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Fowler v Commissioner of Taxation [2012] FCA 1040 (21 September 2012)
Last Updated: 28 September 2012
FEDERAL COURT OF AUSTRALIA
Fowler v Commissioner of Taxation [2012]
FCA 1040
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Citation:
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Parties:
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MICHAEL PATRICK FOWLER v COMMISSIONER OF
TAXATION OF THE COMMONWEALTH OF AUSTRALIA
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File number:
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VID 992 of 2010
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Judge:
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KENNY J
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Date of judgment:
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Catchwords:
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TAXATION — employee share schemes — where director
received options to unissued shares in lieu of cash remuneration — date
on
which director acquired right to shares — where grant of options
conditional on the shareholders’ approval —
where approval was
expected — nature of right acquired — meaning of “right”
in Division 13A of the Income Tax Assessment Act 1936 (Cth) —
right for the purposes of Division 13A acquired only upon the
shareholders’ approval — Income Tax Assessment Act 1936 (Cth)
s 139G.
TAXATION — administrative penalties — failure to take
reasonable care to comply with a taxation law — where no amount returned
in respect of options granted in lieu of cash remuneration — where
taxpayer mistaken as to date right to shares acquired —
where no evidence
of enquiries into tax treatment of options — reasonable care test distinct
from reasonably arguable position
test — administrative penalty justified
— Taxation Administration Act 1953 (Cth) s 284-90.
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Legislation:
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Cases cited:
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7 November and 19 December 2011 |
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Date of last submissions:
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22 December 2011
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Place:
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Melbourne
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Division:
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GENERAL DIVISION
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Category:
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Catchwords
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Number of paragraphs:
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Counsel for the Applicant: |
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Solicitor for the Applicant:
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Hall & Wilcox
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Counsel for the Respondent:
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Ms M Baker
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Solicitor for the Respondent:
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Australian Taxation Office, Legal Services Branch
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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ON APPEAL FROM THE
COMMISSIONER OF TAXATION
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MICHAEL PATRICK
FOWLERApplicant
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AND:
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COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF
AUSTRALIARespondent
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DATE OF ORDER:
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WHERE MADE:
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THE COURT ORDERS THAT:
- The
application be dismissed.
- On
or before 4:30 pm on 28 September 2012, the respondent file a draft form of any
further order.
- On
or before 4:30 pm on 28 September 2012, the parties file any submissions on
costs that they wish to make, having regard to the
reasons for judgment
delivered today.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal
Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 992 of 2010
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ON APPEAL FROM THE COMMISSIONER OF TAXATION
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BETWEEN:
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MICHAEL PATRICK FOWLER
Applicant
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AND:
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COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF
AUSTRALIA
Respondent
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JUDGE:
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KENNY J
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DATE:
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21 SEPTEMBER 2012
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PLACE:
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MELBOURNE
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REASONS FOR JUDGMENT
- This
is a tax appeal brought by Michael Patrick Fowler against a decision of the
Commissioner of Taxation (“the Commissioner”)
to disallow Mr
Fowler’s objection to an amended assessment for the year of income ended
30 June 2007 (“2007 income year”).
The objection was to an amended
assessment of income tax and the imposition of an administrative penalty. For
the following reasons,
I would dismiss Mr Fowler’s tax appeal made by his
application to this court. For the reasons stated, Mr Fowler did not acquire
a
right for the purposes of Division 13A until 30 November 2006. It was open to
the Commissioner to impose an administrative penalty
at the determined rate.
- In
the 2007 income year, Mr Fowler, through Tess Aust Pty Ltd (“Tess
Aust”), acquired 742,500 options (“the options”
or “the
742,500 options”) in Nexus Energy Limited (“Nexus”) in respect
of his services as a non-executive
director of the company. Division 13A of the
Income Tax Assessment Act 1936 (Cth) (“the ITAA 1936”)
concerned with “employee share schemes” was thereby attracted.
- This
tax appeal is primarily concerned with the date on which Mr Fowler acquired a
relevant right with respect to the options for
the purposes of s 139G of
the ITAA 1936. This date determines the amount to be included in Mr
Fowler’s assessable income for
the 2007 income year under s 139B(2)
or s 139D(2) of the ITAA 1936, because the amount to be included in
assessable income is calculated
by reference to market value at the date of
acquisition of the right in accordance with s 139CC(2) of the ITAA 1936.
The Commissioner
considered that the relevant date was 30 November 2006, whereas
Mr Fowler maintained that this date was 14 September 2006 or, alternatively,
29
September 2006.
- When
lodging his return, Mr Fowler did not include any amount in respect of the
options in his assessable income for the 2007 income
year; and he did not make
an election in respect of the options for the purposes of s 139E of the ITAA
1936. On the basis of this
return, the Commissioner issued a notice of
assessment for the 2007 income year in May 2008.
- Following
an audit in 2009, Mr Fowler was issued with a notice of amended assessment,
which included an additional $415,800 in his
assessable income for the 2007
income year and an administrative penalty.
- The
Commissioner determined that the market value of the options as at 30 November
2006 was $0.56 using the methodology for unlisted
rights set out in s 139FC
(see below). On this basis, the Commissioner included $415,800 for the 742,500
options issued by Nexus
to Tess Aust in Mr Fowler’s assessable income for
the 2007 year of income under s 139D(2) of the ITAA 1936. It was not in
dispute that the amount of $415,800 was correctly included in Mr Fowler’s
assessable income for that income year if the date
of acquisition was correctly
regarded as 30 November 2006.
- The
options had less value in September 2006. In a report of 9 May 2011, exhibited
to his affidavit of 7 July 2011, Mr Lom, a forensic
accountant, assessed that,
as at 14 September 2006, the options were worth $31,928, with a value of $0.0430
per option. As at 29
September 2006, the options were worth $75,661, with a
value of $0.1019 per option. Mr Lom’s evidence was unchallenged. The
date of acquisition of relevant rights for the purpose of Division 13A therefore
had significant tax consequences for Mr Fowler.
- Mr
Fowler lodged an objection to the amended assessment of primary tax and the
penalty. The Commissioner later issued a notice of
objection decision
disallowing Mr Fowler’s objection as to both primary tax and penalty.
- This
is a tax appeal under s 14ZZ of the Taxation Administration Act 1953
(Cth) (“the TAA”) against the Commissioner’s objection
decision. In such proceedings, Mr Fowler has the burden
of proving that the
assessment is excessive: s 14ZZO.
- The
applicant relied on his own affidavit sworn on 13 May 2011. He also relied on
the affidavits of: Neil Robertson Philip sworn
on 6 May 2011, Alistair William
Haydock sworn on 6 May 2011, Robert Anthony Boyson sworn on 6 May 2011, Ian
Zacharia Tchacos sworn
on 6 May 2011, Edward Christopher John Munks sworn on 10
May 2010, Paul Lom sworn on 7 July 2011 and Richard Francis Egerton Warburton
sworn on 27 July 2011, with their respective exhibits. Save for Mr Lom, all
were subject to cross-examination.
- The
two main issues before the Court concerned the identification of the date on
which Mr Fowler acquired relevant rights for the
purposes of Division 13A (which
has since been repealed) and, assuming that 30 November 2006 was the correct
date, the rate of the
administrative penalty imposed on Mr
Fowler.
THE FACTS GIVING RISE TO THE APPEALS
- Nexus
– previously called eNTITy1 Limited – was a public company under
s 9 of the Corporations Act 2001 (Cth) (“Corporations
Act”) and was first listed for quotation on the Australian Securities
Exchange (“ASX”) on 8 September 2000. When still
known as eNTITy1
Limited, the company adopted a constitution (“the
constitution”).
- Mr
Fowler was appointed a non-executive director of Nexus on 11 April 2000 and
continued as such until 16 November 2007, when he
was appointed the
non-executive chairman of the board. Shortly after Mr Fowler’s
appointment to the board in April 2000, Nexus
commenced to conduct the business
of oil and gas exploration and production. It was conducting that business in
2006 when the issue
of directors’ options first arose, although at that
time the company had not yet engaged in the commercial production of oil
and
gas.
- At
all material times, Tess Aust, an incorporated company and a resident of
Australia for the purposes of the ITAA 1936, was the
trustee of the Fowler
Family Trust. The Fowler Family Trust was a trust established by deed and a tax
resident of Australia for
the purposes of the ITAA 1936. At all material times,
Mr Fowler was an associate of Tess Aust within the meaning of s 139GE of
the
ITAA 1936.
- Nexus
instituted an employee share option plan in November 2003. At an annual general
meeting on 27 November 2003, the shareholders
of Nexus passed an ordinary
resolution to approve the issue of options under the Nexus Energy Employee Share
Option Plan (“ESOP”).
The ESOP was governed by the ESOP Rules
(“the Rules”). The resolution was in the following
terms:
That for the purpose of Exception 9(b) in ASX Listing Rule 7.2 and for all other
purposes, the shareholders of Nexus approve the
issue of Options under the
Employee Share Option Plan as detailed in the Explanatory Memorandum which
accompanies and forms part
of the Notice.
- About
three years later, the issue of the grant of directors’ options in lieu of
cash fees arose. There was a board meeting
on 26 July 2006, the minutes of
which recorded that, at that meeting, the board passed a resolution in the
following terms:
Accordingly, IT WAS RESOLVED to increase base director’s
fees to $60,000 per annum and the chairman’s fees to $120,000 per annum
effective immediately.
It was also resolved that directors would be entitled to take part or all of
their remuneration in the form of options priced on
the same basis as under the
ESOP scheme and subject to any shareholder and other approvals required.
Directors were to notify the
chairman of their preferred mix of
remuneration.
- The
company’s managing director, Mr Tchacos, subsequently prepared a paper,
which was entitled “2006 Employee Share Scheme
and Board Options
Recommendation” and dated 9 September 2006. The paper recommended the
issue of options to employees under
the ESOP and the issue of options to members
of the board in lieu of cash remuneration.
- There
was a further board meeting on 14 September 2006. According to the minutes of
this meeting, when the board met that day, the
directors resolved
that:
[T]he minutes of the meeting held on 26 July 2006, were accepted and the
Chairman be authorised to sign as a correct record.
- Further,
the minutes recorded that:
The chairman presented a recommendation from the remuneration committee based
upon a recommendation to the board from IZT [Mr Tchacos]
dated
9th September in which the company’s employees
and directors remuneration and incentives were outlined. Following discussion
on
the remuneration philosophy for the company the following board resolutions
were agreed to:
...
IT WAS RESOLVED that the following options be issued to the
directors of the company [on] the same terms and conditions as the
company’s employees
share option plan and that shareholder approval be
obtained prior to being issued.
Directors name Number of options Exercise Price Expiry date
Neil Philip 742,500 87 cents 31 October 2007
Robert Boyson 742,500 87 cents 31 October 2007
Michael Fowler 742,500 87 cents 31 October 2007
Alastair Haydock 742,500 87 cents 31 October 2007
Total 2,970,000
- Also
amongst the minuted board resolutions for 14 September 2006 were resolutions
approving the issue of options to employees.
- Subsequently,
by a letter dated 26 September 2006 from Mr Tchacos, pursuant to the Rules the
Nexus directors invited employees to
participate in the ESOP and offered to
grant options on the terms indicated in the letter. The letter stated that the
offer closed
at 5 pm on 29 September 2006 and could be accepted before that time
by returning the acceptance form enclosed with the letter.
- The
Rules relevantly provided that:
(a) “[a] Participant in the
ESOP may only accept an Offer by delivering the duly completed Application Form
to the Company at
its registered office by 5:00 pm on the Acceptance Date”
(clause 4.5);
(b) “[a] Participant may accept an Offer in his or her name, or in that
of a nominated Associate” (clause 4.7); and
(c) “Following receipt by the Company of the completed Application Form
the Company shall grant the Options and issue an Option
certificate for such
Options” (clause 4.8).
- It
was common ground that Mr Fowler did not receive a letter in like terms to the
26 September 2006 letter sent to employees and
did not provide Nexus with an
acceptance form as referred to in clause 4.5 of the Rules to accept the offer of
the options.
- Nexus
announced to the ASX on 29 September 2006 that the company had issued 6,624,300
options at an exercise price of 87 cents per
share to eligible Nexus employees
pursuant to the ESOP. The announcement also
foreshadowed:
In addition and subject to shareholder approval at the next Annual General
Meeting, a further 4,770,000 million [sic] options are
intended to be issued to
the Managing Director and the non-executive directors. These options will also
have an exercise price of
87 cents per share and will also expire on the [sic]
31 October 2007.
- At
a board meeting on 29 November 2006, the board approved the minutes of the 14
September 2006 meeting subject to minor and non-material
amendments.
- The
Notice of Annual General Meeting (“the Notice”) that was given to
Nexus shareholders for the purpose of the annual
general meeting to be held on
30 November 2006 included the following item:
9. Approval for Issue of Options to Michael Fowler
To consider and, if thought fit, to pass with or without amendment, the
following resolution as an ordinary
resolution:
“That for the purposes of Listing Rules 7.1 and 10.11 and Chapter 2E of
the Corporations Act and for all other purposes, approval is given for the
Company to allot and issue 742,500 Options exercisable at $0.87 each on or
before 31 October 2007 to acquire ordinary fully paid Shares in the capital of
the Company to Michael Fowler on the terms and conditions
set out in the
Explanatory Statement accompanying this notice with a vesting date of 30
November 2006, subject to resolution 9 being
passed.”
- Item
8 of the Explanatory Memorandum accompanying the Notice stated
that:
Resolution 8 [sic] seeks Shareholder approval for the Company to grant 742,500
Options to Michael Fowler a Director of the
Company.
Shareholder approval for the grant of the Options the subject of Resolution 8 is
sought for the purposes of:
- Division 3 of
Part 2E.1 of the Corporations Act – which governs the giving of financial
benefits to “related parties”, e.g. directors of a company;
- Listing Rule 7.1
– which generally prohibits a company from issuing more than 15% of its
capital within a 12 month period without
shareholder approval; and
- Listing Rule
10.11 – which requires the grant of securities to a director of a company
be approved by shareholders.
As part of the annual performance remuneration review of all employees and
directors for the year ending 30 June 2006, the Directors
recommended the grant
of 742,500 Options to Michael Fowler. The exercise price of the Options is 87
cents and will expire on 31
October 2007.
The policy for pricing these[] Options was set by the board in May 2005 and is
determined by taking a minimum 40% premium to the
Volume Weighted Average Price
(VWAP) of the Nexus Shares traded on the Australian Stock Exchange in June and
July 2006. The price
and terms of the Options are the same as those granted to
other employees for the same review period. The pricing of the options
was then
ratified at a board meeting held on 14 September
2006.
The purpose of the proposed grant of Options is to honour remuneration
agreements and to provide Michael Fowler with added incentive
in lieu of salary
whilst enabling the Company to preserve its cash reserves for expenditure on its
existing business. The number of Options proposed to be granted to Michael
Fowler has been determined on the basis that it is reasonable relative
to the
number of Options offered under the Company’s Share Option Plan to other
employees of the Company, having regard to
their respective levels of seniority
in the Company. The Options are being granted for no consideration.
Consequently no funds
will be raised as a result of the grant of the Options. A
total of $645,975 in additional Share capital would be raised if the Options
were exercised in full.
Subject to Shareholder approval, the Options will be granted on the terms and
conditions set out below in this Explanatory
Statement.
...
The proposed grant of Options to Michael Fowler involves the provision of a
financial benefit to a related party of the Company and,
therefore, requires
prior Shareholder approval.
... (Emphasis added)
- The
shareholders passed the resolution set out in item 9 of the Notice at the annual
general meeting on 30 November 2006.
- On
8 December 2006, in accordance with rule 3.19A of the ASX Listing Rules, Nexus
submitted an Appendix 3Y form, “Change of
Director’s Interest
Notice”, to the ASX advising that Mr Fowler’s indirect interest in
Nexus had changed on 30
November 2006 in that Mr Fowler had acquired a further
742,500 options, with an exercise price of $0.87 and an expiry date of 31
October 2007, through Tess Aust.
- In
its annual report for the year ended 30 June 2007, Nexus stated that it had
granted the 742,500 options to Mr Fowler on 30 November
2006; and that the
742,500 options had vested, with a “fair value per option at grant
date” of $0.5552.
- Mr
Fowler could not recall when he nominated Tess Aust to acquire the options on
his behalf, but in his affidavit he stated that
he thought that it was around
the time of the board meeting in September 2006. In cross-examination, however,
he stated that he
thought he made this nomination around December 2006 before
Christmas.
RELEVANT LEGISLATION
- Broadly
speaking, under Division 13A of the ITAA 1936, where there was a discount on a
share or right acquired in relation to the
employment of a taxpayer or services
provided by the taxpayer, then s 139B operated to include the discount in
the taxpayer’s
assessable income. Alternatively, where a taxpayer
acquired the share or right in relation to the employment of an associate of
the
taxpayer, or services provided by that associate, then s 139D operated to
include the discount in the associate’s assessable
income. Save for some
presently irrelevant exceptions, the discount was included in the year of income
in which the share or right
was acquired: see ss 139B(2) and 139D(2).
Under s 139CC, the discount was the market value of the share or right at
the time when
it was acquired by the taxpayer less any consideration paid or
given by the taxpayer as consideration for the acquisition of the
share or
right.
- Again,
broadly speaking, a taxpayer acquired a right under an employee share scheme for
the purposes of Division 13A where the right
was: (1) a right for the
purposes of Division 13A; (2) acquired within the meaning of s 139G;
(3) acquired in respect of employment
or services provided by the taxpayer for
the purposes of s 139C; and (4) acquired for less than market value as
set out in s 139C(3).
- Section
139B provided:
(1) If a taxpayer has acquired a share or right under an employee share scheme,
the assessable income of the taxpayer includes the
discount given in relation to
the share or right.
Note: Employee share scheme is defined in section
139C.
...
When the discount is to be included
(2) Unless subsection (2A) or (3) applies, the discount is included in the
taxpayer’s assessable income of the year of income
in which the share or
right is acquired.
...
(3) If the share or right is a qualifying share or right and the taxpayer has
not made an election under section 139E covering the
share or right, the
discount is included in the taxpayer’s assessable income of the year of
income in which the cessation time
(see sections 139CA and 139CB)
occurs.
- Section
139CC(2) provided:
If subsection 139B(2) ... applies to the discount, the discount is the market
value of the share or right at the time when it was
acquired by the taxpayer
less any consideration paid or given by the taxpayer as consideration for the
acquisition of the share or
right.
- Section
139C defined “employee share
scheme”:
139C(1) A taxpayer acquires a share or right under an employee share
scheme if the share or right is acquired by the taxpayer in respect of, or
for or in relation directly or indirectly to, any employment
of the taxpayer or
an associate of the taxpayer.
(2) A taxpayer acquires a share or right under an employee share scheme if the
share or right is acquired by the taxpayer in respect
of, or for or in relation
directly or indirectly to, any services provided by the taxpayer or an associate
of the taxpayer.
(3) The taxpayer does not acquire a share or right under an employee share
scheme if the consideration for the acquisition is equal
to, or more than, the
market value of the share or right at the time that it is
acquired.
(4) The taxpayer does not (except for the purposes of Subdivision DA) acquire a
share under an employee share scheme if the taxpayer
acquires the share as the
result of exercising a right that the taxpayer acquired under an employee share
scheme.
(5) The taxpayer does not acquire a share or right under an employee share
scheme if the taxpayer is the trustee of a trust whose
sole activities are
obtaining shares, or rights to acquire shares, and providing those shares or
rights to employees of a company
or to associates of those
employees.
- It
was common ground that the rights with which this appeal was concerned were
acquired under an employee share scheme within the
meaning of s 139C and
that neither Mr Fowler nor Tess Aust gave any consideration for the
purposes of s 139CC(2) (or, presumably,
s 139C(3)). Mr Fowler did not
contend that his agreement to forego remuneration gave rise to consideration for
the purposes of s
139CC. Thus, the discount was equal to the market value
of the right at the time it was acquired.
- Section
139CD defined “qualifying shares” and “qualifying
rights”:
(1) For the purposes of this
Division:
(a) a share in a company is a qualifying share
if:
(i) the 6 conditions below are satisfied; and
(ii) in the case of a share that a taxpayer has acquired while engaged in
foreign service—section 139CDA applies to the share;
and
(b) a right to acquire a share in a company is a qualifying right
if:
(i) the first, second, third, fifth and sixth of the 6 conditions below are
satisfied; and
(ii) in the case of a right that a taxpayer has acquired while engaged in
foreign service—section 139CDA applies to that
right.
Note: Section 139DF excludes certain shares from being qualifying shares.
Note: Foreign service is defined in section
139GBA.
(2) The first condition is that the share or right is acquired by a taxpayer
under an employee share scheme.
(3) The second condition is that the company is the employer of the taxpayer or
a holding company of the employer of the taxpayer.
(4) The third condition is that all the shares available for acquisition under
the scheme are ordinary shares and all the rights
available for acquisition
under the scheme are rights to acquire ordinary
shares.
(5) The fourth condition is that, at the time the share was acquired, at least
75% of the permanent employees of the employer were,
or at some earlier time had
been, entitled to
acquire:
(a) shares or rights under the scheme; or
(b) shares or rights in the employer, or a holding company of the employer,
under another employee share scheme.
(6) The fifth condition is that, immediately after the acquisition of the share
or right, the taxpayer does not hold a legal or beneficial
interest in more than
5% of the shares in the company.
(7) The sixth condition is that, immediately after the acquisition of the share
or right, the taxpayer is not in a position to cast,
or control the casting of,
more than 5% of the maximum number of votes that might be cast at a general
meeting of the company.
(8) The Commissioner may determine that the fourth condition (see subsection
(5)) is taken to have been satisfied in relation to
a share if the Commissioner
considers that the employer has done everything reasonably practicable to ensure
that the condition was
satisfied.
- Section
139DD provided:
(1) For the purposes of this Division, a right to acquire a share in a company
is never acquired by a taxpayer if the following 2
requirements are
satisfied.
(2) The first requirement is that the taxpayer loses the right without having
exercised it.
...
(3) The second requirement is that the company was, at the time the right was
acquired, the employer of the taxpayer or a holding
company of the employer of
the taxpayer.
...
(4) Section 170 does not prevent the amendment of an assessment at any time
for the purpose of giving effect to this section.
- Division
13A made specific provision for calculating market value. In the case of
unlisted rights, s 139FC provided:
(1) If the right is not quoted on an approved stock exchange on that day, the
market value is the greater
of:
(a) the market value, on the particular day, of the share that may be acquired
by exercising the right, less the lowest amount that
must be paid to exercise
the right to acquire the share; and
whichever of the following applies:
(b) if the right can not be exercised more than 10 years after the day when the
right was acquired—subject to section 139FE,
the value determined in
accordance with regulations for the purpose of this paragraph or, if no such
regulations are in force, the
value determined in accordance with
sections 139FJ to 139FN;
(c) if the right can be exercised more than 10 years after the day when the
right was acquired—the greater
of:
(i) the arm’s length value of the right as specified in a written report,
in a form approved by the Commissioner, given to
the person from whom the
taxpayer acquires the right by a suitably qualified valuer; and
(ii) the value that would have been determined under paragraph (b) if the
right could be exercised 10 years after the particular
day.
(2) In calculating, for the purpose of subsection (1), the market value of
the share that may be acquired by exercising the right,
subsection 139FAA(1)
applies as if the share were acquired on the particular
day.
- Section
139FF provided that:
To avoid doubt, if a person acquires either the beneficial interest or the legal
interest in a share or right, the value that is
applicable for the purposes of
this Division is the value of the share or right, not the value of the interest
in the share or right.
Notes: 1. It is the value of the share or right that is relevant because
the taxpayer is taken to have acquired the share or
right—see section
139G.
2. Double taxation is avoided by section 139DA.
- As
already noted, s 139G set out the events that give rise to an acquisition
or provision of a share or right for the purposes of
Division 13A. Section 139G
stated:
139G A person acquires a share or right
if:
(a) another person transfers the share or right to that person (other than, in
the case of a share, by issuing the share to that
person); or
(b) in the case of a share—another person allots the share to that person;
or
(c) in the case of a right—another person creates the right in that
person; or
(d) the person otherwise acquires a legal interest in the share or right from
another person; or
(e) the person acquires a beneficial interest in the share or right from another
person.
In those circumstances, the
other person provides the share or right.
Nothing in this
appeal was said to turn on whether Nexus issued the options directly to Tess
Aust or to Mr Fowler, who then assigned
them to Tess Aust.
THE PARTIES’ SUBMISSIONS
- In
written submissions filed before the hearing, the applicant formulated the issue
for resolution as “whether the Options
were created pursuant to a contract
made on or about 14 September 2006 or, alternatively, on or about 29 September
2006 satisfying
the terms of ss 139G(c), (d) or (e)”. In these
submissions, Mr Fowler’s primary argument was that the options were
acquired
pursuant to s 139G(d) and (e) when he entered into a contract
with Nexus to acquire them on 14 September 2006. In the alternative,
Mr Fowler
submitted that the options were created for the purposes of s 139G(c)
on 14 September 2006. On either case, the discount
determined under
s 139CC(2) was nil. Mr Fowler also advanced these arguments at the
hearing.
- In
written submissions, Mr Fowler advanced a secondary argument that the options
were acquired under s 139G(c), (d) and/or (e) when
he entered into a
contract with Nexus to acquire them on 29 September 2006 in accordance with the
offer made to eligible employees
of Nexus. In this event, the discount
determined under s 139CC(2) was $26,485.
- In
his written submissions, the applicant argued that a contract was formed in
relation to the options “without the need for
shareholder approval or
ratification”. The applicant submitted that: (1) “[t]he evidence of
those making and accepting
offers is that there was no such condition and the
relevant minutes are contradictory”; and (2) “such a contract was
not void on account of potential or actual breaches of general corporate law
rules”. Alternatively, the applicant argued that,
if there was any
condition requiring shareholder consent for the grant of the options to him, it
was a condition precedent to performance
of the company’s obligations
under a contract in existence from the date of the communication of acceptance
of the offer.
On this basis, the applicant submitted that “from either 14
or 29 September 2006 a contract subsisted entitling [him] or his
nominee to the
Options”. According to the applicant, ss 139G(c), (d) and/or (e)
were satisfied at this point.
- In
relation to penalty, Mr Fowler’s case was that:
(1) since
there was no shortfall amount under s 284-80 of Schedule 1 of the TAA,
there could be no penalty under s 284-75 of Schedule
1 of the TAA; or
(2) if there was a shortfall amount, nonetheless his position was reasonably
arguable, as defined in 284-15 of Schedule 1 of the
TAA, thereby
demonstrating that he took reasonable care in submitting his tax return for the
2007 income year; and it was appropriate
to remit all penalties.
- In
written submissions, the Commissioner formulated the issue as one concerning
“the date on which the applicant or the applicant’s
associate
acquired, in respect of [the] options, either a right to shares or a beneficial
interest in a right to shares for the purposes
of Division 13A ... having regard
to the definition of ‘acquires’ in section 139G of that Act”.
The Commissioner
contended that the options were acquired on 30 November 2006,
when the Nexus shareholders approved the grant of the options in an
annual
general meeting and the options were formally granted to Mr Fowler. The
Commissioner maintained that no right or beneficial
interest to which Division
13A applied was acquired before that date.
- The
Commissioner maintained that the offer made by Nexus to Mr Fowler in respect of
the options was conditional on obtaining the
shareholders’ approval, with
the effect that, as the Commissioner put it in written submissions:
- the
condition operated as a condition precedent to formation, such that there was no
contract in existence before 30 November 2006
and the offer could be withdrawn
at any time until shareholder approval was given;
- alternatively,
the condition operated as a condition precedent to performance (a condition
subsequent), such that the applicant had
no proprietary right or beneficial
interest in the options that was capable of being protected or enforced in law
or equity until
the condition was satisfied;
- further
and alternatively, any contractual right that existed before the condition was
satisfied was not capable of being a ‘right
to shares’ to which
Division 13A of the 1936 Act applied.
- The
Commissioner sought to support the submission that there was no legally
enforceable contract before 30 November 2006 by reference
to three propositions,
namely: (1) the board had no power to grant the options; (2) the express
prohibitions on the power of the
board to grant the options without shareholder
approval indicated that the board did not intend to create legal relations but
intended
the words “subject to shareholder approval” to operate as a
condition precedent to the formation of a contract; and (3)
the evidence is
unclear as to “if and when [Mr Fowler] accepted the purported offer made
by Nexus”.
- As
to penalty, the Commissioner’s fundamental propositions were that: (1) Mr
Fowler had a shortfall amount within the meaning
of s 284-80 of Schedule 1
to the TAA as a result of a false and misleading statement in his return for the
2007 income year; (2)
having regard to Mr Fowler’s position as a company
director and the size and nature of the options transaction, it would have
been
reasonable to expect him to have made enquiries about the tax treatment of
options; and (3) since Mr Fowler made no enquiries
and failed to keep records of
important matters connected with the transaction, a penalty for failure to take
reasonable care was
justified. On this basis, Mr Fowler was liable to pay an
amount of administrative penalty of $48,336.75 for the 2007 income year
pursuant
to s 284-75 of Schedule 1 to the TAA.
CONSIDERATION
Primary tax
Division 13A rights
- Division
13A of the ITAA 1936 is concerned with the acquisition of a share or a right
under an employee share scheme, as defined
in s 139C set out above. There is no
statutory definition of the “right” with which the Division is
concerned. The
nature of this right must be discerned from the text of Division
13A: see Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue
(NT)
[2009] HCA 41 
; (2009) 239 CLR 27 at 46-47 [47] . The legislative history of Division
13A is also indicative.
- The
text of Division 13A indicates that the “right” to which its
provisions refer is a “right to acquire a share
in a company”.
Thus, it is only possible for a taxpayer to make an election under s 193E
if the rights acquired by the taxpayer
satisfy the necessary conditions for
“qualifying rights”. Section 139CD(1)(b) indicates that, for there
to be a qualifying
right, there must first be a right to acquire a share in a
company as well as the satisfaction of the relevant specified conditions
in that
section. Various other provisions of Division 13A support this construction of
the intended meaning of the word “right”
in the Division: see, for
example, ss 139DD, 139FC(1), 139F, 139FE, 139FF, 139G. Further, the
predecessor provision to Division
13A, s 26AAC of the ITAA 1936,
specifically referred to a “right to acquire a share in a company”.
- An
immediate and unconditional option to acquire shares constitutes a right to
acquire shares for the purposes of Division 13A.
In this circumstance, in the
ordinary case, when an option over unissued shares is granted, s 139G(c) will be
satisfied. This conclusion
follows from the nature of an option of this kind
and is in accordance with authority: see Commissioner of Taxation v
McWilliam [2012] FCAFC 105 (“McWilliam”).
Options conditional on third party approval
- An
option over unissued shares is a contract made by a company that, if certain
conditions are met, it will issue or allot the shares,
if and when the
option-holder exercises the option. The option-holder is free to decide whether
to require the issue or allotment
at a future time. See, for example, Green
v Crusader Oil NL (1985) 10 ACLR 120 (“Green v Crusader
Oil”) at 124; Laybutt v Amoco Australia Pty Ltd [1974] HCA 49; (1974) 132 CLR
57 (“Laybutt”) at 76; and Hilder v Dexter [1902] AC
474 at 482-483. If the option-holder decides to exercise the option, then the
option-holder is contractually obliged to pay for the
shares at the exercise
price. The essential terms of an option include: (1) the exercise price; (2)
the identification of the subject
matter of the option; and (3) the exercise
period. It is only when the option-holder is in fact able to exercise the
contractual
right inherent in an option to acquire the shares that the
option-holder can be said to have acquired the option. This cannot occur
until
the option is granted or “vested”.
- When
an option is granted, property is created by the grant in the form of a chose in
action, namely, the right of the option-holder
to exercise the option: see, for
example, Green v Crusader Oil at 125; Kingston v Keprose Pty Ltd
(1987) 11 NSWLR 404 at 412 (Hope JA with whom Priestly JA agreed). From grant
until the option is exercised, the option-holder acquires an equitable
interest
in the property the subject of the option, measured by the relief equity will
accord to prevent the company acting inconsistently
with the grant: see
Commissioner of Taxes (Qld) v Camphin [1937] HCA 30; (1937) 57 CLR 127 at 132-134;
O’Neill v O’Connell [1946] HCA 59; (1946) 72 CLR 101 at 129; and Adamson
v Hayes [1973] HCA 6; (1973) 130 CLR 276 at 303. Thus, the holder of an option to
purchase land has, prior to its exercise, a sufficient equitable interest to
support a
caveat: see, for example, Laybutt at 75; Re
Henderson’s Caveat [1998] 1 Qd R 632; and Forder v Cemcorp Pty
Ltd [2001] NSWSC 281; (2001) 51 NSWLR 486. Until the company grants the option, however, a
person cannot “acquir[e] a title to the option” in the sense of
“becoming
registered as the option holder[] in the company’s
book”: see Green v Crusader Oil at 125.
- In
keeping with the nature of options outlined above, ss 168 and 170 of the
Corporations Act require companies to keep a register of holders of options to
take up unissued shares, which states, amongst other things, the date
of grant
of the options, as well as the date on which the option-holder’s name was
entered in the register. Part 6D.2 of the Corporations Act and, in the case of
a listed company, the ASX Listing Rules, stipulate disclosure requirements
regarding the grant of options. Furthermore,
s 300(1)(d) of the
Corporations Act requires the annual directors’ report to disclose details
about options over unissued shares, including options granted over
unissued
shares during or since the end of the year to any of the directors or any of the
company’s five most highly remunerated
officers as part of their
remuneration.
- The
position is different where the grant of an option is subject to the consent or
approval of a third party. In this case, there
is a question as to whether the
contractual right is a right for the purposes of Division 13A.
- A
contractual promise to grant an option subject to a condition to secure the
approval of a third party requires the putative grantor
to do all such things
– in the language of some authorities – “as might be
necessary” to obtain the approval
of a third party; alternatively –
in the language of other authorities – “as is reasonable” to
secure such
approval. For “necessary”, see McWilliam v
McWilliam’s Wines Pty Ltd [1964] HCA 6; (1964) 114 CLR 656
(“McWilliam’s Wines”) at 661 and Brown v Heffer
[1967] HCA 40; (1967) 116 CLR 344 (“Brown v Heffer”) at 350. For
“reasonable”, see Perri v Coolangatta Investments Pty Ltd
[1982] HCA 29; (1982) 149 CLR 537 (“Perri v Coolangatta”) at 541, 553, 557,
566; Butts v O’Dwyer [1952] HCA 74; (1952) 87 CLR 267 at 279-280; and Kennedy v
Vercoe (1960) [1960] HCA 64; 105 CLR 521 at 526, 529.
- In
such a case, where the grant of an option is subject to the approval of a third
party, the option-holder has an equitable right
or rights arising from the grant
of the option, as measured by the relief that equity would accord in the
appropriate circumstances.
The nature of the equitable right and the quality of
any equitable interest that may accompany it depends on the nature of the
available
equitable relief: see Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 at
446, cited in KLDE Pty Ltd v Commissioner of Stamp Duties (Qld) [1984] HCA 63; (1984)
155 CLR 288 (“KLDE”) at 297. In conformity with this, the
majority in KLDE at 297 (Gibbs CJ, Mason, Wilson and Dawson JJ) went on
to say that a purchaser under a contract for the sale of land which is
specifically
enforceable has a beneficial interest in the land though
conditional on the purchaser paying the price. Similarly, in the particular
circumstances in Baden Pacific Ltd v Portreeve Pty Ltd (1988) 14 ACLR
677, it was held (at 681) that a purchaser under an executed agreement for the
purchase of shares acquired an equitable interest in the
shares though the sale
was subject to approval in general meeting. As Gzell J noted, however, in
Affinity Health Ltd v Chief Commissioner of State Revenue (NSW)
[2005] NSWSC 663; (2005) 60 ATR 1 at 5; [2005] NSWSC 663 at
[26]:
The authorities ... which speak in terms of an equitable interest arising upon
execution of a conditional contract for sale are based
upon the premise that
equity intervenes because it would be unconscionable to allow the other party to
act inconsistently with its
obligations under the contract for sale. Equity
acts in personam against the vendor to prevent unconscionable conduct. It goes
no
further.
- In
the context of a grant of options conditional on third party approval,
injunctive relief would likely be available in appropriate
circumstances to
compel the grantor to fulfil its implied promise to take all reasonable steps to
secure the third party’s
approval: see Hill End Gold Ltd v First
Tiffany Resource Corporation [2010] NSWSC 375 (“Hill End
Gold”) at [18]; GPT RE Ltd v Lend Lease Real Estate Investments
Ltd [2005] NSWSC 964 (“GPT RE Ltd”) at [56], affmd in
Lend Lease Real Estate Investments Ltd v GPT RE Ltd [2006] NSWCA 207.
Alternatively, it may be possible to obtain an order for specific performance:
see Perri v Coolangatta at 566 (Brennan J).
- Notwithstanding
that the putative option-holder may have equitable rights, where the approval of
a third party is required and that
approval cannot be compelled, the
option-holder has no immediate equitable interest in the property the subject of
the grant: see
Hill End Gold at [18]; McWilliam’s Wines at
660-661; Brown v Heffer at 350-352; Dekala Pty Ltd (in liq) v Perth
Land & Leisure Ltd (1987) 17 NSWLR 664 at 666. This may be contrasted
with KLDE where the purchaser had it within power to complete the sale.
Where the approval of a third party is required and that approval
cannot be
compelled, the option-holder may be said to have a “contingent equitable
interest” – approval being the
contingency on which the acquisition
of the immediate equitable interest depends: see GPT RE Ltd at [57]; and
compare Australian Securities and Investments Commission v Carey
(No 6) (“ASIC v Carey”) [2006] FCA 814; (2006) 153 FCR 509 at
519-520 [34]. On obtaining approval, the option-holder is in the same or a
similar position to the holder of an option not subject to condition.
- Between
the exercise of the option and, ultimately, entry in the share register in
respect of the shares over which the option was
exercised, the option-holder
acquires different equitable interests measured by the availability of specific
performance: see Bahr v Nicolay [No 2] [1988] HCA 16; (1988) 164 CLR 604 at 619-623 and,
generally, Handbury Holdings Pty Ltd v Federal Commissioner of Taxation
[2008] FCA 1787; (2008) 74 ATR 560 at 577-578; [2008] FCA 1787 at [73]- [74]; affmd [2009] FCAFC 141; (2009) 179 FCR
569.
Factual findings on the acquisition of the options and related rights in this
case
- The
evidence was that Nexus granted the 742,500 options to Mr Fowler on 30 November
2006. Pursuant to s 176 of the Corporations Act, in the absence of
evidence to the contrary, the register of option-holders is proof of the matters
in the register. The register
of option-holders for Nexus was not, however, in
evidence. As Young J said, however, in Green v Crusader Oil at 122-123,
as a general rule, where the only evidence before the court is evidence that is
inherently probable and not contradicted
by other evidence, then the court is
bound to accept it. Applying this principle, 30 November 2006 must be accepted
as the date
of the grant of the options. The Appendix 3Y form submitted by
Nexus to the ASX on 8 December 2006, in accordance with the ASX Listing
Rules,
advised that Mr Fowler had acquired the options on 30 November 2006. The 2007
annual directors’ report, required by
the Corporations Act, also stated
that Mr Fowler’s options were granted on 30 November 2006.
- Further,
the unequivocal statements in these documents are entirely consistent with the
conduct and other statements of the company
on 30 November 2006 and preceding
this date. The ordinary resolution passed by the company’s shareholders
on 30 November 2006
gave approval for the grant of the options to Mr Fowler
“with a vesting date of 30 November 2006”. This accorded with
the
Notice and the Explanatory Memorandum sent to shareholders for the 30 November
2006 annual general meeting. As noted above,
the Explanatory Memorandum had
advised the shareholders that the “proposed grant ... requires prior
Shareholder approval”.
- The
company’s announcement to the ASX on 29 September 2006 advised not only
that the company had issued options to its eligible
employees but also that
“subject to shareholder approval at the next Annual General Meeting”
the company “intended”
to issue options to the non-executive
directors and managing director. The evidence was that the company considered
that this announcement
was important: in the words of Mr Boyson, “it was
essential that the market was informed that these options were in play”;
and, although drafted by the company secretary, Mr Munks, the announcement was
reviewed by the chair, Mr Philip, and the managing
director, Mr Tchacos, before
being sent to the ASX. Mr Munks gave evidence that he included the reference to
shareholders’
approval, “based on [his] understanding that
shareholders were required to approve the options”.
- The
applicant’s argument that, notwithstanding this evidence, for the purposes
of ss 139G(c), (d) or (e), he acquired the options
on either 14 September
2006 or 29 September 2006 depended on two separate propositions.
- The
submission that 29 September 2006 was the appropriate date depended on the
proposition that the non-executive directors’
options were granted under
the ESOP. This proposition was contrary to the evidence, and the
applicant’s submission as to 29
September 2006 must be rejected. Mr
Fowler did not receive a letter like that sent to employees. He was not
required to accept
any offer of options by returning the requisite ESOP
acceptance form in the same way as employees and did not do so. Further, Mr
Tchacos stated (and I accept) that it was not intended that the directors’
rights be governed directly by the ESOP, but that
the terms as to exercise price
and expiry date be the same for both the company’s directors and
employees.
- The
submission that 14 September 2006 was the relevant date depended on the
proposition that there was a contract created on 14 September
2006 and that this
contract gave rise to a right, or beneficial or legal interest, satisfying
ss 139G(c), (d) or (e). The contract
was said to be evidenced in part by
the board’s resolution of 14 September 2006.
- Whether
or not a contract was formed on 14 September 2006 or thereabouts depends on the
evidence about intention to contract. The
nature of the evidence that may be
considered on this issue is perhaps wider than that available to construe the
meaning and effect
of contractual terms, although today the difference is much
less than in the past. This is because nowadays, under Australian law,
the
rights and liabilities of parties to a contract are determined according to
“the principle of objectivity”, that
is, by reference to the words
and conduct of the parties, the text, the surrounding circumstances known to the
parties, and the purpose
and object of the transaction: see Toll (FGCT) Pty
Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 176 [40]. See also, for
example, Wilkie v Gordian Runoff Ltd (2005) [2005] HCA 17; 221 CLR 522 at 528-529,
citing McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 at
589 [22]; and Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at
461-462 [22]. These factors also bear on the issue of contractual intention:
see the earlier discussion in Air Great Lakes Pty Ltd v KS Easter (Holdings)
Pty Ltd [1985] 2 NSWLR 309 (“Air Great Lakes”) at
334 (Mahoney JA) and 337-338 (McHugh JA).
- The
evidence as to the parties’ words and conduct, the surrounding
circumstances, and the purpose and object of the transaction
considered as a
whole, supports the finding that a contract was in fact made between the company
and Mr Fowler with respect to the
grant of options on 14 September 2006.
- The
surrounding circumstances known to the parties include the fact that, in 2006,
the company was engaged in oil and gas exploration
rather than commercial
production; and the conservation of its cash reserves were critical for its
continued daily operations. Mr
Haydock, a non-executive director and a member
of the company’s remuneration committee in 2006, gave unchallenged
evidence
that, with this in mind, the committee discussed the remuneration
packages for the company’s employees and directors around
May/June that
year, including the suitability of options as part of these packages. For the
same reason, around this time too, Mr
Tchacos made a recommendation to the
remuneration committee to utilise options as part of the company’s
remuneration packages.
- The
company’s directors – at that time, Mr Philip (chair),
Mr Haydock, Mr Boyson, Mr Fowler and Mr Tchacos (managing
director) – discussed the company’s cash resources at board
meetings. All were present at the board meeting on 26 July
2006, when the board
discussed increasing the quantum of the directors’ remuneration and
remunerating them with the issue of
options in lieu of cash. As a result of
this discussion, the board passed the resolution (see [16] above) that
“directors
would be entitled to take part or all of their remuneration in
the form of options priced on the same basis as under the ESOP scheme
and
subject to any shareholder and other approvals required”. Directors were
to let Mr Philip know of their “preferred
mix of remuneration”. The
evidence established that, in effect, at the 26 July 2006 meeting, the directors
agreed in principle
to forego the payment of part or all of their fees in cash,
in return for options in unissued Nexus shares. This in-principle agreement
was
subject to a report to be made by Mr Tchacos about the terms and pricing of the
options.
- In
conformity with the resolution of 26 July 2006, between that date and the
following board meeting on 14 September 2006, Mr Fowler
informed Mr Philip that
he would forego 100% of his cash remuneration in exchange for options.
- As
noted earlier (at [17]), the paper subsequently prepared by Mr Tchacos and
circulated to board members prior to 14 September 2006
recommended both the
issue of options to employees under the ESOP and the issue of options to members
of the board in lieu of cash
remuneration. There was also a recommendation
concerning the managing director’s option package. The paper
observed:
Several of the directors of the Company have requested the opportunity to
sacrifice board fees in exchange for options. Providing
the opportunity for
board members to be remunerated via options is recommended because it aligns the
board with the interest of the
shareholders.
- As
to value, the paper stated that:
The equivalent cash value of the options being discussed in this recommendation
is shown in Appendix 1. The value of options is
based on a 40% premium to the
June and July 2006 Volume Weighted Average Price and a 13 month option term. It
is proposed that the
same basis is used for the calculation of the option value
in the case of employees, management and board.
- In
relation to the process to be adopted to grant the options, the paper
distinguished between options for the employees and options
for the board. The
paper stated that options issued to “the staff and management team”
could be issued immediately after
board approval. In the case of the board and
the managing director, however, the paper noted
that:
[T]he issue of options is subject to shareholder approval hence issue of
options can only occur after the AGM. It is imperative however that the options
package is announced as soon as practically
possible to avoid shareholder
dissention in the event that the share price escalates substantially prior to
the AGM. (Emphasis added.)
- There
was evidence of discussions between board members prior to the following 14
September board meeting. For example, between
9 and 14 September 2006, Mr
Fowler had a discussion with Mr Philip about the proposed issue of options to Mr
Philip.
- All
directors attended the board meeting on 14 September 2006, at which matters
addressed in Mr Tchacos’ paper were discussed
and the board resolved that
“options be issued to the directors of the company [on] the same terms and
conditions as the company’s
employees share option plan and that
shareholder approval be obtained prior to being issued”. These options
included the 742,500
options to Mr Fowler, with an exercise price of 87 cents
and an expiry date of 31 October 2007: see [19] above.
- The
directors’ salary sacrifice came into effect immediately after the 14
September 2006 meeting. I accept that, as the applicant
submitted, this is
indicative of the fact that a contract was made at that meeting, pursuant to
which Mr Fowler (and each director)
agreed to forego payment of fees in cash in
return for the 742,500 options in unissued shares on the terms recorded in the
minutes
for that meeting. The resolution recorded in the minutes set out the
essential terms of the options, namely, the grantee, the number
of options, the
time within which the options might be exercised (in this case, prior to 31
October 2007) and the exercise price
(87 cents per option).
- Mr
Philip explained that the exercise price was fixed as at 14 September 2006,
rather than as at the date the options were to be
granted, in order to expose
the directors to the same risks that the shareholders faced from this date and
to ensure that there was
a premium between the exercise price of the options and
the then market value of the company’s shares. Mr Philip’s evidence
(which I accept) was corroborated by the evidence of Mr Tchacos and that of the
other non-executive directors at that time. The
position of Mr Philip was
probably a little different from the other non-executive directors but this
difference is not relevant
here.
- The
fact that the company entered into such a contract with Mr Fowler on 14
September 2006 is corroborated by the explanatory memorandum
that accompanied
the Notice to shareholders regarding the November 2006 annual general meeting.
As set out above, the explanatory
memorandum in fact stated that “[t]he
purpose of the proposed grant of Options is to honour remuneration agreements
and to
provide Michael Fowler with added incentive in lieu of salary whilst
enabling the Company to preserve its cash reserves for expenditure
on its
existing business”.
- Further,
whilst I would treat the directors’ evidence as to their state of mind
most cautiously, in so far as this evidence
had any relevance (see, for example,
Air Great Lakes at 319, 330-331, 333-334, 337) it was supportive of the
fact that each director entered into a binding agreement with the company
with
respect to the grant of the options at the meeting of 14 September 2006.
- Having
regard to the text of the board’s resolution of 14 September 2006, it is
plain enough that the issue of the options
to Mr Fowler was subject to the
shareholders’ approval being obtained. The inclusion of this condition
was consistent with
the distinction between employees’ options and
directors’ options made in the board paper prepared by Mr Tchacos, which
was the basis of the board’s discussion and resolutions. Indeed, the need
for the shareholders’ approval had been foreshadowed
in the earlier
resolution of 26 July 2006.
- Furthermore,
the existence of the condition as to shareholder approval was entirely
consistent with the company’s subsequent
conduct in seeking such approval
on 30 November 2006. It was also consistent with the terms of the
company’s announcement
to the ASX on 29 September 2006, and the Notice and
the explanatory memorandum provided to shareholders in anticipation of the 30
November 2006 annual general meeting. Finally, it was borne out by the terms of
the shareholders’ resolution at that meeting;
and the fact that the
company’s documents did not record the grant until after the shareholders
had given their approval.
- In
so far as it is relevant, the existence of the shareholders’ approval
condition is also corroborated by the evidence of
Mr Philip, Mr Tchacos and Mr
Munks that they believed that the law required that the shareholders’
approval be obtained before
the options could lawfully issue. As well, the
evidence of some other members of the board indicated that they shared this
assumption.
- At
various points in his submissions, the applicant challenged the accuracy of the
board minutes in so far as they referred to the
need for the shareholders’
approval. For the following reasons, I would reject that challenge.
- First,
it must be borne in mind that minutes of directors’ meetings recorded in
accordance with s 251A(1) of the Corporations Act and signed as required by s
251A(2) are evidence of the resolution to which it relates unless the contrary
is proved: see s 251A(6). Broadly, the evidence established that the
company’s board meeting minutes were recorded and signed in accordance
with s 251A(1) and (2).
- Mr
Munks, as the company secretary from 16 July 2002 until 13 October 2006,
attended the board meetings on 26 July 2006 and 14 September
2006 and
subsequently prepared the minutes. His evidence was that at the relevant time
his practice was to type the notes of the
board meeting on his laptop whilst the
meeting was in progress and, after the meeting, to review the notes and turn
them into draft
minutes to be sent to Mr Philip and Mr Tchacos for review and
comment. In the case of the 14 September 2006 board meeting, Mr Munks
said that
he reviewed his notes “soon after” that meeting and “made
alterations and amendments where I thought
necessary to give effect to the
discussion and resolutions”.
- Mr
Philip and Mr Tchacos said that, once they received the draft minutes from
Mr Munks, they would review them and propose any change
they thought
necessary to reflect the meeting. Thereafter, according to Mr Philip, the draft
minutes were circulated to the other
board members for review and comment. The
draft minutes, as amended, would be considered by the board at the following
board meeting
when, after any further correction, the minutes would be adopted
as correct, signed by the chair, and entered into the company’s
books.
- Unsurprisingly,
none of the relevant witnesses could recall any specific discussion at the
relevant board meetings. None of them
could recall whether or not the board had
in fact discussed the issue of shareholders’ approval. Mr Philip’s
evidence
was that the minutes of 26 July 2006 and 14 September 2006
“matched” or were “consistent with” his recollection
of
board discussions of directors’ remuneration and options. Mr Tchacos also
stated that, whilst he could not specifically
recall the discussions at the
board meetings of 26 July 2006 and 14 September 2006, the minutes were
consistent with his recollection.
- Since
the witnesses’ recollections of the meetings were poor, I would attach
little, if any, weight to the claims of Mr Haydock
and Mr Fowler that the
matter of shareholders’ approval was not discussed at the board meetings
on 26 July 2006 or 14 September
2006. Indeed, in cross-examination,
Mr Fowler ultimately agreed that it was “certainly possible”
that the need for shareholder
approval was discussed at the 14 September 2006
board meeting.
- Having
regard to the numerous opportunities afforded board members to review and
correct the minutes before they were approved, there
is little reason to suppose
that the minutes, as approved and signed, were other than accurate. The
evidence at the hearing was
insufficient to establish that the minutes were
inaccurate with respect to the issue of the shareholders’ approval and,
assuming
it was applicable, to overcome the presumption in s 251A(6) of the
Corporations Act. I do not consider the absence of a reference to shareholder
approval in the 14 September 2006 resolution concerning Mr Tchacos
justifies a
different conclusion.
- In
any event, in so far as it was relevant to the terms of the contract with Mr
Fowler as recorded in the minutes of 26 September
2006, Mr Philip’s
evidence was that, whether or not the issue was discussed, he believed in 2006
that, by law, Nexus was required
to obtain the shareholders’ approval
before the company could issue the options to the directors. Mr Tchacos and Mr
Munks
gave evidence to the same effect. There was also some evidence that this
was the understanding of most, if not all, the non-executive
directors. In
re-examination, Mr Fowler agreed that he was “always aware of any
transactions ultimately having to be sanctioned
by shareholders relating to
specifically related parties like options”.
- The
condition as to the shareholders’ approval was not a condition precedent
to the formation of the contract between the company
and Mr Fowler, as the
Commissioner at one point argued. This possibility is not supported by the
evidence to which I have referred,
including that the directors commenced to
“salary sacrifice” from 14 September 2006. Rather, the performance
of the
contract on the company’s part by the grant of the options required
the fulfilment of a contingency, namely, the obtaining
of the
shareholders’ approval. This conclusion is supported by the observations
of Mason J in a much-quoted passage in Perri v Coolangatta at 552.
Describing the prevailing position with respect to conditions of this kind, his
Honour said as follows:
Generally speaking the court will tend to favour that construction which leads
to the conclusion that a particular stipulation is
a condition precedent to
performance as against that which leads to the conclusion that the stipulation
is a condition precedent
to the formation or existence of a contract. In most
cases it is artificial to say, in the face of the details settled upon by the
parties, that there is no binding contract unless the event in question happens.
Instead, it is appropriate in conformity with the
mutual intention of the
parties to say that there is a binding contract which makes the stipulated event
a condition precedent to
the duty of one party, or perhaps of both parties, to
perform. Furthermore, it gives the courts greater scope in determining and
adjusting the rights of the parties. For these reasons the condition will not
be construed as a condition precedent to the formation
of a contract unless the
contract read as a whole plainly compels this
conclusion.
See also Perri v Coolangatta at
541, 545 (Gibbs CJ).
- In
summary, the company granted the 742,500 options to Mr Fowler on 30 November
2006, pursuant to a contract made by the company
with him on 14 September 2006.
This contract was subject to a condition precedent to performance – that
the shareholders’
approval first be obtained before the options were
granted. Mr Fowler was unable to exercise any right to acquire the shares the
subject of the option prior to 30 November 2006; and he did not have an
immediate equitable interest in the shares prior to that
date. Pursuant to the
contract, however, the company was obliged to take all reasonable steps to
obtain the shareholders’
approval; and Mr Fowler had such equitable rights
as equity would afford, by way of specific performance or injunction, to ensure
that the company took these steps.
The scope of Division 13A rights
- The
critical question is whether any equitable right to ensure that the company took
all reasonable steps to obtain the shareholders’
approval, or his
contingent equitable interest in the shares the subject of the options, was
sufficient for the purposes of Division
13A and, in particular, s 139G(c)
and (e). Mr Fowler argued that Division 13A and, in particular, s 139G(c)
and (e) were not limited
to unconditional rights (or, I would add, immediate
equitable interests). For the reasons I am about to state, I do not consider
that Mr Fowler acquired a right or interest that was sufficient for Division
13A. Having regard to the foregoing discussion, it
is clear enough that
s 139(d) cannot further assist Mr Fowler’s case: see [106]
below.
- In
McWilliam, delivered whilst judgment in this matter was reserved, the
Full Court indicated that Division 13A of the ITAA 1936 was not limited
to a
right which of itself conferred an entitlement to the acquisition of shares.
The parties drew my attention to McWilliam but indicated that they did
not wish to make further submissions with respect to that case.
- Like
this case, McWilliam concerned the question whether, for the purposes of
Division 13A, the taxpayer had adopted the wrong date as the date of acquisition
of options to purchase shares. The Full Court’s decision turned on the
Tribunal’s unchallenged finding of fact that
the taxpayer had acquired the
options as at 1 July 2003, as the taxpayer alleged.
- Notwithstanding
this, the Full Court also considered and rejected the Commissioner’s
submission that “anything less than
a right which confers an immediate
entitlement on the taxpayer to the acquisition of shares upon the exercise of
the right is not
a relevant right for the purpose of Division 13A”: see
McWilliam at [70]. The Court, in obiter dictum, held that a contractual
right arising from the taxpayer’s contract of employment, “which
was
not conditional on future events”, to require the taxpayer’s
employer to grant options to acquire shares was a relevant
right for the
purposes of the Division: see McWilliam at [76].
- The
Court explained (at [71]-[73]):
It is difficult, indeed impossible, to discern from the text of Division 13A
(see Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue
[2009] HCA 41 ; (2009) 239 CLR 27 at [47] ) any legislative policy manifest in a construction
which includes as rights options to acquire shares, but excludes contractual
rights
to acquire such options, particularly where such contractual rights are,
as here, fully executed by the respondent’s performance
of the
contract.
The Commissioner accepted that the word “right” in Division 13A
carried the same meaning as the expression “right
to acquire a share in a
company” in s 26AAC of the ITAA, the precursor to Div 13A. When
s 26AAC was inserted into the ITAA
in 1974 to remove the taxation of such
benefits from the ambit of s 26(e), the difficulties of application of
which had been recently
illustrated in the decision of the Supreme Court of NSW
(Bowen CJ in Eq) in Donaldson v Federal Commissioner of Taxation [1974] 1
NSWLR 627; (1974) 74 ATC 4192, the Treasurer of the day (the Hon. Frank
Crean MP) said:
The new provision will apply to options or other rights acquired after
17 September 1974 and to shares acquired after that date unless acquired as
a result of the exercise or operation of rights acquired on or before
that date. (Emphasis added.)
In other words, the concept of “right to acquire a share in a
company” extended to rights, other than options, which
operated to give
rise to an acquisition of shares, rather than being confined to the acquisition
of shares by the exercise of options.
- The
Court continued (at [78]-[84]):
Section 139G does not support the Commissioner’s position. It is
artificial to read s 139G as establishing mutually exclusive
categories.
... The fact that legal or beneficial interests were expressly dealt with in
s 139G(d) and s 139G(e) in the context
of acquisition from another
person, in contrast to the creation of such rights, does not support reading
s 139G(c) more narrowly
than its language suggests. The fact that
“right” itself is not a defined term supports this
conclusion.
This construction is supported by the reasoning in Commissioner of Taxation v
Linter Textiles Australia Ltd (in liq) [2005] HCA 20; (2005) 220 CLR 592 at [30] that the
assumption that the law of property requires the location at all times and in
all circumstances of distinct legal and beneficial
ownership was exploded by
Commissioner of Stamp Duties (Q) v Livingston (1964) 112 CLR 12. ...
Thus, in our view, s 139G(c) applied to the creation of a legal or beneficial
interest in the right and ss 139G(d) and (e) did not
deal exclusively with a
legal interest in the right or with the beneficial interest in the right,
respectively.
The Commissioner accepted in argument that on 1 July 2003 Mr
McWilliam had a contractual right to have the options issued to him.
Once the
construction of s 139G is rejected that the legal interest or the beneficial
interest has to separately exist in the person
creating the right before that
right can be acquired by, in this case, Mr McWilliam, it must in our view follow
that that right was
created in Mr McWilliam by Seven Network Limited and, by
virtue of s 139G(c), Mr McWilliam acquired that right, on 1 July 2003.
Although it is true to say, as the Commissioner submitted, that Division 13A did
not define the word “right”, it did
by s 139G nevertheless define
the meaning of a person acquiring a right and a person providing a right, that
provision being in Subdivision
G, headed “Definitions”. On the
present alternative, Mr McWilliam, as at 1 July 2003, had at least a beneficial
interest
in the relevant right, being the right to acquire shares. The interest
was vested in Mr McWilliam by his contract of employment.
The fact that the
source of Mr McWilliam’s interest in the right was vested by his contract
of employment is immaterial. Nothing
in the statutory scheme supports the
Commissioner's contrary proposition that something more “immediate”,
“formal”,
“concluded” or “coalesced” is
required.
Our emphasis has been on s 139G rather than on s 139C because, in our
view, the latter section was addressed to the nature of the
relationship between
the right and the employment rather than to the nature of the right
itself.
The statutory language does not support the Commissioner's distinction between
an interest in the relevant right (the right to acquire
shares) and an interest
in an anterior right (the right to require the employer to provide the shares).
No uncertainty as to the
taxing point thereby arises. No difficulty with
valuation arises: see s 139FF. Nor does any policy consideration assist
the Commissioner.
By virtue of s 139C(4) no double liability arises because a
taxpayer does not acquire a share under an employee share scheme if
the taxpayer
acquired the share as the result of exercising a right the taxpayer acquired
under such a scheme.
- Plainly
enough, however, as the Court in McWilliam acknowledged (at [74]), not
all entitlements which may lead to an acquisition of shares were
“rights” for the purpose
of Division 13A. The Court accepted that
in this regard Fraunschiel v Federal Commissioner of Taxation [1989] FCA 236; (1989) 20
ATR 955 (“Fraunschiel”) at 975 was correct, saying (at
[74]):
For example, a right to accept an offer will not be such a right (see
Fraunschiel v Federal Commissioner of Taxation [1989] FCA 236; (1989) 89
ATC 4616; (1989) 20 ATR 955 per Lee J) nor, if it be different, will a
pre-emptive right to be offered shares to buy if the prospective vendor is
desirous of
selling. More difficult issues arguably arise in the case of
conditional rights such as those that arose under the “Savoy
Clause”
in ACP Publishing Pty Ltd v Commissioner of Taxation [2005] FCAFC 57; (2005) 142 FCR 533,
but the present case is a long way from that factual
context.
- Whilst
a right to acquire shares and, as McWilliam showed, a right to a right to
acquire shares were enforceable rights to shares within Division 13A, a right to
accept an offer was
not because, as Lee J said in Fraunschiel at
975:
[T]he right to accept an offer has no enforceable quality attached to it. The
offer may be withdrawn or revoked and the right to
accept vanishes with the
destruction of the offer. The fact that the property may be acquired by the
acceptance of the offer does
not make the right to accept a right to
acquire.
- Whilst
the present case is different from Fraunschiel, it is also different from
McWilliam in that, as at 14 September 2006, the only right that Mr Fowler
had obtained was a right to options conditional on a future event –
namely, the approval of the shareholders. In this circumstance, as previously
noted, Mr Fowler had an
equitable right to compel the company to fulfil its
implied promise to take all reasonable steps to secure the shareholders’
approval and a contingent equitable interest, in the sense described by French J
in ASIC v Carey at 519 [34]. As his Honour there observed, “[a]
contingent interest may be described broadly as the possibility that a right
of
a proprietary character will come into existence at a future time if some event
occurs”. In the present case, the relevant
event or contingency was the
obtaining of the shareholders’ approval.
- The
present case is not one in which it is within the right-holder’s own power
directly or indirectly to acquire a right to
shares, as was the case considered
in McWilliam (or as in the case of an unconditional option over unissued
shares). Mr Fowler could not call on the company to grant him the 742,500
options until the shareholders gave their approval to the grant. As in
Fraunschiel, in the present case, as at 14 September 2006, Mr
Fowler’s contingent right to the grant of options might never have vested
since it was open to the shareholders to deny approval. Had they done so, then
Mr Fowler’s contingent equitable interest in
the shares the subject of the
options would have been defeated. In contrast to McWilliam and like
Fraunschiel, Mr Fowler’s ultimate right to shares in the company
was dependent on the actions of third parties, which were outside his
control.
- Since
it cannot be said that, as at 14 September 2006, Mr Fowler had an enforceable
right directly or indirectly to acquire shares
in the company, it cannot be said
that he had a right within the meaning of Division 13A. It follows that, at
that date, it cannot
be said that the company had created a right in Mr Fowler
within the meaning of s 139G(c) and, in consequence, that Mr Fowler had
acquired a right by virtue of this provision, for the purposes of Division 13A.
Since, as at 14 September 2006, Mr Fowler had not
acquired a legal interest in a
share or right to acquire a share from another person, s 139G(d) had no
application. Finally, as
at 14 September 2006, since it cannot be said that Mr
Fowler had a beneficial interest in a share or right to acquire a share from
another person, s 139(e) can have no application. As indicated above, Mr
Fowler’s beneficial interest in a right to acquire a share did not arise
until
the contingency as to the shareholders’ approval was satisfied.
- It
follows from this that the Commissioner’s submission should be accepted
that, in Mr Fowler’s case, the date of acquisition
of rights for Division
13A purposes was 30 November 2006.
- Even
if the directors were confident that they would obtain the shareholders’
approval, their confidence would not alter this
conclusion. There was some
limited evidence that some of the directors considered that there would be no
difficulty in fulfilling
the condition. Mr Philip, who was an honest and
reliable witness, said in cross-examination that “presumably, we
were confident that the shareholders would grant approval at the AGM”
(emphasis added). Mr Philip did not purport actually
to recollect his state of
mind. In cross-examination, Mr Boyson, a non-executive director, testified
that:
We knew that the AGM was going to back that particular proposal, because we were
actually doing what the shareholders had asked us
to do, and we were physically
locked in because the option had actually commenced in ...
September.
According to Mr Boyson, “there were
enough shareholders with enough votes that the actual approval at the November
AGM would
have been a foregone conclusion”.
- Whilst,
for the reasons stated, I accept Mr Philip’s evidence so far as it went,
it must be borne in mind that possibly two
witnesses besides Mr Fowler had an
interest in the outcome of the litigation. The evidence must be critically
assessed for this
and other reasons. See, in this regard, Pascoe v Federal
Commissioner of Taxation (1956) 30 ALJR 402 at 403 and Federal
Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74; (2011) 193 FCR 149 at
176. I am not persuaded that the directors’ supposed confidence was any
more than the confidence that would ordinarily
be entertained by a board that
believed that it was acting reasonably and in conformity with what it understood
generally to be the
shareholders’ wishes. Confidence of this kind may,
however, ultimately prove to be misplaced for a variety of reasons, including
that the directors have misconceived the shareholders’ wishes or on
account of a material change in circumstances before the
shareholders’
approval is sought. Accordingly, if such evidence as to the board’s
confidence were of any relevance (which
I doubt), I would accord this evidence
little weight.
- Even
if the directors were confident on 14 September 2006 that they would secure the
approval of the shareholders at the annual general
meeting later that year, the
fact remained that the shareholders’ determination as to whether or not to
approve the options
was a matter solely for the shareholders at the time of the
meeting. The shareholders’ giving or withholding of approval lay
outside
the control of the directors.
- Mr
Fowler argued that he had assumed an “equity risk associated with an issue
of shares or rights” from the time he entered
into the contract with
respect to his remuneration on 14 September 2006 and that “that time is
consistent with the evident
policy concerning when to tax participants in
employee share schemes”. The applicant’s argument was that
“[c]onsistent
with this policy, if there were inchoate rights before
shareholder approval, upon that approval those rights ought to be regarded
as
having been fully formed from the date the contract was entered into ... such
that upon that approval being obtained the taxing
point arises at the time the
directors were on risk [sic]”.
- Mr
Fowler’s argument had two aspects to it – policy and law. The
argument depended in part on a proposition advanced
at the hearing that, once
the shareholder’s approval was obtained, the approval had “a kind of
retroactive effect”,
with the result that the parties were to be taken to
have entered an unconditional contract as from the time they entered the
contract,
namely, 14 September 2006. Support for this argument was said to lie
in the reasons for judgment of Windeyer J in Brown v Heffer at 351-352
and of Brereton J in Hill End Gold at [18], citing Brown v Heffer.
Neither case supports the applicant’s argument.
- In
Brown v Heffer at 351-352, Windeyer J was concerned with a different
issue to that which concerned Mr Fowler, namely, the effect of the giving or
withholding of ministerial consent for a land dealing to which the Closer
Settlement Acts (NSW) was applicable. Windeyer J held (at 351-352) that
where consent was refused, the transaction was at an end; and where consent
was
given, the instrument between the parties operated according to its terms. It
was in this sense that his Honour’s observation
“that the giving of
the consent had a kind of retroactive effect making the instrument effective as
from its date” was
to be understood.
- The
applicant’s reliance on this part of his Honour’s judgment
illustrates the danger of failing to have regard to the
context in which a
remark is made. Having regard to this context, it is plain enough that, in
addressing the effect of consent,
his Honour’s intended meaning was that
once consent was given, the parties’ rights and liabilities ceased
to be conditional. The phrase “as from its date” did not, however,
signify that the contract was treated from its inception as being what it was
not – an unconditional contract. Indeed, this
was the very point upon
which the case turned, as Windeyer J’s discussion in the ultimate
paragraph of his reasons for judgment
shows. In this last paragraph Windeyer J
stated his agreement with the plurality judgment’s holding (at 350) that
the devise
to the respondent was not adeemed by the contract of sale because the
relevant contracts of sale, “though absolute in so far
as they bound the
parties to do what was necessary for obtaining the Minister’s consent,
were inchoate in so far as they provided
for sale and transfer” prior to
the testator’s death because the consent had not yet been obtained. The
result would,
as Windeyer J noted at 352, have been different had the consent
been forthcoming before the testator’s death.
- It
is clear from the passage in Hill End Gold at [18], to which the
applicant referred, that Brereton J was merely intending to follow Brown v
Heffer and the other authorities to which his Honour referred, some of which
have also been mentioned in the above discussion.
- As
to the matter of policy, the application of Division 13A depends on the text or
terms of its provisions, in this case, particularly
s 139G of the ITAA
1936. For the reasons stated, under s 139G, Mr Fowler acquired the
relevant right – being the right to
acquire shares – on 30 November
2006. The text of Division 13A does not, for the reasons stated, permit of a
different conclusion.
- In
the circumstances as found, it is unnecessary to consider the
Commissioner’s submission that the grant of the options without
shareholders’ approval would have entailed a breach of Rule 10.11 of the
ASX Listing Rules and a consequential breach of the
company’s
constitution. Equally, it is unnecessary to consider whether, as the
Commissioner said, the grant of options without
shareholder’s approval
would have involved a breach of s 208 of the Corporations Act and the
applicant’s response that, having regard to Mr Warburton’s evidence,
the grant fell within the exception in s 211 of the Corporations Act. It is
unnecessary to deal with these submissions because I have found that obtaining
shareholders’ approval was a condition
precedent to the grant of the
options to Mr Fowler and that the shareholders’ approval was in fact
given.
Penalty
- As
noted at the outset of these reasons, Mr Fowler did not return any amount as
assessable income under either ss 139B(2) or 139D(2)
of the ITAA 1936
in respect of the 742,500 options in the 2007 income year. Since I have found
that, as the Commissioner argued,
the date of acquisition of the options was 30
November 2006, then, as set out at [6] above, their market value (as determined
under
s 139FC of the ITAA 1936) was more than nil, and the assessable
discount for the purposes of s 139CC(2) of the ITAA 1936 was more
than nil
($0.56 in respect of each option). The result was that the Commissioner
determined that Mr Fowler had a shortfall amount
within the meaning of item 1 of
s 284-80(1) of Schedule 1 of the TAA of $193,347 in respect of the 2007
income year. In consequence, the Commissioner assessed Mr Fowler
as liable to
an administrative penalty under s 284-75(1) of Schedule 1 of the TAA.
Section 284-75(1) relevantly provides that a taxpayer is liable for an
administrative penalty if: (1) a taxpayer or the taxpayer’s agent makes
a
statement to the Commissioner; (2) the statement is false or misleading in a
material particular; and (3) the taxpayer has a shortfall
amount as a result of
the statement.
- Mr
Fowler made a statement that was false or misleading in a material particular
when he lodged his income tax return for the 2007
income year without including
any amount in assessable income in respect of the options. Whether or not Mr
Fowler believed that
he was required to include an amount in his assessable
income under Division 13A of the ITAA 1936 in respect of the options in the
2007
income year was not material: see Revlon Manufacturing Ltd v Commissioner of
Taxation (1995) 63 FCR 535 at 561-562 (Wilcox J, with whom Tamberlin J
agreed). Thus, it was open to the Commissioner to find that
Mr Fowler’s shortfall
amount arose as a result of the false or
misleading statement made to the Commissioner and that Mr Fowler was liable to
an administrative
penalty. Mr Fowler’s submission to the contrary must be
rejected.
- The
Commissioner assessed Mr Fowler as liable to pay a penalty of 25% of his
shortfall amount in accordance with s 284-85 of Schedule
1 of the TAA on
the basis of lack of reasonable care. Accordingly, Mr Fowler was assessed as
liable to pay an administrative penalty
of $48,336.75 in respect of the 2007
income year. Mr Fowler challenged the Commissioner’s determination to
assess him as liable
to pay a penalty calculated at 25% of the shortfall amount.
Mr Fowler submitted that it was appropriate to remit all penalties.
- For
the reasons stated below, I would reject Mr Fowler’s submission as to
administrative penalty.
- At
the relevant time, s 284-90 of Schedule 1 of the TAA made provision for
various base penalty amounts worked out according to a table that was part of
the provision.
Relevantly, for this appeal, item 3 in the table in
s 284-90(1) provided for a base penalty amount of 25% of the
taxpayer’s shortfall amount in the following
situation:
Your *shortfall amount or part of it resulted from a failure by you or your
agent to take reasonable care to comply with a *taxation
law.
- Item
1 in the table in s 284-90(1) concerned a shortfall amount resulting from
intentional disregard of a taxation law and item 2, with recklessness. In the
former
case, the base penalty amount was 75% of the shortfall amount and in the
latter case, 50% of the shortfall amount. The items are
relevant to the
reasoning in Commissioner of Taxation v Traviati [2012] FCA 546
(“Traviati”), discussed below.
- At
the same time, item 4 in the table in s 284-90(1) also provided for a base
penalty amount of 25% of the taxpayer’s shortfall amount in the following
situation:
Your *shortfall amount or part of it resulted from you or your agent treating an
*income tax law as applying to a matter or identical
matters in a particular way
that was not *reasonably arguable, and that amount is more than the greater of
$10,000 or 1% of the income
tax payable by you for the income year, worked out
on the basis of your *income tax return.
The
reasonably arguable test was not, however, the test that the Commissioner
purported to apply in Mr Fowler’s case.
- The
reasonable care test in item 3 of s 284-90(1) of Schedule 1 of the TAA,
which the Commissioner in fact applied, “calls upon a taxpayer to exercise
the care that a reasonable person would be likely to have exercised in
the circumstances of the taxpayer in fulfilling the taxpayer’s tax
obligations”:
see Aurora Developments Pty Ltd v Federal Commissioner of
Taxation (No 2) [2011] FCA 1090; (2011) 196 FCR 457 (“Aurora”) at 465
[38]. In Aurora, Greenwood J went on to say (at 465
[38]):
The test looks to whether such a person would have foreseen, as a reasonable
probability or reasonable likelihood, the prospect that
the action or step or
the failure to act or take an affirmative step would result in a shortfall
amount and in determining that question,
a relevant factual enquiry is whether
the taxpayer made the reasonable attempts a person in the position of the
taxpayer ought to
have taken so as to comply with the provisions of a taxation
law.
In Aurora, his Honour found that the
taxpayer had failed to exercise reasonable care upon the basis of the advice
relied on by the taxpayer,
which demonstrated that the taxpayer had failed to
communicate material matters to the taxpayer’s tax adviser: see
Aurora at 476 [108].
- Mr
Fowler’s evidence in cross-examination was that he had a tax agent at the
relevant time and the company had a tax advisor.
In this evidence, after
referring to difficulties in recalling events “long ago”, he
said:
I would have spoken to people like Brendan Brown, who was advising the company.
But in my personal circumstances I had an account,
obviously, with my tax agent.
So all tax matters I would discuss, at some point, with them.
- When
asked why did he decide not to include an amount in respect of the options in
his assessable income, Mr Fowler said:
On the basis of the view of mine at the time, which forms a basis of the case, I
guess ... in that I agreed to salary sacrifice from
1
July.
- Plainly
enough, this evidence was general, limited and vague. Further, as the
Commissioner noted in written submissions, a taxpayer’s
use of a tax agent
to lodge an income tax return does not of itself indicate that reasonable care
has been taken.
- There
was no actual evidence that Mr Fowler had ever directed his mind to the tax
consequences of the grant of the options so far
as his own income tax liability
was concerned. There was no evidence of any specific enquiries made by Mr
Fowler about these tax
consequences or of any relevant advice that he may have
received. Mr Fowler was apparently unable to produce any records of his
own
concerning his nomination of Tess Aust or the date of any acceptance of the
options. There was, moreover, no evidence about
any enquiries that Mr
Fowler’s tax agent may have made on his behalf concerning the tax
treatment of the options.
- Having
regard to Mr Fowler’s position as a company director and the nature of
agreement pursuant to which the options were
granted, a reasonable person in the
circumstances of Mr Fowler would be expected to have made some reasonable
enquiries concerning
the tax treatment of the options under the relevant tax law
– here Division 13A of the ITAA 1936 Act. Indeed, given that
Mr
Fowler had agreed to forego cash fees that were undeniably in the nature
of assessable income in his hands, a reasonable person in
his position would
have expected his agreement to forego cash for options in lieu would have some
income tax consequences. Such
a person would have foreseen, as reasonably
likely, that the failure to include in his assessable income an amount in
respect of
the options would result in a shortfall amount. The lack of cogent
evidence that Mr Fowler made any relevant enquiries and his failure
to keep
basic records relating to the grant of the options justified the imposition of
administrative penalty for failure to take
reasonable care.
- Mr
Fowler’s main submission was that his position was reasonably arguable, as
defined in s 284-15 of Schedule 1 of the TAA,
and that this demonstrated
that he took reasonable care in submitting his tax return for the 2007 income
year. Section 284-15(1)
stated that a matter was reasonably arguable
“if it would be concluded in the circumstances, having regard to relevant
authorities,
that what is argued for is about as likely to be correct as
incorrect, or is more likely to be correct than incorrect”.
- The
Commissioner responded that whether or not Mr Fowler’s position was
reasonably arguable was not determinative of whether
he had taken reasonable
care to comply with Division 13A, for the purposes of item 3 of s 284-90(1)
of Schedule 1 of the TAA. Having
regard to Traviati (delivered whilst
judgment was reserved), the Commissioner’s submission must be
accepted.
- Whilst
Traviati concerned the administrative penalty provisions of the ITAA 1936
and not those now in Schedule 1 to the TAA, the scheme for the imposition
of
administrative penalties is relevantly the same. In effect, Middleton J held in
Traviati that the provisions dealing with reasonable care and with a
reasonably arguable position are concerned with different standards.
After
considering the principal authorities, including Walstern Pty Ltd v
Commissioner of Taxation [2003] FCA 1428; (2003) 138 FCR 1, North Ryde RSL Community Club
Ltd v Commissioner of Taxation (2002) 121 FCR 1 and MLC Ltd v
Commissioner of Taxation [2002] FCA 1491; (2002) 126 FCR 37, his Honour said (at
[70]-[71]):
The language of the two provisions reveals two independent standards. Section
226G was concerned with the taxpayer, or their registered
agent, taking
reasonable care. Reasonable care is a concept familiar to the law, and whilst
an objective standard, it considers
the subjective circumstances of the
individual in question. Likewise, ss 226H and 226J refer to the concepts of
“intentional
disregard” and “recklessness”. These,
again, are familiar concepts to the law, and are objective standards with
subjective elements.
Whether or not a taxpayer has a reasonably arguable position for the purposes of
s 226K, however, is a purely objective test. That
is clear from the words
that the legislature has used to describe the standard that the taxpayer must
meet to avoid a penalty. Put
another way, ss 226G, 226H and 226J all
examined the means (or process) that the taxpayer had utilised in complying with
the Act.
Section 226K only examined whether, as an end, the taxpayer had a
reasonably arguable position.
- As
noted already, the legislative scheme for administrative penalties applicable in
this case is materially the same as that considered
by Middleton J in
Traviati. As his Honour noted (at [72]), his conclusion was also
consistent with that of Murphy J in Sent v Commissioner of Taxation
[2012] FCA 382 at [219]. Furthermore, as the Commissioner noted, in
Aurora Greenwood J did not treat the reasonably arguable position of the
taxpayer as a substitute for the reasonable care test.
- With
respect to the administrative penalty provisions relevant here, I would
respectfully adopt the reasoning of Middleton J in Traviati and conclude
that item 3 and item 4 of the table in s 284-90(1) of Schedule 1 of the TAA
provide for two different and independent
standards. Although an objective
standard, reasonable care takes into account the subjective circumstances of the
individual in
question, whereas whether a taxpayer has a reasonably arguable
position is solely an objective test.
- Whether
or not Mr Fowler’s position was reasonably arguable, he failed to take
reasonable care that he complied with Division
13A of the ITAA 1936. On this
basis, there is no error shown in the Commissioner’s determination that Mr
Fowler was liable
to pay an amount of administrative penalty of $48,336.75 for
the 2007 income year of income pursuant to s 284-75 of Schedule 1 to
the
TAA.
- In
view of the above conclusions, it is unnecessary to consider Mr Fowler’s
submissions with respect to the Commissioner’s
position in relation to Mr
Tchacos. In any case, for the reasons outlined by the Commissioner in written
submissions on penalty,
this matter did not bear on Mr Fowler’s
administrative penalty liability.
DISPOSITION
- For
the foregoing reasons, the application should be dismissed. The Commissioner
will have seven days to file any draft form of
further orders for further
consideration. The parties will both have seven days to file written
submissions on costs. If no submissions
on costs are filed within this time, I
would order that the applicant pay the respondent’s costs of and
incidental to the application.
I certify that the preceding one hundred and
thirty-eight (138) numbered paragraphs are a true copy of the Reasons for
Judgment herein
of the Honourable Justice Kenny. |
Associate:
Dated: 21 September 2012
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