issues, including: 

1. all-inclusive annual salary arrangements do not remove the requirement to keep records of entitlements. Employers must not only keep time and work records but also interpret and classify the time and work into a record of an employee’s entitlement. A breach of record-keeping requirements may shift the burden of proof to employers 

2. confirmation that leave and rostered public holidays not worked count as hours worked (e.g. for determining overtime based on cumulative time calculations) 

3. confirmation that for agreements to be effective, employees must also understand that they are forgoing rights under the Award 

4. approval of a methodology for calculating underpayments where records were incomplete or missing. 

A further case management hearing is listed for 2 October 2025. It is also possible that Coles and Woolworths may appeal the decision. 

Implications for employers 

If not appealed, this decision may have significant implications for employers that rely on annual salary arrangements to cover employee entitlements arising out of industrial instruments. Retrospectively, this may mean that wage underpayments could arise even where employees are better off on an annual basis. Going forward it may mean that employers need to retain better and more sophisticated records, calculate notional Award or EBA-based salaries for record-keeping purposes, and top up employee salary on a periodic basis if necessary. 

How SW can help 

Given the current uncertainty surrounding the case management hearing and its potential outcomes, we recommend that employers take this opportunity to review and assess any potential gaps or areas of exposure.  

SW can assist by: 

• conducting gap and risk assessments across employment arrangements, payroll systems, timekeeping processes, and record-keeping practices to identify where entitlements may not be met or where obligations are unclear 

• developing simple testing models to help clients estimate underpayment exposure and assess risk – whether using existing data or scenario-based assumptions 

• supporting clients to reconstruct detailed entitlement records using available time and attendance data (e.g. clock-in/out logs) and identify where further tracking or classification may be needed. 

Whether you have robust data or limited records, we can help you understand your exposure and take practical steps to reduce legal and financial risk. 

To find out how SW can tailor a solution to your organisation’s needs and safeguard your compliance, get in touch with our team today. 

Contributor  

Thomas Grimsey-Carr 

The post Federal Court of Australia rules annualised salary arrangements are not effective  appeared first on SW Accountants & Advisors.