Sent v Commissioner of Taxation [2013] HCATrans 108 (10 May 2013)

Last Updated: 17 May 2013

[2013] HCATrans 108

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M8 of 2013

B e t w e e n -

EDUARD SENT

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

KIEFEL J
KEANE J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 10 MAY 2013, AT 2.36 PM

Copyright in the High Court of Australia

MR L.A. WARREN: I appear on behalf of the applicant, Mr Sent. (instructed by Russell Kennedy Solicitors)

MR S.J. SHARPLEY: I appear for the respondent, your Honours. (instructed by Australian Government Solicitor)

KIEFEL J: Yes, Mr Warren.

MR WARREN: Your Honours, this application concerns the approach the Court should take when considering section 6-5(4) of the Income Tax Assessment Act 1997 (Cth). The court in this particular case was faced with two possible constructions of the tax before it. In this particular case, the trustee received the payment, the taxpayer never having received either shares or cash.

The court could have taken the view that the trustee received the payment and the principles in Constable applied, in which case the trust being subject to various contingencies, the taxpayer would not have been liable for any assessment of tax or, as the Full Court did in this particular case, has applied section 6-5(4) to reach the view that the taxpayer, in essence, received the shares and directed those shares to be paid to the trustee, thereby being assessable under the deeming provisions of the Act.

KIEFEL J: The applicant had bonus entitlements, they would have been income, would they not?

MR WARREN: The applicant, being a cash basis taxpayer, if those bonuses had, in fact, been paid to the taxpayer - - -

KIEFEL J: They would have been income.

MR WARREN: - - - they would have been income at that point of time, being derived - - -

KIEFEL J: They were replaced by an entitlement to shares.

MR WARREN: That is how the Full Court considered the situation.

KIEFEL J: What is wrong with that characterisation of what occurred?

MR WARREN: The taxpayer says that characterisation is incorrect because it focuses on what was, in fact, a machinery mechanism put in place to implement the actual agreement between the employer and the employee taxpayer, being that there would be - - -

KIEFEL J: Well, how can it not be a substitution? On day one he has an entitlement to income and on day two he has got an entitlement to shares.

MR WARREN: If the Full Court is correct in viewing that as the correct approach, if you go from point (a) to point (b) as your Honour said, once there is a shareholder approval under the share issue deed, then if you accept that as being a substitution of the original arrangement, then it would follow, as your Honour says in terms of point (c), that would then attract section 6-5(4).

KIEFEL J: I take what you said before that your point is that it cannot be said to have been paid to the taxpayer because it cannot be said that he directed payment, is that the real point?

MR WARREN: No, your Honour, although when one looks at the findings of the Tribunal, the Tribunal never makes a finding about the payment to the trustee was either directed by or on behalf of the taxpayer. It says there was a payment to the trustee in respect of the taxpayer, and we say that is because the Tribunal took the proper characterisation of the arrangements, the taxpayer says, which is that there was a substitution of an employment contract that he had with a new arrangement which involved a payment to the trustee.

The taxpayer says the machinery mechanisms that were put in place to achieve the new arrangement whereby there was a payment to the trustee, should not itself be viewed as a separate part of the transaction which should be itself analysed and attracts section 6-5(4) because there was never the intent of the parties that the taxpayer be issued shares. He was not, in fact, issued shares. The parties did not want him to be issued shares. The parties had always agreed that the payment should go to the trustee which would be issued shares, and the only reason why there was - - -

KIEFEL J: It would go to the trustee at his request?

MR WARREN: The Tribunal did not find that it went to the trustee at his request.

KIEFEL J: Well, what is the only other inference? Who else is directing it to the trustee?

MR WARREN: There is an agreement between the employer and employee to set up an employee share plan, and that then becomes just a new employment arrangement, just like any other employment share plan that is set up for the benefit of employees of an employer. There has to be a trustee of the trust to which the payments are made but that does not mean that the taxpayer has derived that income at the time that there is a payment to the trustee. It just simply means under the Constable analysis there is a provident fund set up for the benefit of the taxpayer and the employer is making payments to the trustee - - -

KIEFEL J: A payment to a trustee under the direction of the taxpayer is equivalent to a payment to the taxpayer, is it not?

MR WARREN: If the taxpayer had derived the income first then that would be yes, and what the taxpayer is saying here is that a business approach should be taken to the question of whether, in fact, he had derived it. He had not derived it at point (a) because he was a cash basis taxpayer and had not been paid the moneys and, in fact, the employer was not in a position to pay him the money; (b) there was an agreement reached that in lieu of his previous employment arrangements there would be a payment to the trustee, just like there could be for any other employee in this country, an employee share plan set up.

We say an agreement to set up an employee share plan does not mean that, in respect of any payments made to the trustee, that the employee has derived that income and has directed it to be paid to the trustee. That would be inconsistent with the approach that this Court has taken in Constable’s Case. That being so, the question one has to ask is what then makes the taxpayer to have derived the income at any point of time. The only thing that can be pointed to is not the overall arrangements about an employee share plan, but the fact that there was this share issue deed.

We say the taxpayer says, well, that share issue deed should not be viewed in isolation, it was just a mechanism to implement the employee share plan, and if the employee share plan itself would not have been subject to taxation, then the mere fact that there was an intermediate step, a mechanism put in place to achieve the payment to the trustee, should not thereby attract the provisions of section 6-5(4) because the principles of Constable apply.

Now, your Honour might say what about the fact that part of the bonuses were partly accrued. That is a slightly different question, but the Full Court never got to that point because they said, we are going to treat it as if it was derived once the shareholders approved the issue of the shares. So the Full Court never really analysed what, if any, portion of the payment should be treated as under the Arthur Murray principles or through some sort of McLaurin apportionment because it did not even get to that point.

All it simply said is no, we are going to view the shareholders’ approval of that share deed as a separate step and therefore whatever happened afterwards simply attracts section 6-5(4). It is not right. The businesslike view of the situation would be to acknowledge that the employee and the employer had substituted one form of remuneration with a new employee share plan - - -

KEANE J: Why would you not say – if you want to look at it in terms of the business, the commonsense of it, the business purpose, why would you not say that it is substituting one form of remuneration for another, because that is what it is in commercial reality, is it not?

MR WARREN: No, because the taxpayer might never – under the arrangements that were struck the taxpayer might never benefit from the moneys that were made to the trustee. It was subject to a 12 month vesting period. If the employee remained as an employee during that period he could benefit from it.

KEANE J: There is that possibility, I suppose, but the fact that it happens at his instigation means that in lieu of him getting remuneration, this other arrangement is made, and looking at that other arrangement in the broad, it is an arrangement that is made at his direction in lieu of remuneration.

MR WARREN: Well, the Tribunal did not find that there was a direction of that sort, your Honour. There was an agreement reached, true, to substitute one form of employment arrangement with another, but that falls short, in the applicant’s submission, of a direction within the meaning of section 6-5(4). Parties can agree all the time to change their employment arrangements.

KEANE J: They can, but what happened here is that this arrangement was set up and the shares vested in the trustee, pursuant to arrangements driven by the taxpayer.

MR WARREN: The proposition your Honour has just said can be tested in this manner. If the taxpayer had not held a 20 per cent interest in the company already and therefore did not require the mechanism of the share issue deed and there had simply been a substitution of arrangement (a) with arrangement (c), the taxpayer says that would not have been taxable at that point of time. There would not have been a question of section 6-5(4) because there would not have been the share issue ..... the shareholders’ approval. There would have simply been a payment to the trustee and then one would have had to examine whether either the trustee was taxable at that point of time – no, because Constable says no, it is a gift – and whether or not then the taxpayer would be taxable because he was a beneficiary of that trust – no, because he did not control the trust and was subject to a 12 month vesting period.

If that is the conclusion one takes if there had been a direct translation between points (a) and (c), one has to ask the question from a

business practical point of view, if all that step (b) did was to implement the new arrangement between (a) and (c) should it change the result and the applicant says no. That is the applicant’s position, your Honours.

KIEFEL J: We need not trouble you, Mr Sharpley.

MR SHARPLEY: If the Court pleases.

KIEFEL J: In this matter, the applicant’s employer company agreed to provide him five million shares in consideration of the applicant waiving his entitlements to substantial bonus payments. The company then paid a sum representing the value of those shares to the trustee of a trust of which the applicant was the sole beneficiary. The primary judge and the Full Court of the Federal Court held the moneys to be income. The judgments apply settled principles and we see no reason to doubt the conclusion reached. Special leave is refused with costs.

AT 2.49 PM THE MATTER WAS CONCLUDED