Blank v Commissioner of Taxation [2016] HCATrans 115 (16 May 2016)

Last Updated: 17 May 2016

[2016] HCATrans 115

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S244 of 2015

B e t w e e n -

VAUGHAN RUDD BLANK

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

FRENCH CJ
KEANE J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON MONDAY, 16 MAY 2016, AT 11.08 AM

Copyright in the High Court of Australia

MR M. RICHMOND, SC: If the Court pleases, I appear with my learned friend, MR T.O. PRINCE, for the applicant. (instructed by Clayton Utz Lawyers)

MR J.O. HMELNITSKY, SC: May it please the Court, your Honours, I appear with MR G.O.J. O’MAHONEY, for the respondent. (instructed by Minter Ellison Lawyers)

FRENCH CJ: Yes, Mr Richmond.

MR RICHMOND: Your Honours, I propose to state the issue raised by this matter in broad terms and then draw out three features which help refine it further. The issue is whether an amount is income according to ordinary concepts where it is received for the disposal of shares and associated rights which were granted to the taxpayer while he was an employee and which conferred an entitlement in the future to a share of the profits of an enterprise specifically linked to his position as a shareholder.

Now, there are three features which help refine the issue, and they are these; first, the shares and associated rights, which we will call PPU, that were granted to the applicant, conferred an entitlement in the future to a share of the profits of the enterprise and that was specifically linked to his position as a shareholder in the holding company through stapling of the shares to the PPU and through the way in which the entitlement was calculated. It was calculated in a way which conferred upon the applicant a proportionate entitlement to profit referable to his proportion of the shares in the holding company of the group.

Second, this bundle of interconnected rights, as Justice Pagone put it, was entirely separate from his salary and his discretionary bonuses. The application undertook no obligation for the grant of these rights beyond the payment of 50 Swiss francs per share, hence we would say the rights are entirely different from salary or similar forms of remuneration. Third, while the rights were subject to a vesting period of two years, this did not apply in the case of permanent disability or death. In that situation, the rights vested upon grant.

Now, the issue of principle which arises, we say, is whether an amount received by an employee or former employee in the capacity other than as employee, such as the holder of shares and associated rights, can be income according to ordinary concepts as income from services. We say that Justice Pagone was plainly correct to conclude that it cannot be.

What this case involves, we submit, is an interplay of two principles; first, that income according to ordinary concepts includes a benefit which is remuneration for services, on the one hand, and second, that it does not include an amount received for the disposal of a capital asset. Now, the relevant statutory provisions are, first, section 6-5 of the 1997 Act which your Honours will find at page 166 of the application book which your Honours will recall brings into assessable income:

income according to ordinary concepts –

Also relevant is section 15-2 of the 1997 Act which is in the same form as former section 26(e) of the 1936 Act and that brings in a statuary income:

the value to the taxpayer –

and we emphasise those words “value to the taxpayer” of benefits provided to the taxpayer directly or indirectly in relation to his employment or services rendered.

Now, in order to determine whether the proceeds of disposal of the rights in this case were ordinary income, one needs to start at the beginning, that is, at the time of the grant of the rights as Justice Pagone did. We say that is necessary, that is, to start at the beginning, because to determine whether an amount is income, one has to have regard to the whole of the circumstances which led to the receipt. That is a clear accepted principle.

FRENCH CJ: There is a constellation of factors which lead to character, once you get away from what one might call the core meaning of income or the core meaning of capital, and I suppose there is a question as to whether issues of principle are truly raised when what you are really dealing with is a debate about characterisation based on a constellation of factors - - -

MR RICHMOND: Yes, indeed, your Honour, it does.

FRENCH CJ: - - - or circumstances, as you might call them.

MR RICHMOND: It does, your Honour. We would say the issue of principle is that in circumstances, particularly here where employees obtain rights in addition to salary, one has to be very careful to identify the character in which - or the capacity in which the benefit is ultimately received.

FRENCH CJ: You say they are rights vested at the time they are received and that the release and so forth, down the track, is simply a realisation of an asset.

MR RICHMOND: Indeed, your Honour, and that, we would submit, is clearly the basis upon which the leading cases of Abbott v Philbin and Donaldson and McArdle were decided - the need to carefully identify the stages at which benefits are obtained and then distinguish between the various benefits and to see in what capacity the recipient has received those benefits, and we would say that the initial grant is a very important step, as Justice Pagone held, because there is then a benefit which is income.

Then one looks at the realisation of the benefit at a later time, and the characterisation of that benefit is informed, firstly, by what was the tax consequences of the grant and, second, by the nature of the gain that was then made and, in particular, the capacity in which it was received and, we would submit, that is a question at principle. It is a principle which one can apply to properly analyse the complicated facts of this and, we would submit, other cases where remuneration is not simply salary.

Now, Justice Pagone concluded that at the time of grant of the items of the bundle, the shares and associated rights, there was a benefit which was ordinary income. The majority appear to have reached a different conclusion at paragraph 89 of the Full Court decision at page 106.

Now, we would submit, his Honour Justice Pagone was clearly correct in his Honour’s conclusion because the shares and associated rights were capable of being turned to pecuniary account in the relevant sense, and the relevant sense is the sense indicated by Lord Reid in Abbott v Philbin which is that the taxpayer could have found someone prepared to pay a significant sum of money for the taxpayer to exercise the right at the time of exercise, and we would say that was the position in Abbott v Philbin, even though the rights there were not assignable. Here, the position is the same and, further, the taxpayer here could have assigned his rights to a personal holding company and thereby turn them to pecuniary account.

KEANE J: What would have happened if your client had been sacked for cause?

MR RICHMOND: In those circumstances, your Honour, he would have been entitled still to exercise the rights, that is to say, he would have been required to dispose of his shares. He would have been entitled to dispose of his shares and to receive the crude entitlement attached to the shares at the time of termination - - -

KEANE J: Dismissal.

MR RICHMOND: Dismissal, your Honour, yes. Importantly, he had the ability to do that, both at dismissal, at voluntary termination, which was the case in this case, or resignation, or retirement, and also earlier, if he so wished. The contract allowed him to come along to Glencore and, if you like, cash in his rights along the way, which it was not something that he did but other employees did do that from time to time.

Now, we would submit, that the majority at paragraph 89 appear to consider that the primary judge decided that the bundle of rights could not be turned to pecuniary account on grant. They rely upon the primary judge for that conclusion but, with respect, there is nothing in the primary judge’s decision which supports such a conclusion. His Honour just simply did not; the primary judge did not deal in his decision with whether the rights could be turned to pecuniary account on grant.

And, furthermore, we would say that whatever the position might be under the ordinary income provision, section 6-5, the rights were certainly assessable under section 26(e) which picks up benefits which have value to the taxpayer and the expert evidence in this case was absolutely clear that these rights had value to the taxpayer and therefore were assessable under section 26(e) at the time of grant.

So, what this throws up, with respect, is that the rights were assessable on grant and now we turn to the position on exercise in 2007, and here, Justice Pagone concluded that the exercise of the rights involved no further derivation of income because it was merely the exploitation of rights held in the capacity as a shareholder.

Now, that we say is an important principle which informs how one analyses these sorts of cases. The exploitation of rights held in the capacity as shareholder, other than as employee, supported by the way his Lordship Lord Radcliffe dealt with the matter in Abbott v Philbin where his Lordship said that the shares there were an advantage which accrued to Mr Abbott, the taxpayer, as the holder of a legal right which he had obtained in an earlier year and which he exercised as option holder against the company.

Now, to understand Justice Pagone approach, one needs to turn to two aspects of the agreement. The first is clause A.5 found at page 22 of the application book - it is at the top of page 22, clause A.5 - and this makes the entitlement to the sum of money that is payable conditional upon the applicant and other employees signing a declaration in the form of annexure C.

The actual declaration which was signed by the applicant is found at page 132 in the decision of Justice Pagone and what this draws out is that it is the execution of a declaration of assignment and general lease instrument which gives rise to the receipt of the amount. It is a condition upon which the amount becomes payable and, we would submit, it is the document which indicates what the payment received by the taxpayer is actually for and we see that in clause B on page 132.

We see the three elements of the consideration given by the applicant as employee, as defined, for the consideration that is payable to him, and we emphasise paragraphs b) and c). Paragraph b) is the Genussscheine he then held and c) is his shares. So, the consideration that he receives is clearly in the governing documentation described and characterised as a payment for the disposal of the various rights that he received at the earlier time.

Now, the proposition that the taxpayer on disposal is merely exercising rights previously granted and deriving something which is not income because it is received in a different capacity than as employee is, we would say, the fundamental premise upon which Donaldson and McArdle’s Cases were decided. They were also cases about options and similar rights. In Donaldson, his Honour Sir Nigel Bowen pointed out that the distinction is between the enjoyment of the rights and the enjoyment of the fruit of the rights. It is the fruit of the rights which are enjoyed at the later time when the rights are exercised.

Now, the error of the majority is found, we would submit, in paragraphs 81 to 84 of the majority’s decision, starting at page 103 and, your Honours, we have dealt with each of those paragraphs in our written submissions. I would just like to emphasise, firstly, that paragraph 81 is giving, we would say, prominence to a recital in a way which is inappropriate. Secondly, paragraph 82 mischaracterises the nature of the bundle of rights. In paragraph 82, the majority treat the PPUs as serving only as a calculation mechanism but, we would submit, as his Honour Justice Pagone found, that this fails to properly identify the nature of the rights which the applicant had, which were essentially rights as shareholder.

The shares to which these PPUs are stapled is really given no emphasis and no regard, we would say, at all in the analysis as to what the amount is being paid for. It is being paid for rights as shareholder which have attached to those rights as shareholder a calculating mechanism designed to recognise the proportionate interest of the shareholder in the profits of the underlying enterprise.

Paragraph 83, we would submit, incorrectly, as Justice Pagone found, ignored the Genussscheine which had already been issued to the applicant. But, finally, it is paragraph 84 which is the crux, we would submit, of the difference between the majority and Justice Pagone’s approach. In paragraph 84 the majority, we would submit, have elided the distinction between the benefit conferred by the grant of rights to receive money or other property in the future and the benefit received when the money or property is ultimately received.

We would submit that the approach taken in paragraph 84 of jumping to the benefit ultimately received and ignoring the benefit on grant is fundamentally inconsistent with the approach taken in Abbott, Donaldson, McArdle and, indeed, this Court’s decision in McNeil’s Case. The point is illustrated by the options involved in Abbott and Donaldson which were options over unissued shares of the employer of the taxpayer. Now, in that situation, the taxpayer will only ever receive property from the employer, the shares that are issued. That did not mean, the courts held in those cases, that the shares on exercise of the option were the only benefit.

There are, of course, two benefits. There is the option itself and the shares acquired on the exercise of the options, and in both those decisions, consistently with Abbott and Philbin, the courts held that the benefit of the options was income according to ordinary concepts and the property arising on exercise was not. That was not a benefit received by the taxpayer in the capacity of an employee but in the capacity of the holder of the rights previously granted. Similarly, in McNeil’s Case, what the taxpayer was granted was a right to receive money in the future. What was held to be income according to ordinary concepts was not the money when received but the right to payment of the money.

FRENCH CJ: I think there was a difference in characterisation between first instance and appeal work.

MR RICHMOND: In McNeil’s Case, your Honour?

FRENCH CJ: Yes.

MR RICHMOND: Yes. Well, your Honour, I am relying very much on what was said in this Court - - -

FRENCH CJ: Yes, of course.

MR RICHMOND: - - - in the decision, not at an earlier stage. Now, your Honours, we would say this difference in approach of the majority and the minority is a difference of principle. The test that is commonly used for determining whether an amount is income from services is to ask whether it is the product of the services. That is the test that is helpful and usually sufficient in the case of ordinary salary and similar forms of remuneration but it falls down, we submit, when you come to more complicated arrangements.

As Professor Parsons pointed out, the notion of a product can be illustrated, it cannot be defined. Further tests are required to give content to the concept of what is a product of an income-earning activity and you see that in Hayes’ Case itself where Justice Fullagar did have regard to the capacity in which the taxpayer there, who had been an employee, received the payment which ultimately his Honour held to be a gift. You also see it in Abbott v Philbin in the analysis of Lord Radcliffe to which I have referred and we submit it underpins the decisions in Donaldson and McArdle. In other words, the statement that something is a product of an income-earning activity is really a conclusion. It does not give you a test to apply and in this fundamental area of income from services we submit that it is important that the Court develops what is the test to be applied.

Now, that brings me to the question of public importance. We would say that the days have long since passed when employees are remunerated by salary only. The affidavit of Mr Cecchini establishes that there are a wide variety of employee incentive plans which involve employees receiving equity linked benefits of various kinds. Increasingly prevalent are plans giving an entitlement to receive a future cash payment equivalent in value to the shares that would otherwise have been issued. Company profit performance is a common measure used for unlisted companies in working out the amount of money to be paid at a subsequent time on the exercise of rights and this is so both for employees at senior management level, such as the applicant in this case, and more broadly for employees at a lower level than senior management.

We would submit, it is important to clarify the principles to be applied in identifying at what stage of the transaction there is a derivation of ordinary income. Second, the decision of the majority in the Full Court creates considerable uncertainty, we would submit, about the correct tax treatment at the time of grant of rights under these plans. The uncertainty is applicable to many different taxpayers, not just senior executives. I will explain how this uncertainty arises.

If no tax is payable on grant of the rights, as is suggested by the way the majority approached the matter at paragraph 89, then this exposes a significant gap, we would submit, or loophole in the system because employees could take performance or equity-linked rights in exchange for lower salary. There would be no upfront taxation on the grant of the rights and on exercise of the rights, a number of different situations could arise, all involving less tax than if the taxpayer receives salary. The first is that if they move their residency, which is a clear prospect with the mobility of labour these days, then there is no derivation at the time of receipt because the taxpayer is not an Australian resident and the source of the income can be readily moved to a foreign jurisdiction.

FRENCH CJ: I think we can understand the examples that might be multiplied.

MR RICHMOND: Yes.

FRENCH CJ: Thank you, Mr Richmond. Yes, Mr Hmelnitsky.

MR HMELNITSKY: Your Honours, the applicant’s first task, if leave is granted, is to persuade the Court that the payments of cash that were received between 2007 and 2010 did not have the character of income according to ordinary concepts because, if one adapts their argument to the language of this Court in connection with ordinary income, that cash represented gains that had already come home to the applicant in earlier years. It is that the benefit of the plan had come home to him in the sense that he had been granted realised or realisable rights at an earlier time.

The taxpayer has thus far failed in that endeavour before the primary judge and in the Full Court not because of any uncertainty as to the law of ordinary income or any other matter concerning the state of the decided cases, but because the contention is just so difficult to reconcile with the agreement itself pursuant to which these payments were made. I will come to the agreement in a moment, but can I first just identify what the reasoning of the Full Court was that the applicant seeks to attack.

The Court has seen that the payments that were made between 2007 and 2010 were described as being deferred compensation for his future service – that is, future at the time when he began to participate in the plan – and for that reason can be seen to be incidental to and a product of his service as an employee.

Now, applying ordinary principles, that will be sufficient in the case of a cash basis taxpayer who is an employee to make those payments ordinary income and, on the question of derivation, that is, when was it that those payments came home to him, when did he derive the benefit of the plan, because he is a cash basis employee, he files his tax returns based on a cash basis not an accruals basis, they are ordinary income at the time they are realised in cash, namely, when they are paid to him. In this case, they were the payments that were received between 2007 and 2010.

In those circumstances, section 26(e) of the 1936 Act that the applicant relies on really has nothing to say about the circumstances because, as Justice Windeyer explained in Scott’s Case and in the passage that is extracted at page 95 of the application book, section 26(e) is concerned with benefits granted, allowed to employees other than money. That is fundamentally the concern of section 26(e), is to ensure that those amounts of income that are in moneys worth, meals, allowances, options and other rights, are included in assessable income. But in the case of a cash basis employee who is rewarded in cash, then 26(e) really has nothing to say about the circumstances.

It is possible to demonstrate the force of the reasoning that was adopted by the primary judge and the Full Court by reference to the agreement itself. It is almost completely set out between pages 18 and 25 of the application book, and there are just three aspects of that that we would invite particular attention to. If your Honours have page 18 of the application book, your Honours see from about line 30 and following the text of the 2005 agreement which the court below found was the agreement that was on foot and gave rise to the entitlement to be paid a share of profit. From line 40 onwards your Honours see two recitals. First, that GI – that is Glencore International:

has adopted a plan of deferred compensation known as the “Incentive Profit Participation Plan –

et cetera, and then next:

WHEREAS, in consideration of the services to be rendered by Employee to the Service Provider . . . AG and GI have agreed that Employee should participate in such plan –

Now, to see what participation in the plan involves and to see what is granted to the employee by reason of his participation in the plan, one sees first on page 19 at about line 35, the definition of incentive profit participation. Your Honours see that incentive profit participation is an amount of cash:

the deferred compensation calculated on the basis of the results of GI granted to Employee hereunder.

That is then taken up over the page on page 20 in clause A.1.1 where one sees what it is that is granted to the employee as a participant in the scheme, and what is granted is:

deferred compensation which will be calculated on the basis of the results of GI (IPP) –

In other words, the deferred compensation is the payment of cash to be calculated on the relevant day, which is when he retires, or his employment is otherwise terminated. So, one sees there the aspect of the agreement that so persuaded the primary judge and the majority in the court below, namely, that the employees relevant right here is not any non-pecuniary right such an option or something else that has come home to him upon entry into this agreement, it is the prospect of being entitled to a cash payment as part of his compensation package later on.

The third point that we would emphasise in relation to the agreement is what follows immediately from that language in A.1.1 and is picked up again in A.1.2, and that is that:

solely for the purpose of . . . calculating the amount of . . . PPU –

GS have been issued – GS stands for Genussscheine – and they are the forms of certificates under Swiss law – and they serve as a basis of calculating the amount of compensation that will be paid on termination. And A.1.2 one sees the important acknowledgment of the parties, including this taxpayer, that the Genussscheine are issued solely for that purpose - they do not give rise to any other right, the common position of the experts before the primary judge was that the issue of Genussscheine gives rise to no enforceable obligation in and of themselves, and one sees in A.1.2, in around the middle of that clause, that:

Employee shall not have nor be deemed to have any interest whatsoever in the GS.

Now, that we say is consistent with the construction of the arrangement that the primary judge and the majority in the court below settled on, which is that it is a promise to pay compensation to a cash basis employee in the future, contingent upon continued service, contingent upon the existence of profits as and when the calculation is to happen.

The contrary argument that the applicant invites this Court into is that the grant of rights under this arrangement in 2005 is akin to and bears some relevant analogy with cases such as Abbott v Philbin, Donaldson, McNeil and so on. So the taxpayer’s argument goes that it may be so that the payments are called deferred compensation, but they were in fact payments received from the realisation of a capital asset.

What was that capital asset? Well, it was a bundle of rights that were granted and had value, realisable value, at the time that they were issued. The difficulties in the way of that, your Honours see from the agreement itself and from the provisions of the agreement that I have taken the Court to, the taxpayer was given no right other than the right to receive cash subject to the contingencies that had to be met and subject to circumstances existing at the time of termination of his contract.

Secondly, your Honours, just dealing with the proposition that what was disposed of in 2007 was a bundle of rights that ought be seen as an asset held on capital account. It is useful, if your Honours would go back to the form of the declaration, my learned friend took the Court to this, it appears on page 132 - this is the declaration of assignment and general release that the taxpayer was required to execute before the payments of deferred compensation would be paid to him.

Your Honours see that it provides for two payments. The first in clause B is for a payment of $US160 million, that is paid by Glencore International who was the counterparty to the participation agreement, that is the profit share. Secondly, and quite separately, there is a payment of an amount of 80,000 Swiss francs which is to be paid by Glencore Holdings, that is the company in which the applicant held shares.

Now, I just invite the Court back to the way that the taxpayer sought to frame the issue at the outset of the applicant’s submissions this morning, which was in these terms, whether the payment of an amount that is for shares and ancillary rights is to be treated as ordinary income et cetera, et cetera.

In other words, the taxpayer seeks to argue that the issue in the proceedings is whether or not the amount of cash that was paid to him is not ordinary income because, on its proper construction, it is an amount that is paid both for shares and also as profit participation, but it is not so, your Honours, the taxpayer received 80,000 Swiss francs in consideration of selling his shares back. He bought them at par. He sold them back at par. That was always the agreement. The only amount in issue and the only amount that has been included in his assessable income by my client is the amount that your Honours see that was paid by Glencore International, his profit share, pursuant to the participation arrangement.

FRENCH CJ: What do you say about the characterisation by the majority in the Full Court at para 83 of the use of the units and so forth as a calculation mechanism?

MR HMELNITSKY: The description of the Genussscheine and the profit participation units as a calculation mechanism is drawn directly from the terms of the agreement. Clause A.1.1 says precisely that, and your Honours see that on page 20. Those certificates, which were never issued physically and gave the taxpayer no rights in any event, were issued solely for the purpose of calculating how much profit share might be payable on termination. So, there cannot - - -

FRENCH CJ: That does not affect their characterisation as rights, does it?

MR HMELNITSKY: There is a question as to whether or not they do give rise to any rights and that - - -

FRENCH CJ: They are not notional, they are real?

MR HMELNITSKY: They are real but they do not, on their own, give rise to any enforceable claim against the company and that was the common position of the experts before the primary judge. In circumstances where they are employed as they are in this plan as a calculation device to determine how much cash compensation may be payable at the end of the day, it is difficult to support the conclusion that is sought to be supported by reference to that clause which is that they somehow give rise to proprietary rights or other rights or vested or accrued rights.

Lastly, on this question of error, we would wish to say something about that line of cases, Abbott v Philbin, Donaldson, McNeil and so on. They are all cases, every one of them in which a taxpayer has received some form of non-cash benefit, a right, such as to call for shares to be issued to him or her or, in the case of McNeil, to require shares to be bought back from her. McNeil, in particular, is not a case where the taxpayer simply had the benefit of a promise to pay cash. What she had, and the Court emphasised this in paragraphs 27 and 51 of the majority’s reasoning, was a vested, accrued, absolute entitlement to put her shares back to the bank. The proposition that that case relevantly stands for, at least so far as this aspect of it is concerned, is that Mrs McNeil’s $514 or whatever it was - - -

FRENCH CJ: It was a sympathetic case.

MR HMELNITSKY: She was, your Honour - it simply stands for the proposition that the benefit of that gain, whether it was paid in cash to her or not, was something that she realised and had come home to her in a realisable form upon the listing of the sell back rights on the stock exchange. So, it is entirely consistent with Abbott v Philbin, Donaldson and so on, it is a case about derivation of income, the realisation of a gain other than a cash gain.

So, in our submission, on proper analysis, one simply does not get to Abbott v Philbin, Donaldson, McNeil or any of those issues in determining whether or not a cash basis employee has derived assessable income when all the employee ever had was the prospect of being paid cash as compensation. In our submission, the case is much simpler than that.

On the question of leave to appeal, in addition to what we have put in writing, we would just make two short points, your Honours. The first is that the affidavit of Mr Cecchini on which the applicant relies can be accepted. There are a great many arrangements out in the marketplace, as it were, in relation to employee retention schemes, but what is conspicuous about Mr Cecchini’s affidavit is that he does not say - and we would suggest he cannot say - that the proposition for which the majority’s reasoning in the Full Court stands for, casts any doubt on any aspect of

those arrangements or on some principle around which those arrangements have been structured.

That brings me to the second and final point I wish to make in relation to the question of leave to appeal which is that it is important for the Court to take account of the consequences of what it is the applicant is arguing and how that may affect the market for these kinds of arrangements. The taxpayer’s case is that a cash basis employee, someone who pays tax on their remuneration as and where it is received in cash ought, at least in some cases, be required to pay tax on that promise at a time before the cash is actually paid. That is convenient to the taxpayer in this case because he was not a resident for most of the time that those promises were made to him but the consequence for cash basis taxpayers generally would be significant, on the applicant’s view.

FRENCH CJ: How does this argument feed into the grant of special leave or refusal?

MR HMELNITSKY: I do not think I can say more about it than that.

FRENCH CJ: I am not sure what you were going to say, actually.

MR HMELNITSKY: Well, it perhaps just goes back to the strength of the taxpayer’s case and perhaps it is something better addressed to the question of error and as to whether or not the Court really would be persuaded of the proposition that is being put. If the Court pleases.

FRENCH CJ: All right, thank you, Mr Hmelnitsky. Yes, Mr Richmond.

MR RICHMOND: Thank you, your Honour. Just on this question of McNeil’s Case, we would submit that at the time that the rights were granted to Mrs McNeil, she had merely a right to receive a sum of money and that was the gravamen of the decision.

FRENCH CJ: I think they were actually thrust upon her.

MR RICHMOND: They may well have been thrust upon her, your Honour, but so far as she was concerned, it was the right to receive a cash payment which she was treated as having derived as income on grant and which she could sell to somebody else in the market. That was what ultimately occurred. She did not dispose of her shares. She sold this right to someone else through the market mechanism.

We wish to draw out, your Honours, that the characterisation that the respondent puts on the payment that was made is incorrect in suggesting that the amounts that were paid can be divided up, if you like, because it is clear, we would submit, from the terms of the declaration at page 24 of the application book, and the actual declaration that was signed, which is at page 132, which differs significantly from the one in the pro forma in the addition of Genussscheine which the applicant held, the 1500 Genussscheine that he held issued by Glencore International, that the two sums of money certainly are paid by separate entities.

They are paid for the disposal of the three elements of the bundle: the contractual entitlement to a payment, the Genussscheine that he already held and the shares that he held. The payments come from different people but what they are paid for is the disposal of the bundle, and that bundle, as we say, is held in the capacity of a shareholder given the nature of the interconnected rights.

The next point I wish to make is that the evidence of Mr Cecchini certainly does not deal with the tax consequences of the various plans. If we sought to adduce evidence from an expert about the tax treatment of employee share plans we would have been criticised. We did not seek to do that. He was not asked a question to that effect. He was asked more generally what is the nature of the plans that are used by employers and, we would submit, it throws up the issues that we are presenting as issues of principle.

Finally – two further points finally - the Genussscheine that the applicant held – the 1500 Genussscheine that he held are not the ones referred to in the clause of the agreement to which my learned friend took you, that is, the calculation mechanism in clause A.1.2. They are the Genussscheine issued by a different entity. The ones that we are focusing on as additional rights as part of the bundle which Justice Pagone placed emphasis upon were the ones that had already been issued to him by Glencore International which conferred rights under the articles of Glencore International directly to the applicant as the holder. Those were the rights which his Honour Justice Pagone noted had not been disposed of, they still remained on foot, and were expressly included in the declaration that he signed to dispose of all his rights. Those were valuable rights arising under the articles of association of Glencore International in addition to his contractual rights under the 2005 agreement.

Finally, your Honours, we would submit that my learned friend, again, made the error when he opened his observations that the majority make at paragraph 84 which is eliding the two benefits. There is a benefit on grant and a benefit on exercise. They are two different benefits to be treated separately for the purposes of determining whether there is an amount of income derived, and if one fails to do that then one has the outcome which, we would submit, involves the risks of double taxation and so on. In particular, double taxation because on his Honour

Justice Pagone’s approach there is a derivation at grant and on the majority’s approach, a derivation on exercise and, hence, the very real prospect of double taxation of a gain which is the same, and so for those reasons – thank you, your Honour.

FRENCH CJ: Thank you.

There will be a grant of special leave in this matter. An estimate of one day?

MR RICHMOND: Yes, your Honour.

MR HMELNITSKY: Argument certainly took more than one day before the primary judge.

FRENCH CJ: Well, we will look at a day and a half. Can I mention there is a standard form timetable which will be provided to you? The Court will now adjourn to reconstitute.

AT 11.52 AM THE MATTER WAS CONCLUDED