Blank v Commissioner of Taxation
[2016] HCATrans 181
[2016] HCATrans 181
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Sydney No S144 of 2016
B e t w e e n -
VAUGHAN RUDD BLANK
Appellant
and
COMMISSIONER OF TAXATION
Respondent
FRENCH CJ
KIEFEL J
GAGELER J
KEANE J
GORDON J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON TUESDAY, 23 AUGUST 2016, AT 10.17 AM
Copyright in the High Court of Australia
MR M. RICHMOND, SC: If the Court pleases, I appear with my learned friend, MR T.O. PRINCE, for the appellant. (instructed by Clayton Utz Lawyers)
MR J.T. GLEESON, SC, Solicitor‑General of the Commonwealth of Australia: May it please the Court, I appear with MR J.O. HMELNITSKY, SC and MR M.J. O’MEARA, for the respondent. (instructed by Minter Ellison Lawyers)
FRENCH CJ: Yes, Mr Richmond.
MR RICHMOND: If the Court pleases, I propose to deal with the issues in the order in which they are set out in our three‑page outline which hopefully your Honours will have. The principal question in the appeal is whether the payments received by the appellant were ordinary income or otherwise statutory income on one of three alternative grounds, either as income as a reward for services, or as income under the first strand in the Myer Emporium Case or, thirdly, as statutory income on the basis that they were an ETP.
Turning first to the income from services issue, the basis upon which the majority in the Full Court and the primary judge held that the payments were income was that they were deferred compensation for services rendered. The difference in the approach taken by the Full Court on this issue turns essentially on whether an amount is properly regarded as income from services where it is received for the disposal of shares and associated rights which were granted to the taxpayer while he was an employee as a reward for services and, secondly, conferred an entitlement in the future to a share of the profits of the employer’s enterprise.
FRENCH CJ: I think your characterisation of the arrangements as shares and associated rights is under challenge, is it not?
MR RICHMOND: It certainly is, your Honour. I will come in a moment hopefully to explain to your Honour why our characterisation is correct but it is the characterisation which the primary judge applied to the rights here. He said that they were a bundle of interconnected rights and, in our submission, they were certainly a bundle of interconnected rights comprising shares and associated rights.
Now, his Honour Justice Pagone decided that the amounts were not income from services because it was the shares and associated rights ‑ I do not think it can be denied that they can be characterised in that way ‑ were income at the time of grant and the amount that was received at the later time, in the 2007 year, was merely a capital receipt from the exploitation of those earlier rights – or the grant of those earlier rights.
Before addressing this question in detail, we wish to draw out five features of the facts in the case which are important to understand the circumstances of which the amount was paid. I am now taking up what is said in our submissions at paragraph 39 and I will expand on it slightly. The first feature which we say is important is that the shares and associated rights, which we will call “PPU”, which were granted to the appellant, conferred upon him an entitlement in the future to a share of the profits of the Glencore enterprise.
That was specifically linked to his position as a shareholder in two ways: first, by the stapling of his PPUs to the shares in the holding company, Glencore Holding, and, secondly, through the way in which the amount payable in the future was calculated. It was calculated in a way that reflected his proportionate shareholding interest in the holding company. Further, that method of calculation meant that if there was a profit in any year, that profit accumulated but, correspondingly, if there was a loss then his entitlement was reduced, reflecting the interest of the shareholder in the holding company
The second feature is that the appellant had what Justice Pagone called a bundle of interconnected rights, which was entirely separate from his salary and other remunerations. So, his salary was fixed by his employment agreement and he was entitled to, like all other employees, whether they were in this scheme or not, discretionary bonuses. He undertook no obligation in return for the rights that he obtained under this scheme, which were entirely separate from those two other forms of remuneration.
The only obligation he undertook was the payment of 50 Swiss francs per share. We emphasise that point. The only consideration he gave for the rights that he acquired over the period from 1993 until 2003 when he accumulated these rights was to pay 50 francs per share. He undertook no obligation to perform services in return for the rights granted. The third feature we rely upon is ‑ ‑ ‑
FRENCH CJ: The grant was not altruistic?
MR RICHMOND: No, your Honour. I will take you to – there is some evidence about that. It was not altruistic – certainly not, your Honour – but it was an incentive and perhaps in short an incentive to those employees who participated to continue performing services for the benefit of the entire enterprise.
The third matter is that the rights were subject to what is called a vesting period of two years, but this did not apply in the case of death or permanent disability. By a “vesting period” we mean that there was a two‑year period from 1 January, in the year of grant, when the PPU did not count for the purpose of calculating the amount ultimately payable. But we would say that the PPU had actually vested from the time of grant, as evidenced by the fact that on death or permanent disability the PPU issued within the two preceding years would count for the purposes of the amount ultimately payable. So we use “vesting” in a sense referring more to not the existence of the right but the extent to which an amount would become payable at a later time.
The fourth key matter, we submit, is that the appellant was entitled to assign the rights to a personal holding company, trust or foundation, controlled by him, by any of capital, votes or some other means provided he obtained the written consent of Glencore International. Now, that is important, we submit, because he was only required to control the assignee, he was not required to own an interest in the assignee. Control was all that was required. Importantly, he had a right to assign, with consent, and that consent on the evidence could not be unreasonably withheld by Glencore.
The fifth matter which is important is that the consideration which he ultimately received was received under the terms of the declaration that he signed on 15 March 2007, which expressed the consideration as being for the disposal of the entire bundle of rights, not just the PPU but the entire bundle including the shares which he had been issued.
Now, your Honours, I propose to take you to some of the key documents in volume 1 of the appeal book to draw out these five features which we say are important to understand the circumstances in which the payments were received and if your Honours can go to, firstly, the PPA 1999 which is found at page 339 of volume 1 of the appeal book. As your Honours will have seen, there were four PPAs over the relevant period signed in 1994, 1999, which is this one, 2003 and 2005.
For convenience, I will start with this one to draw out the key aspects of his entitlements prior to the 2005 agreement. If we may start at clause A.1 on page 339 – that is at the bottom of the page – and your Honours will see that Glencore International granted the employee what is called:
a participation in the results of GI, in the form of (a) “Genussscheine” (GS) as per section 657 of the Swiss Code . . . and (b) a contractual claim hereunder, both defined . . . as Profit Participation.
Your Honours will find the terms of section 657 of the Swiss Code in volume 3 of the appeal book at page 883. I do not think I need to take your Honours to it now.
The first element of this combination of rights is dealt with in clause A.3 on page 341. The second element, the contractual claim, is dealt with in clause A.4. There is a different tax treatment under Swiss law for the two components. One is subject to withholding tax and one is not. For present purposes, that distinction is not material, we submit.
Now, we deal with the nature of the Genussscheine that were issued to the appellant in our written submissions at paragraphs 19 to 20. If I can just take your Honours to Article 8 of the Glencore International Articles under which these Genussscheine were to be issued, your Honours will find that at volume 2 of appeal book, page 455. If your Honours have page 455, Article 8 is found a little under line 30 and clause 1 states that:
The Company has issued 150’000 profit sharing certificates -
Then clause 2:
A profit sharing certificate grants upon restitution to the Company –
that is, of the certificate:
a claim to a cumulative portion of the balance sheet profit, to be determined by the general meeting of shareholders ‑ ‑ ‑
GORDON J: Is that not a problem for you in relation to the GS, that is, the way in which subclause 2 reads is that it is only upon restitution to the company, i.e. delivery up to the company that the entitlement to the balance sheet profit or a portion of it comes home?
MR RICHMOND: No, your Honour. We would submit that – and I will expand on this in my submissions regarding Abbott v Philbin and the UBS Case – upon the grant of the Genussscheine, in the same way that upon the grant of shares the person receiving the grant obtains an entitlement to something which will be done in the future, in the case of shares, the payment of dividends, the terms of capital and so on in the future; in the case of these certificates similarly a right to receive a share of profit in the future “to be determined by the general meeting of shareholders”.
GORDON J: Is that consistent with the last four lines of that subclause which says that:
he shall have no claim to any payment . . . in respect of restitution –
So that you have this concept that it is not until someone delivers up the very certificate that one is entitled to claim the very right to, or have any entitlement to, a share of the profit.
MR RICHMOND: Well, your Honour, those words your Honour has just referred to are concerned with this vesting period. They are only concerned with that 24 month period after the issue of the Genussscheine. It is not a general statement that he shall have no claim at all.
GORDON J: No, I was referring to the first two lines and then drawing attention to the fact that the concept of restitution seems to appear throughout this concept of the way in which the GS is both allocated or – I think it is called “distributed” in sub‑Article 1.
MR RICHMOND: Well, your Honour, as we submit, the Genussscheine are an entitlement created by the articles of association to receive at a future time a cumulative proportion of balance sheet profit to be determined by the general meeting - and I will come to that in a moment - during the period of ownership of that certificate in proportion, as it says, to the number of certificates on issue.
KIEFEL J: Well, you refer to receive - or payment in a future time. Another way of reading this is that the benefit accrues at a future time.
MR RICHMOND: Well, your Honour, we would say accrues over the period that the Genussscheine are held, and that is a submission that is supported by the terms of the agreements under which they are issued. The entitlement accrues over the period but it is not paid until a later time and that later time is when they are handed back, if you like, or the restitution of them occurs by handing them back to the company.
FRENCH CJ: Where does their legal force derived from? Is that from the Code of Obligations?
MR RICHMOND: The Code of Obligations, your Honour, permits a company which has a provision in its articles authorising it to do so, to issue these things, if I can call them that. We say they are things which are recognised as a corporate law concept under Swiss law and there is some evidence which we refer to in our submissions at 19 and 20. Also they have a contractual element because they are issued together with a contract which regulates the circumstances under which an amount will be paid and that is, in this case, the PPAs, the profit participation agreements.
Addressing the point Justice Gordon has raised, it is analogous to the situation where there is a contractual obligation to pay money or to issue property ‑ and an option is one such form of contract – at a future time when the holder of that right exercises the right. We would say that on the grant of the right in those two cases the holder has a present right to a payment of money or the receipt of property in the future because it is by reason of his act of cashing in or exercising the right that the right becomes payable. But there is a distinction between the contract to receive money or property in the future on the one hand and merely a right in the future to receive something and we would submit this is the first category.
The restitution to the company of the certificate is the event that crystallises the payment, not the right to the payment. It is the holding of the certificate over the period which gives rise to the share of profit, which is then crystallised and is paid at the time of the restitution of the certificate and the concluding words ‑ ‑ ‑
FRENCH CJ: Were physical certificates actually issued?
MR RICHMOND: No, your Honour, they were not, and that is clear ‑ but I will take your Honour to the documents ‑ it is clear that the Genussscheine were issued in the sense that Glencore acknowledged in writing that it had issued them. We would say there is no difference between a company issuing shares with no physical certificates and a case where a company issues PPU, or Genussscheine I should say without physical certificates.
The physical certificate does not bear upon the creation of the right and there is nothing in Article 8 that requires a certificate to be issued to create the right. The right arises under the articles, if there is an issue, and is dealt with by the contract between the holder, in this case the appellant, and the company.
KEANE J: Just in terms of the nature of the right you are talking about, it is the right to a cumulative portion of the balance sheet profit during the period of the ownership. So, say the period of employment is 15 years, 14 years, after the first seven years, the seven good years, seven fat years then seven lean years eat the seven good years. At the end of the period, under this provision, there would not be any amount payable. Is that right?
MR RICHMOND: That is right, your Honour, if the seven bad years ‑ ‑ ‑
KEANE J: Whereas at the end of the seven good years, but there is no termination of employment and no restitution of the certificates, there would be notionally, in some way, an entitlement to a large amount of profit. Does that not tend to suggest that it is really all inchoate until there is a termination or a notice of termination and restitution?
MR RICHMOND: No, your Honour, we would submit not. We would submit that the right exists from the time of grant. The right is not conditional.
KEANE J: It is a funny old right, is it not? It is a right that does not give you an entitlement to anything at all until termination and in the meantime, what that amount that is ultimately payable may be might be nil. So it is not really a right to payment of an amount in the future. It is a right to a future payment, is it not?
MR RICHMOND: Your Honour, with respect, no, and that is not the way that his Honour Justice Pagone saw it. You can draw analogy with shares. Shares are an entitlement ultimately to money, to either dividends or capital distributions. There is really nothing else that a shareholder has if they have the right to vote but in terms of his economic interest it is an interest entitling him or her to receive money at a future time by way of capital dividend ‑ ‑ ‑
KEANE J: Well, it is more than that, is it not? On any view, it is a right to the due administration of the company.
MR RICHMOND: But ultimately shareholders, in most situations in any event, acquire shares not just because they want to attend general meetings of the company and so on and vote, but because they want to receive money to defray the cost of their investment in the company and ‑ ‑ ‑
KEANE J: Whatever their motives are, whatever their motives are, there is a legal structure which gives them what is commonly called an equity in the company.
MR RICHMOND: Indeed, an equity. Well, in this case, with respect, the appellant had an equity in the holding entity through his shares and an equity of sorts in the entity which was the operating company being these profit participation, profit sharing certificates but, your Honour, my point is to draw, and his Honour Justice Pagone did this as well, the analogy with shares is that they too are sentient rights to the payment of money. In a financial sense, that is what they are and whether any money is ultimately received depends upon the economic performance of the entity, the company.
If it does not have profits over a period, there will be no dividends. No shareholder has a right to dividends. Their right to dividends is like the rights of the holders of the Genussscheine, a right conditional upon, or a right subject to, I should say, of a vote at the general meeting in favour of making the distribution and whether a return of capital ultimately occurs again is subject to the performance of the entity. If the entity does not succeed in its business, then no amount may have become payable by way of capital or dividend and, we submit, perhaps analogous to a holding of these instruments. The distinction we say is between the right to receive money in the future and the quantum of the money which may become payable in the future and ‑ ‑ ‑
GORDON J: I wonder whether that is the confusion in the sense that, if one looks to the purpose of these GS, the analogy with the shares is actually more distracting than helpful in this sense. If one looks to the GS and one looks to the articles, they are clearly to be issued for a particular purpose and that purpose is to enable a method of calculation of the share of the profits. And they clearly do not have other rights attached to them that you would ordinarily expect to be attached to shares. And if you understand that by reference to Article 8 and understand that they, in effect, do not grant anything until they are delivered up, then one understands that they, in effect, have two purposes: to provide a method of calculation for the intervening years and then, upon restitution, an entitlement to a share in the profit calculated, as Justice Keane says, according to what has gone before it.
MR RICHMOND: Your Honour, we would submit that the starting point there is incorrect. It is not correct, with respect, to say that the profit‑sharing certificates, which emphasise a part of the overall bundle – the case is not just about these Genussscheine, it is about the entire bundle – the entire bundle involves the creation of a right to the payment of a sum of money in the future, the quantum of which depends upon the profit performance of the operating holding company, Glencore International. We submit that it is clear that there is a right. It is a payment in the future, albeit that the quantum of that amount payable in the future will depend upon the vagaries of the business in that intervening period.
Importantly, the employee has the ability to choose when to exercise his or her rights so that, in Justice Keane’s example, if, after seven years, things are going well but the employee sees clouds on the horizon, that the employee can cash in. The employee has the ability under the terms of the agreements to cash in the rights in one way or another, either by agreement with Glencore or by retiring or by assigning to another entity. The third one is not a good example. It is either cashing in with the employer or terminating his or her employment.
KEANE J: And would that be so if he were dismissed for misconduct or dishonesty?
MR RICHMOND: I think that would be so, too – well, yes, your Honour, there is no provision that restricts the ability of the employee to ‑ the event is simply termination, regardless of the circumstances of termination.
KEANE J: Is not the event notice of termination? Is it not the giving of notice of termination, by either employer or employee?
MR RICHMOND: Yes, clause A.2.4.
KEANE J: And under your client’s terms of employment, either party was entitled to give notice of termination, save in cases of misconduct or dishonesty, when no notice was necessary. So that if your client were dismissed for dishonesty or misconduct, he thereafter would not be in a position, would he, to give notice of termination?
MR RICHMOND: I think your Honour is correct, with respect.
KEANE J: If this is right, then does not that suggest that your client’s rights remain – sorry, that Glencore’s – the employer’s obligations in relation to the profit share payment remain executory and your client’s correlative rights remain inchoate rather than accrued.
MR RICHMOND: In our submission, no, your Honour, because the employee could terminate at his or her own election.
KEANE J: Well, not if he has been dismissed for cause.
MR RICHMOND: Your Honour, that is a situation ‑ ‑ ‑
KEANE J: No, it is a situation that did not arise but we are talking about – we are testing, we are testing your proposition that there was an accrued entitlement. What I am suggesting to you is that the nature of the parties’ rights and obligations look like what there was was an inchoate prospect, an expectation that there would be a payment in the future but that it was not an accrued entitlement, it was subject to the due performance for the balance of the contract of employment of your client’s obligations as a servant.
GORDON J: It arises in this way, Mr Richmond. At appeal book 358, there is the termination clause for the Australian contract, that is, his employment contract, which permits his employer to terminate him without notice for:
willful misconduct or dishonesty -
If one reads that with one of the PPAs – whether you choose the one you are taking us to now or 2005 – the event that brings about the crystallisation – we use that neutral term for the moment of what these rights are – seems to be a notice of termination.
MR RICHMOND: I accept, your Honour, that it is a notice of termination that crystallises the entitlement but there is no requirement that it be a written notice. There is no requirement that it be a written notice of termination. If an employer says to an employee, your position is terminated, the employer has given notice of the termination and ‑ ‑ ‑
KEANE J: Well, it might depend on whether this agreement is using “termination” in a comprehensive sense. It does not look like it when it talks about notice of termination. But, in any event, apart from that, as Justice Gordon has pointed out, the employment agreement itself contemplates dismissal, if you like, otherwise than termination by notice.
MR RICHMOND: Your Honour ‑ ‑ ‑
KEANE J: As is only sensible. I mean, it is inconceivable that an arrangement like this could be enforced by an employee who was dismissed for dishonesty.
MR RICHMOND: Your Honour, coming back to Justice Gordon’s point about the agreement at page 358, the word “notice” there has been used in the sense that there does not need to be a period of time given to the employee because the first part of the clause is saying that the employer must give one month’s notice. The exception is where there is this misconduct or dishonesty where no notice in that sense, that is, no time is required.
But there would be, we would submit, a notice of termination if the employer said to the employee, “You are now terminated for dishonesty or misconduct”, and that would involve, we would submit, a trigger under the notice date provision. So if we are back in the 1999 agreement, A.2.4 at page 340, so a notice of termination – so the crystallisation occurs where there is notice – not a notice of, but “notice of termination of employment”. It does not say in writing.
KEANE J: But this agreement has to be understood in the context of the very familiar and fundamental understanding that in employment law, the employment relationship may be terminable on notice for no reason on either side, or it may be terminable for cause. I mean, that is a really fundamental understanding against which these agreements would have been drafted.
MR RICHMOND: Yes, your Honour, but if I could just make – the first point is that nothing in that clause requires written notice, and that is confirmed by the last four lines of page 340:
notice of termination of employment shall be valid whether made in writing or otherwise –
FRENCH CJ: In the 2005 agreement the entitlement to payment is determined by reference to a thing called a notice date and that appears in – as defined in 399. That does seem to contemplate something given or received. I suppose the question then becomes one of construction. Does it pick up a termination where the employee is simply told, “You’re dismissed for dishonesty”?
MR RICHMOND: Yes. Your Honour, with respect, we would submit that is the case. If you look at that definition at page 399, paragraph 13:
Notice Date means the last day (a) of the month notice of termination . . . is received –
It does not say “written notice of termination is received”. Even in the case of dishonesty and wilful misconduct, there has to be some communication by the employer, we would submit, in order for the employee to be terminated. It will be a communication of some kind which constitutes the termination of the employment, albeit that it may not be in writing. There is nothing in the two agreements or any of the agreements, in particular the earlier one at 340, is explicit that written notice is not required, and it has been accepted by all the courts below that these agreements were not intended to change the substance of the arrangement and that they are materially the same, and that was consistent with the evidence that they were merely – the later iterations were designed to update them and so on, not to change the substance of the rights of the employee.
So one does not take anything, we would submit, from the fact that there is no reference on page 399 in the definition of “Notice Date” to the lack of a need for writing. We would say that is implicit. It was an unnecessary addition in the earlier agreement and you would construe the later agreement as containing the same general concept that notice of any kind is sufficient. It has never been put in this case that there is an issue of construction of the agreement as to whether written notice was required.
KEANE J: No, but this is just as aspect of the larger argument which is whether your rights are inchoate and the other side’s obligations are executory, or whether you have an accrued right. It is just another way of testing your fundamental contention.
MR RICHMOND: Your Honour, indeed, and our submission would be that it would be an extraordinary result to construe the agreement in this way, that an employee has an entitlement over, say, 10 years of employment, which has accrued under the agreement and then the employer terminates the employment and says, “Bad luck, we’ve terminated you for misconduct and all your entitlements over the entire period which have accrued and if you were to terminate voluntarily would have been payable to you the employee have now gone up in a puff of smoke because we, the employer, have terminated you early”.
It would be an extraordinary result and we would submit that a proper construction of the contract would avoid that extraordinary result that the employer had the ability at any time to avoid the rights from crystallising into an amount due by any such means. It just does not involve a commonsense construction of the way the agreement works.
It is an agreement which operates, we would say, to grant rights up front when the various Genussscheine are issued and the shares which go with them are issued and the quantum is all that is then at issue or uncertain. The quantum of the amount that will become payable is uncertain, but a right to receive money which ultimately might be zero because of intervening events is still a right to receive money, we would submit.
The fact that a person promises to pay another person a sum of money which is calculated over a period and might ultimately turn out to be zero by reason of those events in the interim does not deny that at the time of grant there was a right granted. It is a right granted to an uncertain sum of money but nevertheless it is still a right.
The position is different where there might be conditions attaching to the receipt of the money which are not within the control of the donee of the right and in those circumstances – that would perhaps be the Tagget situation – where there are conditions which affect the creation of the right. We would submit there are no conditions here which affect the creation of the right. The uncertainties only go to the quantum that might ultimately be paid.
Now, if I can go back to the 1999 agreement and go to page 340 we see the method of calculation of the entitlement. We then have Annexure A, page 348, which summarises the method of calculation. We see that, essentially, the employee is entitled to a proportion of the profit accumulated over the period that he or she holds the rights, the Genussscheine, until the notice date – the year in which the notice date occurs.
GAGELER J: Where do you get that from? I am just trying to follow ‑ ‑ ‑
MR RICHMOND: At A.2.4, at the conclusion of that. It is aggregated over the period. The profit dissipation, which is the amount that has been calculated annually under A.2.1 through to A.2.3, is then aggregated over the period that the employee holds the Genussscheine, from the allocation date, which is 1 January in the year in which the issue occurred, and then becomes payable.
GAGELER J: But not before?
MR RICHMOND: But does not become payable before. That is right. It is a case of a contract to pay money in the future.
GAGELER J: A.2, the calculation clause, then feeds into A.3 and A.4. Is that right?
MR RICHMOND: Yes, your Honour, in the sense that A.3 and A.4 deal with the two components of the ultimate amount. Forty‑five per cent is treated as a contractual claim under A.4 and the balance of 55 per cent is treated as a profit distribution under A.3.5 under the GS.
GAGELER J: Just so I understand the basic structure, A.2.4 limits any payment to a payment that occurs after the notice date and that governs both the GS and the contractual claim?
MR RICHMOND: Yes, your Honour, in the sense that the amount that becomes payable, which is the periodical profit participation, does not become payable until the notice date occurs. So when it becomes payable, as a consequence of the notice date occurring, then it becomes due, so we see clause A.5 on page 341:
The Profit Participation will become due 30 days after the Notice Date –
subject to the proviso, which is that the employee has signed a document in the form of Annexure C on page 351.
GAGELER J: If the employee then tried to cash in the GI before the notice date there would be nothing to cash in, would there? There would be no cash.
MR RICHMOND: Your Honour, there is provision in clause A.10, on page 343, for early repayments. So, there can be a negotiation between the employee and GI for the employee to buy back. So, there is a situation where, in this agreement, where the notice date has not occurred but there is a payment coming due.
GORDON J: I must say, I read that as a right that was in the hands of GI, not the employee. Is that how I am to read that?
MR RICHMOND: Yes, your Honour.
GORDON J: That is, that the employee could not do what Justice Gageler put to you, ask to cash in.
MR RICHMOND: Indeed, he could not. He has to negotiate that with the employer but there is evidence that that did occur from time to time.
GORDON J: At the instigation of an employee?
MR RICHMOND: At the instigation of the employee. Well, it is not clear whether it is at the instigation ‑ ‑ ‑
GORDON J: That is my point. My point is, as I understood A.10, it was limited to a right in the hands of GI, not the employee.
MR RICHMOND: Well, there are examples given in the affidavit of Mr Hubmann where the purchases did occur and – this is paragraph 20, volume 2, page 442. So, whilst your Honour is correct that the clause does not give the employee the right to require repurchase, the evidence is that from time to time, due to reasons such as divorce, the employee did instigate a redemption of his or her entitlement. That is at paragraph 20 on page 442.
Then in the later agreement, the IPPA 2005, page 399, the definition of “Notice Date” is slightly different in clause 13 on page 399. There is a new paragraph (c) there. So, the notice date can be:
such other date agreed to be the Notice Date –
So, that is the situation of the sort that Mr Hubmann is referring to at paragraph 20 of his affidavit where there is an agreement ‑ ‑ ‑
FRENCH CJ: That does not define a right, that just defines a contractual or a possibility that the parties might – or an agreement that the parties might enter into. It has got to be bilateral.
MR RICHMOND: Your Honour, yes, but subject to this. It is defining a circumstance in which there can be a cashing in of the entitlement in the future other than termination or death or disability.
FRENCH CJ: Yes, I understand that.
MR RICHMOND: We would submit it does not go to whether there is a right ‑ ‑ ‑
FRENCH CJ: No, that is right.
MR RICHMOND: ‑ ‑ ‑ it goes to when the right is exercised.
FRENCH CJ: You can do anything by agreement, really, I suppose.
MR RICHMOND: Your Honour, the agreement is as to when the amount becomes due. It is not an agreement as to whether there is an amount payable.
FRENCH CJ: No.
MR RICHMOND: I am sorry if I am labouring the point but we submit that nothing in the concept of “notice date” is assisting one to identify whether a right exists at the time these agreements were executed or only exists in 2007. We would submit that the right does exist. On each occasion when shares and Genussscheine or PPU are issued, albeit that it is a right to receive an amount the quantum of which is uncertain at that time, but our submission is that that does not detract from the proposition that there is there a right. With respect, we must not confuse whether an amount will become payable with the question whether there is a right in the first place.
There is evidence that when there is a change in the accounting practices of Glencore, it came to recognise the accruing obligation in its accounts prior to termination. I will take your Honours to that a little bit later. So when there was a change in the US accounting standards, it became necessary for Glencore to recognise in its shareholders’ funds in its balance sheet the fact that it had an accrued obligation, albeit not presently payable, to make a payment in the future, the quantum of which would vary from year to year, clearly, but the obligation nevertheless existed.
Now, there can be a right or an obligation, notwithstanding that the quantum ultimately payable is uncertain, and the concept of notice date is only dealing with ‑ as clause A.5 on page 341 makes clear ‑ it is only dealing with the date when:
The Profit Participation will become due –
It is quite clear:
The Profit Participation will become due . . . provided that –
the declaration is signed. We know in relation to debts we have amounts which are payable in the future but do not crystallise into a debt until some event occurs. So, there is not a debt in law until that event has crystallised but there is still a right at the earlier time as the amount ultimately payable is accruing.
So, for example, you might have interest under a loan agreement which is not interest at the fixed amount per annum. It is rather interest calculated by reference to the profitability of the debtor and we would submit that in a case like that the quantum of the interest would not be known until the end of the period when it crystallises but, nevertheless, there is still an existing right at the earlier time to pay the amount, the quantum of which is uncertain until crystallisation.
Now, I should just draw attention to the vesting period which is at page 340, this is the two‑year what we call vesting period, at A.2.3, last few lines which mirrors the vesting period in Article 8 of the Glencore articles but does it not apply in the case of:
death or permanent disability –
Now, clause A.3 on page 341 states that:
GI has issued to EMPLOYEE the number of GS ‑
set in Annexure B. If your Honours go to Annexure B at page 349 we see the number 800 there. So, picking up on what the Chief Justice asked me earlier, this is an example of where Glencore states that it has issued Genussscheine even though there is no certificate evidencing the issue.
GAGELER J: The issue in your submission was what, payment in advance for services to be rendered? How do you characterise the issue?
MR RICHMOND: Characterise the issue of the Genussscheine, your Honour?
GAGELER J: Yes.
MR RICHMOND: Yes. Well, your Honour, we characterise the reward here as the issue of shares and associated rights, including the Genussscheine, because we include also the agreements themselves which set out the terms under which payments will be made. Those rights – the shares and the associated rights – are reward for past service and an incentive for future service and, viewed in that way, that is capable of being – we submit it is – income according to ordinary concepts, because income according to ordinary concepts from personal services includes benefits given, money or other property, for past, current or future services.
When I say future services there, I really mean incentive, and it comes out in some of the English cases, including Tyrer v Smart that we refer to in our submissions. The House of Lords there recognised that income according to ordinary concepts includes rewards for past, current or future services and employee share schemes of the sort we submit that we have here and which you find in Abbott v Philbin, Donaldson and McArdle and the UBS Case are all examples of schemes where benefits are awarded in advance of service to encourage future performance or secure other benefits for the employer.
Clearly, encouraging future service is important to an employer to ensure that the business continues to prosper. So there is a clear principle which accepts that a reward for future services, i.e. an incentive payment or benefit, is ordinary income at the time it is given and that is to be distinguished from a payment in the future as deferred compensation for services rendered in the future.
So that is the sort of territory that we are in. Which case are we in, are we in the first or the second, and we submit we are in the first, and we submit that cases such as Abbott v Philbin and the UBS Case and Donaldson and McArdle are all examples which are close to this one, or analogous to this one where benefits of this kind were treated as rewards at the time they were granted, even though the fruits of the reward were not obtained until a later time.
As his Honour Sir Nigel Bowen put it in Donaldson, one must be careful not to confuse the right with the fruits of the right. We say there was a right here, as there was in Abbott v Philbin and in Donaldson at the time of grant, even though the fruits of the right would not be received until a later time – the notice date – or in the 2005 agreement another date which is agreed to be the notice date, and even though the fruits might actually be nil. But the tree might produce a crop of apples that are all, as it turns out, rotted on the vine, so to speak, or rotted on the tree, and the fruit may be valueless. But that does not deny that there was in fact a right to the fruit, whatever it might be.
So we would say, drawing that fruit and tree analogy which his Honour Sir Nigel Bowen pointed out in Donaldson is the key to understanding Abbott v Philbin, one must distinguish between the tree on the one hand and the fruit on the other.
In Abbott v Philbin, which I will come to in a minute, that is another example of where the employee has a right which ultimately may bear no fruit at all. The options in Abbott v Philbin were for shares in the company and in between the time of grant and the time of exercise the company may have gone out of business, in which event the right to receive shares under the option might have been worth nothing.
KEANE J: But in the meantime, from the time of grant the ability to turn what was granted into money was exercisable by the employee.
MR RICHMOND: Not by assignment, your Honour, only by ‑ ‑ ‑
KEANE J: No, but the employee had something which, in the nature of things, could be turned into money from the time of grant.
MR RICHMOND: We submit that the employee does here, your Honour. He has -unlike Abbott v Philbin he has the ability – I was just about to go to it, clause C.2 on page 345, which is the right to assign. He, unlike Mr Abbott in Abbott v Philbin, he has the right here, as all employees do, to assign his interest to a personal holding company, trust or foundation controlled by him, by capital and all votes or otherwise.
So he does not need to own the entity. So he has the ability, unlike the taxpayer in Abbott, to assign to a third party which he controls and that brings in the ability to introduce a real third party who may fund the assignment, so he can turn it to account in that way. He can also turn it to account in the same way that the taxpayer in Abbott v Philbin could which was, although he could not assign the option, he could turn it to account by agreeing with someone that when he exercised it he would hand over the shares.
With respect, your Honour, there is no material difference between this case and Abbott v Philbin in that regard. The rights that the employee had here were as capable of being turned to pecuniary account as were the rights of the taxpayer in Abbott v Philbin, in fact more so because unlike Abbott v Philbin this taxpayer had the ability to assign his rights to another entity.
GORDON J: So far, Mr Richmond, we have been dealing with the 1999 agreement but, as I understood it, and I assume you are going to come to it, the 2005 agreement ultimately replaced these agreements and contains quite different language. Are you going to deal with those?
MR RICHMOND: I am, your Honour, yes, I am, but just as Justice Pagone did, we submit that it is important to see the rights as and when they are granted and their nature before going to the final agreement.
FRENCH CJ: Some significance is attached to the allocation date in the 1999 agreement. At 349 there does not seem to be an allocation date. Does anything turn on that?
MR RICHMOND: Yes. Your Honour, that is because he had received those 800 Genussscheine at earlier points in time under the earlier agreements.
FRENCH CJ: So for the allocation date, we need to look back to the history of the particular issues?
MR RICHMOND: Yes. For example, your Honour, on page 333, so this is a letter sent to him in 1999 shortly before the 1999 agreement, and second paragraph of that letter:
As of January 1, 1999, you have been allocated an additional total of 200 Genussscheine -
So the allocation date for those 200 Genussscheine was 1 January 1999.
FRENCH CJ: So when it says at A.3.2 that:
GI has issued to EMPLOYEE the number of GS, indicated in Annex B -
that just takes us to the 800? That is all we need to worry about in terms of annex B; the rest of it is historical?
MR RICHMOND: That is right, your Honour. So the 800 includes the 200 I just took your Honours to and there are letters for each of the other 600 to be found earlier. Another one is at page 326. On each occasion the allocation date is 1 January of the year in which they are allocated or issued.
GAGELER J: Mr Richmond, do you draw any conceptual distinction between the Genussscheine and the contractual claim?
MR RICHMOND: No, your Honour, the Genussscheine entitle, as the articles say, to a proportion of profit. By the contract the entitlement has been divided up into two portions and only part of it is treated as a distribution under the Genussscheine, being 55 per cent, and that is on the basis that there is an agreement with the Swiss tax authorities that withholding tax will be payable on that portion as a dividend and tax deducted at source on the payment, and the primary judge dealt with this in his decision. That was the reason for the split.
But in terms of distinction, well, ultimately we say that the taxpayer had a bundle of rights, including the shares, and these are rights which are a combination of a contractual entitlement and an entitlement evidenced by the Genussscheine that were issued. But the monetary amount that becomes due is the amount called the profit participation referred to in clause A.5, which is the sum of the amounts that have accrued over the period as a proportion of profit, then by contract split into two portions.
So then if I can draw attention to the shareholder’s agreement which goes with this 1999 agreement which is found at page 272 of the appeal book, I just draw attention to the fact that – I beg your pardon, it is page 283 – and I draw attention to the fact that the shares that are issued – this is page 284 – are issued on the conditions set out in A.2 and at clause C.2.3.1 on page 289 the company called Newho, which is Glencore Holding as it became known, agrees in effect to procure that Glencore International meets its obligations under the profit participation agreements.
So, whilst your Honours saw that Article 8 provided that the entitlement was subject to the resolution in general meeting, we have in clause C.2.3.1 a contractual obligation on the part of the entity which owns 85 per cent of the shares of Glencore International agreeing to procure that the profits are distributed in accordance with Glencore International, which is then MRAG, contractual obligations under the PPAs. That is another element of the stapling arrangement. The stapling comes about because Glencore International is agreeing to procure to its shareholder, the employee ‑ the appellant in this case – that it will ensure that the Genussscheine are honoured in accordance with the agreement.
KEANE J: So is the shareholding agreement – is that the obligation on Mr Blank to buy the shares in the holding company – is that the quid pro quo for this guarantee obligation, if you like?
MR RICHMOND: With respect, your Honour, we would not call it a quid quo pro. We would say that it is an element of the interconnectedness of the shares and the contractual rights.
KEANE J: I just wonder, though, whether it is. Looking at it as a company in terms of company law, how would that company’s directors justify giving this guarantee where there is nothing coming to Glencore Holding? Is it not that that is what it is about?
MR RICHMOND: Your Honour, we would not call it a guarantee.
KEANE J: I use “guarantee” in quotes because that is just a shorthand way of saying what the clause says in a lot of words. But in terms of, in effect, promising to procure that International keeps its promise, in return for that what it gets is a subscription from the beneficiary of that promise.
MR RICHMOND: Yes, but the beneficiary of that promise is its shareholder. So I just wish to emphasise in our submission it is important to recognise that the person who has that promise in the shareholder’s agreement is the shareholder of the company giving the promise and it is a promise that the company gives to all its shareholders, or all the people who have these Genussscheine. Clause C.2.3 indicates that the justification for this is that Glencore Holding does not propose to distribute profits to its shareholders but rather to procure that the profits of the operating subsidiary, Glencore International, are distributed not through dividends going up the chain via Glencore Holding but rather through the contractual entitlements with the benefit of the GS.
This clause would not be necessary if the Genussscheine had not been issued and if the PPAs had not been issued. In other words, it would have been possible to have had the same economic effect as what is here with simply each employee taking shares in Glencore Holding, with a contract with Glencore Holding for the distribution of its profits via dividends and so on or, on redemption, at the time redemption of the shares in GH occur.
But, rather than doing it that way – and that is the way the scheme in UBS worked. In that case, the shareholder took shares in the entity with a contractual entitlement to a sum of money on termination which reflected the profits generated in the interim. Here, it is another way of achieving the same result and because it involves two entities, there is this promise here to ensure that that result is achieved.
So, rather than Glencore Holding issuing shares and agreeing to make payments to the shareholder out of its own profits and to redeem the shares at a time in the future – the notice date – instead, shares are issued to the shareholder and the company issuing the shares agrees to procure that the subsidiary entity, Glencore International, meets its obligations to achieve the same result that would have applied if the situation had been of the first kind. But, it certainly is an important element, we would say, of the interconnectedness of the shares and the contractual rights and Genussscheine issued by Glencore.
KIEFEL J: I notice under Article 657 of the Swiss Law of Obligations which you mentioned earlier at appeal book 883 that the connection between the company and the person who might be the subject of a Genussscheine can be either as a shareholder or employee. Does anything turn on that?
MR RICHMOND: No, your Honour, because in this case it is an employee. It could be a shareholder. It could be issued to shareholders of the entity. In this case, it happens to be an employee. We do not think – it recognises that these rights are separate from a shareholding interest and not a shareholding interest, but they give a right which is similar to a right which is one of the bundle of rights which a shareholder has but it is designed to deal with a case where employees are to be benefitted by the performance of the entity that they are employed by.
So, just on the stapling – I did not mention it ‑ I wish to draw attention to clause B.1 on page 343. So, the stapling of the Genussscheine and the shares is shown by clause B.1 on page 343. Not only must the employee have signed a shareholders’ agreement, but the employee must have:
fulfilled his obligations thereunder, in particular to subscribe and pay –
for the shares. I took your Honours to the clause which has that obligation to subscribe for shares at 50 Swiss francs per share. That is an obligation that is continuous. Each time there is a grant of rights in the form of Genussscheine, there is an obligation to perform the obligation to subscribe for shares.
KIEFEL J: The purpose of this is to maintain the linkage required by article 657.
MR RICHMOND: Yes, your Honour.
KIEFEL J: It has to be one or the other or both.
MR RICHMOND: Yes, one or the other or both, but in this case it was designed to ensure the linkage with the shareholding and the ultimate parent, Glencore Holding, because it is fundamental to the scheme, as implemented here, that the persons with the Genussscheine have a corresponding interest in the parent company which matches their interest held through the Genussscheine.
If I can now turn to IPPA 2003, found at page 362, this is an agreement which came into effect in 2003. It did not overtake or replace the 1999 agreement. It just dealt with issues of what are called “phantom units” over the succeeding years and in the case of the appellant only a small proportion of his interest was obtained under this agreement. It was the 100 units.
FRENCH CJ: This was to deal with some tax problem in the US, was it, or US tax law?
MR RICHMOND: Yes, that appears to be the case, your Honour. There was an issue in the US which required that the agreements be redrafted and this is the first time we find on page 362 a reference to deferred compensation, so the second last recital on page 362, and it is the first time we find a reference to consideration of the services to be rendered.
I also note that there is a concept of Genussscheine in this agreement as well, which are referred to in clause A.1.2 and clause A.3. These are Genussscheine issued by a different entity – that is, a company called Glencore AG, which is a subsidiary of Glencore International, but they are different Genussscheine from the ones which were held by the appellant. By this point he had 1,500 Genussscheine issued by Glencore International.
Now if I can move to the 2005 agreement, which is found at page 397, and if your Honours turn to page 398, we see at the top of the page those two recitals to which the majority of the Full Court gave much emphasis. The first refers to a plan to defer compensation and the second to consideration for services.
Before I address those elements, I will just mention some of the definitions which are important on page 399. The concept of “Allocation Date” in clause 1 is the date on which the PPU are allocated and one sees in the various letters that were issued to the appellant that his PPU were allocated as of 1 January of the relevant year.
I note that by this time he has 1,500 PPU in the form of Genussscheine and 100 PPU in the form of phantom units issued under the 2005 agreement. We see the definition “Due Date”, which is the “thirtieth day after the Notice Date”. That term is defined in clause 13. As we see, it is any of three dates. Importantly, the last one is such other date as may be agreed. So rights could be cashed in before termination occurs. And as I indicated earlier, the evidence is that that did occur from time to time ‑ ‑ ‑
FRENCH CJ: Sorry, I am losing you. If you can just lift your voice a little bit.
MR RICHMOND: Yes, I beg your pardon. So, as I indicated earlier, there is evidence that that did occur. Paragraph (c) of clause 13 was activated on a number of occasions in the relevant period. Now, we see clause 10 is the definition of IPP, as it is called, defined to mean:
the deferred compensation calculated on the basis of the results of GI granted to Employee hereunder.
And this takes you to clause A.1.1, where the first sentence states what is IPP. It says the:
GI grants Employee deferred compensation which will be calculated on the basis of the results of GI –
Now, we emphasise the word “grants” and we emphasise that you have to read clause A.1.1 with clause A.1.2 which states on the third line that:
the amount of deferred compensation in the form of PPU which shall be allocated –
In other words, the deferred compensation is in the form of PPU and that term is defined in clause 17 on the top ‑ ‑ ‑
GORDON J: Is that right, Mr Richmond? I read those first three lines as contending, or at least suggesting, that first it was identifying the purpose for which the GS were issued and telling us that they are issued solely for the purpose of implementing the plan and calculating the amount of deferred compensation so that they had, as I think I put to you earlier, two purposes:
issued solely for the purpose of . . . calculating the amount of deferred compensation in the form of PPU ‑
and then we have come to the PPU, and it goes on to say, consistent with that, that the employee does not have any interest in them whatsoever, they are merely a mechanism for calculation.
MR RICHMOND: Well, your Honour, in response to that we would submit that the first two lines are referring to the GS issued by AG, not the GS issued by Glencore International. So, we would say that is a statement of why AG has issued the GS to Glencore International, which are dealt with at clause A.3, and when one goes back to the definition of PPU at clause 17 you see that there are two forms of GS which are being dealt with and the concept of PPU includes both the GS issued by AG under this plan and to the GS issued by GI under the earlier iteration of the plan. It is the last two sentences of clause 17:
or GS issued by GI and held directly by Employees of GI or any of its Subsidiaries pursuant to profit participation agreements.
Well, in the case of the appellant, he had 1,500 such GS and they are ‑ ‑ ‑
GORDON J: GS in which they had no voting rights and all the other rights which have been the subject of discussion.
MR RICHMOND: They had no voting rights, your Honour, but they had a right to receive in the future a proportion of profit of Glencore International corresponding to his proportionate shareholding in Glencore Holding.
KEANE J: So are they different in any material respect to the GS issued by AG?
MR RICHMOND: Yes, your Honour, because they are held by him. They are different because they are rights ‑ ‑ ‑
KEANE J: I mean material in relation to the issue.
MR RICHMOND: In terms of the way in which the profit entitlement is calculated, no, they are not, in the sense that they serve similar purposes as is explained in the calculation clause. A.2 at the bottom of page 400 sets out how entitlement, the profit is calculated and it is materially the same, subject to one point I will come to, to the way in which it was done under the earlier agreement. So the GS, because they are PPU, are used in the same way with a GS issued by AG or by GI. So yes, your Honour, in that sense the answer is yes.
We would submit that nevertheless there is a difference, which is that one that Justice Pagone made something of, which is that the appellant here retained his 1,500 GS and they are expressly made PPU by clause 17 and he has the benefit of the promise from Glencore Holding under the shareholders’ agreement, which is found at page 382.
There was a new shareholders’ agreement signed at the same time which is in identical terms to the earlier one and it contains the same provision which your Honour Justice Keane described in a general way as a guarantee in clause 2.3.1, page 387.
So we would submit that there is a difference which is that the appellant still had his 1,500 GSs, which were PPU under clause 17 under this agreement, and he held the benefit of those GSs with the benefit of the guarantee, if you like, under clause 2.3.1, that the holding company GH, of which he was a shareholder, would procure that GI performed its obligations under this agreement to pay him his proportionate share of profit when the time came.
So in that sense we would submit that there is a difference. It is still part of his bundle of rights that he has the 1,500 PPU together with the contract with Glencore Holding, the shareholders’ agreement and that clause with the guarantee, his shares in Glencore Holding and his contractual rights under this agreement.
In relation to what those contractual rights are, I am just addressing the question of what is the significance of the words “deferred compensation” which are used in 8.1.1, page 400. Our submission is that if you read 8.1.1 with A.1.2, together with the definition at clause 17, one can construe the deferred compensation as being the PPU. It is the right itself, the right which is the PPU which is the deferred compensation, not the payment as and when made in the future.
That is supported by the structure of A.1.1 “grants”. When you ask what has been granted, well it is the IPP. One sees at A.1.2 that “deferred compensation” is said to be “in the form of PPU”, which are things which have been issued in this case over the period. Then we see at A.2.1 that the:
IPP commences as of the Allocation Date.
So the right which is, we say, the IPP which is the grant of deferred compensation commences as of the allocation date. In the case of the appellant, they are dates that have occurred in the past, 1 January in each year when he was issued with GSs and then later phantom units in 2003. By this time they are all fully vested, if I can use that word “vested” again. At the top of page 401 there is a two‑year period, subject to which the rights are taken into account, but that has now – has well and truly expired in the case of the appellant.
I also draw attention to A.2.5, which makes clear that – I was submitting earlier that if over a period of time profit entitlement was to reduce, then there could in fact be no amount ultimately due. But that does not deny, we would submit, that there is a right at the beginning to a payment, just that the quantum is uncertain, and what it does do is show that the entitlement of the holder of these rights is clearly linked to his proportionate entitlement to shares in the holding company because it is putting him in the same position as a shareholder, that is, his entitlement depends entirely on the ultimate performance of the entity in which he has his equity interest.
GORDON J: Mr Richmond, if I could just take you back to the top of the page 401 and the vesting provision?
MR RICHMOND: Yes.
GORDON J: Is it able to be construed as reading that it is only on the notice date - “that have been allocated at the Notice Date” that shall be vested and that until that point nothing vests and all it is doing is identifying that particular PPUs will be vested and some will not?
MR RICHMOND: In our submission, your Honour, the first line is identifying which PPUs one is concerned with when one starts to calculate the amount payable, and they must have been allocated by the time of the notice date. By then they have been allocated, otherwise they do not come into the calculation under clause A.1.2. It is really saying, as we read it, that they must have been allocated for more than 24 months prior to that time.
GORDON J: So it is a distinction between allocation and vesting?
MR RICHMOND: Yes. Well, your Honour, the concept of allocation is ‑ ‑ ‑
GORDON J: Allocation for the purposes of calculation?
MR RICHMOND: Yes.
GORDON J: As distinct from vesting for the purposes of calculating – of determining payment.
MR RICHMOND: Well, we would say allocation is simply a reference to when were they issued? As of what date were they issued? They were issued as of 1 January in a year. You ask, well, was that date, 1 January of the year, more than 24 months before the notice date? If so, then they come into calculation; if not, they do not. But because there is a carve‑out for death or permanent disability we would say that does not detract from the proposition that they are – that the PPU, which in the case of the appellant includes 1,500 GS, are rights which exist. It is just that whether they bear fruit is uncertain for 24 months, except where he dies or suffers permanent disability, in which case they take into account from the time of issue.
Now, importantly in relation to this agreement there was, in fact, nothing granted to him by this agreement because he had already received all his rights. So, the explanation for that is that this is a standard form agreement which he was presented with. It does not actually grant him any rights. He already had the rights. It merely restates what those rights are and, we would submit, in a form materially the same as his rights at the earlier times.
We note at the top of page 402, clause A.5 – and that is the clause similar to the earlier agreement which states that the entitlement, that is, the entitlement to a particular sum of money becomes due as of the due date which is the date defined on page 4, was the “thirtieth day after the Notice” – clause 4 on page 399 is the “thirtieth day after the Notice Date”.
So, it is the proviso that a declaration has been signed and delivered in the form of Annexure C and Annexure C is found at page 411. Your Honours will see that clause B sets out what the employee will receive when – will be entitled to receive on the due date. It is two amounts, an amount of US dollars being the proper participation and an amount of Swiss francs being the amount in respect to the shares. In consideration of those two sums – you see from the first line of clause B – the employee hereby does two things. He:
relinquishes his claim to payments –
and he:
assigns all his shares of GH . . . to GH –
We emphasise that there is a consideration given to the employees expressed to be for what the employee is undertaking under paragraphs (a) and (b).
Just coming back to the 2005 agreement at page 403, we have the stapling requirement in clause B.1 which is in the same form as the earlier provision of the 1999 agreement. We have in clause C.2 on page 404 the provision regarding assignment. It is in the same terms as the earlier agreement. I note also C.7 on page 405 which states that this agreement replaces the earlier agreements.
But, it does not deny that there is still that promise by Glencore Holding in the shareholders’ agreement to procure performance by Glencore International into this agreement of its obligations to make the payments that will become due. The next important document is that found at page 419.
FRENCH CJ: Just before – page 410, these are the AG, GS as distinct from those he held from GI.
MR RICHMOND: Yes, this is a listing of the PPUs allocated to the employees, so we see there the dates for which there are letters earlier, which reflect issues of Genussscheine by Glencore International. All the items, apart from the last one, are reflected in the issue of Genussscheine. The last one is an issue of phantom units under the 2003 agreement. True it is that the words in parenthesis refer to the number of GS to be issued by AG so that reflects, no doubt, that GS was going to or had ‑ ‑ ‑
FRENCH CJ: I have not added these up. Are there 1,600 of them?
MR RICHMOND: There should be 1,600 of them, your Honour.
FRENCH CJ: Then, on top of that, there is the 1,500 that he had?
MR RICHMOND: No, your Honour. I should say that AG had not actually issued any Genussscheine on those dates. What happened was all the dates, except the last one – that is, 1 January 2003 – the 2003 agreement did require AG to issue Genussscheine to Glencore International to reflect the phantom units.
FRENCH CJ: For the purposes of calculation, et cetera?
MR RICHMOND: That is right. But the other items indicated there all reflect the actual issuance of Genussscheine to the taxpayer by Glencore International, as evidenced by the agreements that I took your Honour to and the letters in the appeal book.
GORDON J: What this agreement really did was to take the GS and the phantom units and deem them, for the purposes of the calculations, PPU?
MR RICHMOND: It treated the Genussscheine that he had already been issued by GI to be PPU and therefore to be taken into account in calculating his entitlement under clause 8.1.2.
FRENCH CJ: So you say what he got was 1,600 PPU, with the same allocation dates as the 1,500 GS and 100 phantom units previously received under the 1999 and 2003 agreements.
MR RICHMOND: That is a statement that there has been the issuance of Genussscheine by AG, with retrospective allocation dates set out there.
FRENCH CJ: Yes, reflecting the history of what had happened.
MR RICHMOND: Reflecting the history of what he had actually received which was in the case of the first 1,500 Genussscheine issued by GI. Those Genussscheine are still regarded as PPU; they are still recognised as being PPU.
FRENCH CJ: But does this displace - in a sense, while it is founded upon the history it displaces it by a notional issue of GS by AG held by GI for purposes of calculation.
MR RICHMOND: With respect, no, your Honour, because that would be contrary to clause 17, on page 400.
FRENCH CJ: I am just confused a bit by the words in parentheses.
MR RICHMOND: Indeed, your Honour. They are not entirely clear.
GAGELER J: What about clause A.3.2? Does that not make it clear?
MR RICHMOND: It makes clear that there has been the issuance of GS by AG to GI, but does not deny that they are still GSs issued by GI.
GAGELER J: They cannot be the same things, can they?
MR RICHMOND: Well, your Honour, they still exist because they were issued and not cancelled and they are still recognised in clause 17.
GAGELER J: They were never physically issued. We have agreed on that.
MR RICHMOND: When you say never physically issued, no certificates were issued.
GAGELER J: Of course. So they are only ever contractual rights.
MR RICHMOND: They are rights conferred by an article of association of the company recognised by corporate law.
GAGELER J: Yes, and here we have a tripartite agreement ‑ GI, AG and the employee ‑ which is characterising those previously granted rights in a different way, surely.
MR RICHMOND: Well, we submit you cannot read out of clause 17 that the PPU are the number of GS actually allocated and participating as of a respective date whether issued by AG or GS issued by GI and held directly by employees.
GORDON J: In a sense, what it was trying to do was to say for the purposes of calculation I am going to treat these allocations in the same way.
MR RICHMOND: Yes.
GORDON J: Whether they have been GS issued or allocated – let us use a neutral term – to an employee, whether it has been done through a subsidiary or whether it has been done by reference to the phantom units. Whichever agreement existed in the past gave right to these methods of calculation for the present purposes we all agree that they are all going to be put into one basket and treated as PPU for that purpose, i.e., how do I calculate a distribution of the profit share? In other words, they had to find some commonality between the various things that had been issued so that there was a calculation which was fair and equitable.
MR RICHMOND: Yes, and did not change the existing rights which an employee had, we would submit.
GORDON J: I know you keep saying that, but it comes back to what the purpose of it is as well and then identification of the right that we are talking about. This agreement replaces all other agreements.
MR RICHMOND: It does, your Honour, but in doing so in clause 17 it recognises the existing rights which have already been granted by those concluding words. It was not replacing the prior arrangements by creating a new construct in place of what was there before. Rather clause 17 indicates that the intention was not to take away rights already held but merely to incorporate them into the structure of clause A.1 by making them PPU.
KIEFEL J: But they are rights under a plan of deferred compensation, according to clause 16, A.1.1 and A.1.2.
MR RICHMOND: Your Honour, it comes back to what is the deferred compensation. We submit that the deferred compensation is the right that is granted. That is, as I put earlier in relation to construction of A.1.1 through to A.2.1, what is the deferred compensation is not the payment ultimately made but rather the PPU themselves of a deferred compensation.
GAGELER J: It is a funny sort of expression to refer to something that occurred in the past as deferred compensation.
MR RICHMOND: Well, the word “deferred” there means that it is a right to the payment of money which is deferred as to when it is paid. The deferral is as to not when the right comes into existence, but as to when the right bears fruit. It bears fruit at a future time when it is cashed in. That reflects the fact that it is a right which has no present fruit when it is granted because it looks to the future. It is a right to share in the profits of the enterprise after the date of issue. But it is still a right at the time it is granted, albeit that the fruit is not then known and will depend upon future events.
Just finishing off on this point about the existing 1,500 PPU that he held – or GS, rather, that he held – the declaration that I was going to, page 419, contains an assignment of all his existing GS in clause B(b). What we see at page 419 is that in consideration of the two amounts specified, the first of which is the amount in dispute, the employee hereby does three things, and the second is assign all the existing GS that he held. So we submit you cannot just say that the existing 1,500 GS are not to be taken into account and treated as being superseded. They are recognised both in the document of assignment and general release and in the definition of “PPU” at page 400.
FRENCH CJ: Would it be right to describe the 2005 agreement as a kind of novation that substitutes ‑ ‑ ‑
MR RICHMOND: Yes, your Honour, that would be a way of expressing it. It replaces and restates the rights, but in a way which is not materially different from the way they were and we say that works in our favour. The majority in the Full Court concluded it worked against the taxpayer because you then would just look at the 2005 agreement to see what was the nature of what the taxpayer received. But we would say to the contrary.
The fact that the 2005 agreement does not by its terms, nor was it intended to – and the evidence is clear it was not intended to change the substance of the right, and Mr Hubmann says as much in his explanation of why the agreement was entered into in 2005, the fact that it does not change the rights and was not intended to we say points in the direction that you do not just focus on this agreement, but you do need to recognise that it is setting out in materially the same way as the earlier agreements had, the nature of the rights that he had to payment and does not detract from the proposition that nothing new has happened in 2005 when this is signed, merely a new agreement has been entered into reflecting the same monetary entitlement that he has by virtue of his prior grants of rights.
Importantly, the shares in GH have not been in any way affected. He still holds the same number of shares in GH. It is just an associated agreement that gives those shares the value that they have, as part of the bundle which has been changed. Now, I mentioned that the bundle of rights which the appellant received over the period from 1993 to 2003 in the form of the PPU that were allotted to him was in addition to his salary and bonuses and we see that in Mr Hubmann’s affidavit at paragraph 10, that is volume 2, page 441.
We see it in the evidence of the applicant at appeal book page 264 in volume 1. If I can just give your Honours the references, it is paragraphs 13, 19, 27 and 35, indicating that he received significant salary and discretionary bonuses over the period.
GAGELER J: What does that show us?
MR RICHMOND: Your Honour, that shows us - it comes back to something said in Hayes’ Case, that the fact that the employee receives remuneration which is not said to be inadequate is relevant to determining whether some other benefit he or she receives is a reward for services. So, for example, I take a salary which is less than I would otherwise take and receive some additional benefit.
One would more likely say that additional benefit was a reward for services if my salary is otherwise inadequate but that cannot be said here because he received a very significant salary, as employee, and also the same discretionary bonuses that he would otherwise - well, very significant discretionary bonuses reflective of his position as an employee.
In relation to why is it that the employer grants these rights to the employee there is some evidence about that in volume 2 at page 571. There are a number of public documents issued by Glencore and this is one of those and at page 571 under the heading “Shareholders” we see a description of the ‑ ‑ ‑
GORDON J: Is this the PDS, public disclosure statement? Is that what this is in?
MR RICHMOND: Yes, your Honour. It is a document issued by Glencore International to investors and at page 571 we see under the heading “Shareholders” an explanation of the scheme this Court is concerned with and the second‑last paragraph and the last paragraph are relevant. The second‑last paragraph explains the way in which these interests were allocated to employees:
based on individual’s performance, seniority and future potential.
FRENCH CJ: They call it “golden handcuff”.
MR RICHMOND: Yes, your Honour, indeed, and then the last paragraph explains the purpose, if you like, for Glencore of the arrangement.
Now, whilst we are in volume 2, if I can just take your Honours to page 449 which is a diagram showing the corporate structure of the group at this time, or over the relevant period, and we see that the middle box on the page is Glencore International having on issue 150,000 shares and 150,000 Genussscheine, and we see that Glencore Holding holds 85 per cent of the shares and has issued itself shares of the same number, 127,500, and so there are Genussscheine issued to the employees who are interested in both those entities.
In the case of the appellant, he is one of the employees to whom 127,500 shares have been issued, corresponding to the same number of Genussscheine that have been issued by Glencore International. So that just illustrates the way in which the holding of shares in the holding company – or the majority holding company – is reflective of the underlying interest in Glencore International through both that indirect shareholding and the Genussscheine.
GAGELER J: Mr Richmond, you took us to page 571 to the description of the scheme ‑ ‑ ‑
MR RICHMOND: Yes.
GAGELER J: ‑ ‑ ‑ and you just took us to the last couple of paragraphs there. Do the first three paragraphs accurately describe the scheme in which your client participated?
MR RICHMOND: Well, your Honour, only in the sense that it is correct insofar as it goes.
GAGELER J: Yes.
MR RICHMOND: That is to say, upon resignation and retirement, certain rights come into existence, but we would not accept that it sets out all the situations in which – so I am really focusing on the second paragraph, the first part. It is true, as far as it goes, but there are other situations where the payments become due, which are permanent disability or death, and agreement between Glencore and the shareholder.
KIEFEL J: It tends to underscore the key event of termination or resignation or retirement, does it not, in relation to any entitlement, to use a more neutral term?
MR RICHMOND: Yes, that certainly is one of the, we would say, occasions upon which the entitlement will crystallise into an amount payable and that is mentioned and highlighted there.
GORDON J: These are statements made by Glencore in the context of a note raising for the public.
MR RICHMOND: Yes, but it does not contradict what the agreements say. I am not suggesting other than that one does not go to this statement to see what his entitlements are, one goes to the terms of the agreement, and it is clear from the agreement that the entitlement to a payment does not arise simply upon termination of employment. It can arise in other circumstances as well. But so far as the public is concerned, it is important to know that key employees are tied to the business in this way because it is in their interest to know that. They want to know that the key employees have an interest in the business and so will not leave unless there is good reason.
Perhaps I can now come back to the question of principle and start by addressing the propositions in the outline starting at paragraph 1. The relevant statute provision is section 6‑5 of the 1997 Act, which brings into account, or into assessable income, “Income according to ordinary concepts”. Your Honours will find that in the CCH 2007 edition at page 425, volume 1. It is also relevant to section 15‑2, which is found at page 471 of that volume. Perhaps if I can just take your Honours to page 471, section 15‑2, what this makes assessable as statutory income is the value to the employee:
of all allowances, gratuities, compensation, benefits . . . provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by –
the taxpayer. We emphasise the words “value to the taxpayer”, “value to you”. In order to determine whether the payments received by the taxpayer here were ordinary income, we submit it is necessary to start with the initial grants of the rights. The authorities clearly say that to determine if an amount is income you must look at all the circumstances leading up to the payment of the amount. We give the authorities in our submissions at paragraph 46, footnote 40.
Justice Pagone concluded that at the time of each grant of shares and associated rights the appellant derived a benefit which was assessable as ordinary income. The majority reached a different conclusion. In our submission, the approach taken by Justice Pagone is correct because the shares and associated rights which were granted to the appellant progressively over time were rights which were capable of being turned to pecuniary account in the relevant sense. If I can take your Honours to Abbott v Philbin, which is number one on our list ‑ ‑ ‑
GORDON J: Before you do that, could you just clarify the way in which you say it could be turned to pecuniary account in the relevant sense on the facts here?
MR RICHMOND: One way, your Honour, is the way in which the taxpayer in Abbott v Philbin could take it to its pecuniary account and that is by negotiating with a third party, that when the ‑ or undertaking with the third party to cash in the rights and pay over to the third party the proceeds of the right, which is essentially what the House of Lords said in Abbott v Philbin was sufficient, but a second way is by taking advantage of the right to assign to a personal holding company, trust or foundation.
GORDON J: Is the first one the early termination point? Is that what the first basis is directed at?
MR RICHMOND: No, your Honour, the first basis is to say that the employee has shares and associated rights which he can agree with a third party he will cash in at a future time and pay over to that third party the proceeds.
KIEFEL J: That is a bit like paying a mortgage out to your bank once you get your termination payment, is it not? Are you talking about a situation more complicated than that?
MR RICHMOND: Not really, your Honour, no. It is just he has not ‑ ‑ ‑
KIEFEL J: It does not tell you much about the nature of the right.
MR RICHMOND: No, I was about to do that by reference to Abbott v Philbin. If your Honours could go to Abbott v Philbin ‑ ‑ ‑
GAGELER J: Sorry, just going back to Justice Gordon’s question to you, the ways in which these rights were capable of being taken – brought to account were – can you just list them?
MR RICHMOND: Well, there were two ways in which the taxpayer could turn to account in a monetary way the rights that were granted. The first way was by undertaking with a third party that he would exercise his rights in one of the ways in which the agreements contemplate, and pay over to that third party the proceeds of doing so. That is essentially what ‑ ‑ ‑
KEANE J: That is the sort of promise to pay the money received from the third party now the proceeds to be received in the future?
MR RICHMOND: Yes.
KEANE J: How could such an agreement affect the character of the receipt in your client’s hands when it comes in? I mean, if he has just made an agreement that “when I get this money I’ll pay it over to you”, how does that change the character of the receipt in his hands from – when that money comes in?
MR RICHMOND: Well, your Honour, on the basis of Abbott v Philbin ‑ ‑ ‑
KEANE J: Because the theory works on the basis that the money comes to him and he pays it out.
MR RICHMOND: Yes. In Abbott v Philbin – well, perhaps can I answer the question after going to Abbott v Philbin ‑ ‑ ‑
KEANE J: Sure.
MR RICHMOND: ‑ ‑ ‑ because that way, that first way, is simply picking up on what the House of Lords said in Abbott v Philbin. The second way is to go to the agreements which have a right to assign and we would submit that is a way in which the rights could be turned into pecuniary account, is by signing under the clause expressly allowing for assignment.
KIEFEL J: But that is limited to your own holding company or trust, so you are turning it to a pecuniary account by some payment from a trust or a holding company that you control.
MR RICHMOND: That you control, your Honour, but not that you own, and there is no reason why an employee could not establish a trust or company which he or she had control of, but ownership was with a third party and there could be agreements reached as to the ultimate distribution of the profits of that entity. In the same way that these agreements involve minority shareholders in Glencore having very valuable contractual rights, we would say, to receive money in the future, you do not need to control the entity to have valuable contractual rights and money to be paid by it. So that is a second way in which ‑ ‑ ‑
GORDON J: Just before we come to Abbott – I am sorry, I am delaying you – but is that first way that you have suggested, that it could be turned to pecuniary account, consistent with C.2 of the 2005 agreement, which I thought provided that they could not:
transfer or to alienate otherwise, and not to grant any option right, pre‑emption right or right of first refusal or the likes . . . in connection with the rights and claims granted or issued hereunder –
I understand the assignment point – that is the second point – but is the first way that you suggest that this could be turned to pecuniary account, in effect, exist by reason of C.2, on page 404? Even assuming you are right that there is a right that can be dealt with, an undertaking to a third party that he would exercise his rights and pay over the proceeds from doing so is my note of what you said to us. I do not know; I am just asking.
MR RICHMOND: Our submission now is that there is no inconsistency in clause C.2. That is simply restricting a transfer or alienation of the rights. And, importantly, it contemplates that there are rights in the sense that the clause is consistent and supportive of our submission that there are rights being granted under the agreement because the parties clearly contemplate that the employee can assign it – the right, that is. But all that is restricted there is a transfer or alienation of the right and we would submit that the sort of undertaking that I have described, which is consistent with what the majority said in Abbott v Philbin, would not breach an obligation not to transfer or alienate the right on his giving a promise in relation to the disposition of the proceeds of the right and, more importantly, also as to how the rights are to be dealt with at a future time, and not in a way that alienates the right.
So if I can take your Honours to Abbott v Philbin. Now this, as we see from the headnote, concerned options to purchase ordinary shares at a particular price per share and:
expressed to be non‑transferrable and to expire after 10 years or on the earlier death or retirement of the taxpayer.
So it is a contract to acquire property not yet in existence, shares to be issued in the future, which is not transferrable. It cannot be assigned and it will expire after 10 years or the earlier death or retirement. So it is linked to the continued existence of employer and employee relationship. It can only be exercised whilst the employee is an employee and cannot be transferred.
Now, the majority held that that right was ordinary income at the time of grant. On the question whether there was a right which could be income at grant, if you go to what Viscount Simonds said at page 365, about point 6 of the page, the paragraph commencing “My Lords, I cannot entertain” and through to the second sentence, it does not matter whether it is a “proprietary or a contractual right” or something in that “dim twilight” zone “that divides those” two concepts.
FRENCH CJ: Is that where we are?
MR RICHMOND: Well, your Honour, we are possibly not as dim as my learned friends would say, but we are in a – well, we would say we are more in the proprietary side of the ledger or spectrum, because there is a holding of shares. We have a combination of shares which are clearly choses in action of a proprietary kind, and our contractual rights. But I am prepared to accept that it is analogous to a situation where an employee has a contractual right or rights.
We can live with the characterisation of what is held here as being analogous to contractual rights, but I do emphasise that the shares are a very important part of that bundle of rights as they are accepted as choses in action of a proprietary kind, and the GS too are rights which are not purely contractual, be it that they arise under articles of association. They are recognised by corporate law as well as by the contract with the shareholders – or employees, I should say.
So, Viscount Simonds did not think it mattered whether the right was proprietary or merely contractual, and Lord Reid said something similar at page 372, and this is the paragraph commencing “The argument for the Crown”. His Honour thought that the fact that it is “a kind of right which can be turned to pecuniary account” is enough, so the right there is clearly a contractual right. The right to be issued shares in the future is a contractual right, and that is enough.
Now, we submit that the right held here, or the bundle of rights held here, are also contractual rights which are not materially different from a right to be issued shares in the future. Whether there are shares of any value to be issued in the future is entirely uncertain at the time the option is granted, in the same way there was uncertainty about whether the amount would become payable under these rights that the taxpayer had here. But that does not deny that there are rights in existence at the time of grant.
On the question of whether the right could be turned to pecuniary account, Viscount Simonds deals with this at page 366 at the top of the page. His Lordship said:
it is something which can assuredly be turned to pecuniary account. This was challenged because the option was itself not transferable, but this objection is without substance. There was no bar, express or implied, to a sale of the shares as soon as the option was exercised, and there could be no difficulty in the grantee arranging with a third party that he would exercise the option and transfer the shares to him.
Now, I have extrapolated from that that in the present case there is no difficulty with the taxpayer here arranging with the third party that he would exercise his rights under the agreements and transfer the money to him.
KEANE J: But that would involve termination of the employment.
MR RICHMOND: Yes, it would be perhaps, your Honour, that the employee would say, “I will hold these rights until my termination and when I terminate my employment, when I retire, I will pay over to you the proceeds that become payable to me under these rights”.
GAGELER J: The employee here could have – or the company secretary could have exercised the option at any time.
MR RICHMOND: It could exercise at any time, but he had to be an employee at the time.
GORDON J: Not only that, could have sold the shares, once exercised the option immediately. There was nothing preventing him doing anything immediately.
MR RICHMOND: No, but, your Honour, with respect, that is only dealing with the two‑year vesting element. That would be exactly the same position here for the appellant after two years is up. So, two years after each set of rights are allocated he could have terminated his employment and cashed in the accrued entitlement for those two years.
The vesting period is only, if you like, a condition attaching to whether the amount becomes payable by reference to the previous two years. Once the employee has served the two years his entitlement is payable as from the allocation date. So, for example, if an undertaking is given of the sort that Viscount Simonds was referring to here, it could be that I will stay employed for two years and then when I retire, or exercise my rights and pay over to you the proceeds.
Now, that is a much more immediate way of giving the assignee money than the situation described here which is to give the assignee the shares. The shares are only valuable because they can be turned into money. So, with respect, we say it does not matter that we are talking here about money. In fact, it is almost clearer that the amount is capable of being turned into pecuniary account when all we are dealing with is amounts of money.
They key point is that the right itself to be paid the money is an existing right which can be turned to pecuniary account in a variety of ways. The fact that what ultimately is received is money is not material to the question of whether the right itself is income. The fact that a right to receive shares is income because the right can be turned to pecuniary account is the reason why it is income on grant.
The same reasoning applies to a right to receive money which can be turned to pecuniary account by an arrangement of this kind to give to an assignee the money, the valuable thing, on exercise. Shares are only valuable because they can be sold for money. That is why shares are valuable. They are capable of being turned to pecuniary account. Money is money so it is, with respect, even clearer that the benefit is something which is capable of being turned to pecuniary account where the right is to be paid money.
The important point, as Justice Gordon and also Justice Keane have emphasised, is that it has to identify that the right itself is a right which is of an income nature and is capable of being turned to pecuniary account. I do not wish to confuse those two issues in any way. I am not trying to express this “turning to pecuniary account” point in some way as being the sole issue. It is not.
There is a preliminary issue as to whether there is a right which is of an income nature on receipt, but we say that there is because the right that the taxpayer has here, subject to that one distinction that Justice Gordon has mentioned, is the same as the right which the taxpayer had in this case, and that one distinction is not material because of the decisions of the later cases – Donaldson and McArdle and also the UBS case, which I will come to in a moment.
A two‑year conditionality, if you like, is not material to the question as to whether there is a right which is income on grant and ultimately it goes nowhere, that point, with respect, because at the very worst for the taxpayer the derivation would occur when the two‑year period expired, at which time there was no restriction of the ability to obtain the fruits of the right. The derivation would occur at that time, the later time, two years later, but the cases where this issue has been dealt with, such as Donaldson, have not taken anything from that aspect.
Just finishing off on this “turning to pecuniary account” point, we have Lord Reid dealing with it at page 371 in the paragraph commencing “But the test must be the nature of the right” and then halfway down:
It is true that the option was not transferable, but there are other ways of turning such a right to pecuniary account than assigning it -
He gives a little further down an example of an undertaking by the taxpayer:
to apply for the shares when supplied with the purchase money . . . and thereupon to transfer the shares –
to the third party. That is where we submit support for our first way of turning to account comes from, an undertaking by a third party to exercise the rights and thereupon to transfer the money.
KEANE J: That would be an undertaking to the third party to give notice of termination of the employment.
MR RICHMOND: Well, it would be a matter for agreement as to precisely what the undertaking was but it presumably would be to give it some time at the choosing of the assignee, so that the rights would reach a certain level.
KEANE J: That might be why the permitted assignment was only to a company controlled by the employee, so that the employee would always be the person able to make the decision as to whether or not to give notice of termination.
MR RICHMOND: Yes. That could be a matter subject to negotiation between the employee and the assignee or the person who has the benefit of the undertaking, or the person who owns the assignee in the case of an assignment which is permitted.
KEANE J: One cannot make too much of this, but it would be a rather uncommercial sort of agreement for the third party to be handing over something that reflected calculation of what the value of the then rights were. Without an undertaking termination would occur at its instance.
MR RICHMOND: Or at a suitable time that preserved the value of the asset, perhaps. Our submission is that one does not need to speculate about the terms of that arrangement but rather to note that there are various ways in which the rights could be turned to pecuniary account for the ‑ ‑ ‑
KEANE J: One does in a sense in that, as is apparent from the statement in the document you took us to at 571, these arrangements were intended to be long‑term incentives. They are intended to be incentives that operate for the duration of the employment. It would be an odd sort of arrangement whereby the employee could get the money value of the incentive before the end of the employment.
MR RICHMOND: Yes, but he might wish to raise money in the interim.
KEANE J: Well, the contract contemplates that he may, but he may only do it –at least under the express provisions of the agreements – with the agreement of the employer, so that the employer maintains or continues to hold control over the incentive.
MR RICHMOND: Yes, it requires that the employee control the entity to which the assignment of the rights has occurred.
KEANE J: The thing about golden handcuffs is that the employer has to hang onto the handcuffs or the key to the handcuffs.
MR RICHMOND: Yes, that is true, but there are a variety of different ways in which a person in the position of the employee can monetarise his entitlements whilst at the same time retaining an interest in the entitlements through remaining the holder of them and remaining interested in the assignee. So one can have a situation where the assignee entity is one in which the employee has an interest but others have an interest too and have paid money to the employee to acquire that interest.
The more valuable the rights become – and certainly at the time at which this disposal occurred they had become very valuable – we would submit it is not difficult to conceive of a situation where a third party would be prepared to pay money to acquire an interest in that bundle of rights which had, at that time, a very significant value through having an interest in the assigning entity.
FRENCH CJ: Well, the question of characterisation for the purposes of proposition 1 really turns upon what you have taken us to under proposition 2 in your outline and the conclusion, if you like, of the syllogism is in 3.
MR RICHMOND: Yes, your Honour, that is correct.
FRENCH CJ: I am a bit conscious of the time and I do not want us to – I know we have been assisting you with questions.
MR RICHMOND: Yes. I will just round this off. Lord Radcliffe dealt with it at page 379, point 1. This question of turning to pecuniary account is dealt with in that passage at the top of the page. It is a similar approach to Lord Reid. Importantly, we would say the same reasoning that is addressed there would apply to the rights in the present case.
The fact that the right at the time of grant is not valuable is not seen by their Honours to be relevant to the question of whether it is of income character on grant. We see that at page 366, point 9, the last six lines of the page, Viscount Simonds, and Lord Reid at page 372, at the top of the page.
Now, the approach taken in Abbott was recently adopted and applied to a grant of redeemable preference shares in the UBS Case which your Honours will find in the supplementary authorities at No 7. This is a case where employees received shares in a company in lieu of cash bonuses and Lord Reed sets out the facts, starting at page 1014 of the report, paragraph 24:
The bank decided to award discretionary bonuses to . . . employees –
But rather than paying the bonuses directly it issued them with shares in a special purpose company. The award of the shares had certain conditions attached to them designed to take advantage of a certain provision of the tax legislation referred to at the top of page 1015, and ultimately the Supreme Court held that was ineffective.
At paragraph 25 you see a discussion of the two schemes involved in the case. Paragraph (3) of paragraph 25 describes the nature of the shares that were given to each employee. They were redeemable shares, redeemable at a later time at the election of the employee for a cash amount, which ultimately reflected the amount of the bonuses, give or take, that would have been paid if this scheme had not been entered into.
Now, the discussion of the principle starts at paragraph (4) where Lord Reed says that under ordinary principles of tax law a grant of shares as part of an employee’s remuneration is assessable at the time of grant. These provisions in the UK legislation dealt with in paragraph 15 and following set up a different rule for restricted securities and there was a special regime for what were called restricted securities.
There was no upfront taxation – that was section 425, set out at paragraph 18. Tax rather was paid when the restriction was lifted and we see that in section 426, paragraph 19, but that was subject to an exception set out at section 429.
Now, ultimately the Supreme Court held that that regime did not apply because the shares were not restricted security so that the general or ordinary principles of tax law applied to the shares at the time of their issue. That was Abbott v Philbin. We see, starting at paragraph 90, page 1032, the application of the Abbott v Philbin decision to deal with shares.
I draw the Court’s attention to read paragraph 90 through to 95. Paragraph 91 is very similar to the argument of the Commissioner here which was upheld in the Full Court. That was rejected by Lord Reed in paragraph 92 and the reason given is explained in paragraph 92 in that sentence commencing between G and H on the page:
In both cases, therefore, the realisable value of the shares depended on the performance of the assets in which the companies’ funds were invested, as shares normally do -
and so on. We say that is an observation which is equally applicable to the bundle of rights which the taxpayer had here, which was shares and associated rights designed to give entitlement to the underlying profit performance over the period that the shares were held.
FRENCH CJ: Well, you offer this simply as a particular example of the general proposition that what you have here is that where you have a proprietary or contractual right, or something in the dim twilight in between, that is income at the time of grant and the particular arrangement answers that description. I just wonder how helpful it is to multiply particular examples of different factual scenarios when we have a particular set of contractual arrangements here. It is a matter of really characterising what they do, is it not, on your argument, as I understand it?
MR RICHMOND: It is, your Honour, but what this case illustrates is that the Abbott v Philbin principle is being applied to a grant of shares which are redeemable by reason of a provision in the articles of association entitling the shareholder to cash them in at future times. They are non‑voting shares. In the case of the UBS scheme, the shares were non‑voting shares and ‑ ‑ ‑
FRENCH CJ: They are not inchoate or an executory right of any kind?
MR RICHMOND: They were not an executory right of any kind or otherwise inchoate. They were shares conferring, in essence, an entitlement to a payment of money at a future time. They were shares in a private company, an offshore private company which owned shares in UBS, so the value of the shares ultimately turned on the value of the underlying shares but the shares held by the taxpayer were shares in a private company which, it really only ever be taken advantage of through cashing them in for a payment of money - the redemption amount or dividends in the interim which we say is on all fours with the taxpayer in this case.
We rely in particular in what is said at paragraph 94 which emphasises that the fact that there were restrictions in relation to the shares which, in the case of the UBS employees, is Article 2, paragraph 14, set out at paragraph 30. So there was a restriction on the ability to enjoy the shares ‑ ‑ ‑
FRENCH CJ: Then at 98 you get:
Income tax payable on the value of the shares as at the date of their acquisition in accordance with Abbott v Philbin, account being taken of any effect which the conditions may have had.
MR RICHMOND: Yes, so the conditions go to the valuation, not to the existence of the right or to the time at which the income is derived. But importantly, what is taxed here is not the cash ultimately received, but rather the right to the cash taken in the form of shares at the time of grant. The shares confer essentially a right to the payment of cash in the future, the same way that the rights of the taxpayer here were shares with associated rights entitling to him to the payment of cash in the future.
FRENCH CJ: I see the time, Mr Richmond. We will be moving on to the delights of Myer Emporium.
MR RICHMOND: Yes, your Honour, I will do that.
FRENCH CJ: All right, 2.15.
MR RICHMOND: Thank you, your Honour.
AT 12.47 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.15 PM:
FRENCH CJ: Yes, Mr Richmond.
MR RICHMOND: Your Honours, finishing off that first issue, before lunch I was addressing the question of whether the rights could be turned to pecuniary account. That is an issue which does not arise with section 26(e), of course, and there the question is only whether the rights have a value to the taxpayer. Based on the evidence in this case, the rights certainly did have a value to the taxpayer at the time of grant, which is what is required. We rely upon Donaldson’s Case and McArdle’s Case for the proposition that the rights on grant were subject to tax under section 26(e).
Going back to the question whether the amounts on payment can be said to be deferred compensation, we say there are seven reasons why the amount that was paid cannot be characterised as deferred remuneration or compensation for services. The first is that the amount is not calculated by reference to the services performed. Second, it does not bear any relation to the value of the services performed. Third, it is not conditional upon services being performed. The only condition that related to service was the vesting period in clause A.2.1 of the 2005 agreement.
But that had been satisfied by the time of the 2005 agreement, so any conditionality that had applied in the past could not be said to apply at the time of the 2005 agreement and so, at the very least, there was a grant of something valuable in terms of a right at the time the 2005 agreement was entered into, and at the time that that agreement was entered into, the value of the rights already held had reached $64 million. We see that from appeal book page 425.
At the end of the 2004 year, the accrued entitlement had reached the figure of $65 million. That is the accrued benefit of the 1,600 PPU held over the period up to that time, which is immediately up to about the time of this agreement being signed and reached the value of $64 million or $65 million.
So, if we are incorrect in saying that the rights had vested at the earlier time as rights, albeit to a quantum of money that was uncertain, then the worst case is there was a right acquired at the time this agreement was signed in 2005. But, in any case, it is not correct to say that A.2.1, the two‑year vesting period, affects derivation, as that was made clear by Sir Nigel Bowen in Donaldson’s Case at page 643F where he makes the distinction between the right and the fruits of the right and, in that case, there were conditions of service, a vesting period not dissimilar to the one in the present case, and that did not affect the assessability at the time of grant of the various rights that had been granted in the form of options under a share scheme.
But in any event, we say as a consequence of what Sir Nigel Bowen said, the rights were rights which were assessable at the time of receipt under ordinary principles or section 26(e) and the vesting provision did not affect that conclusion in the light of what Sir Nigel Bowen said in Donaldson. The same follows from what the Supreme Court said in the UBS Case. The fourth matter is that the amount is not reduced if services are below standard. The fifth point is that the amount is not reduced if the employee is terminated for cause such as misconduct.
GAGELER J: What precise statutory question are you addressing at this point?
MR RICHMOND: I am addressing the question whether the amount that was paid is income as deferred compensation, which is the basis upon which the Full Court found that it was income, and I am giving seven reasons why it cannot be characterised as remuneration for services or deferred compensation.
KEANE J: So is this in support of the submission that it is capital in nature?
MR RICHMOND: Yes. Its proper character is payment received from the exploitation of the rights previously granted that were the reward for the service. It cannot be seen as a payment which is deferred compensation, which is the basis upon which the Full Court found that it was of an income nature.
The fifth matter is that the amount was payable in the event that the employee was terminated for cause. We rely upon clause A.2.4 of the 2005 agreement which - I took your Honours to an equivalent provision in the earlier agreement, the 1999 agreement, but that makes it clear that no written notice is required and we submit makes clear that payment will be required to be made even if the employee had been terminated for cause. In other words, the notice date would be triggered by reason of the notice of termination and an amount will become payable under clause A.5.
So if, for example, termination had occurred in the early part of 2005 the taxpayer here would have been entitled to an amount of $65 million, being the amount that had accrued up to that date, despite the fact that he was terminated for misconduct. His entitlement under the agreement is not, in any sense, conditional upon his performance being satisfactory or termination being not for a reason such as misconduct.
FRENCH CJ: If you are not right on that, is that an Achilles heel?
MR RICHMOND: No, your Honour, because there are other bases on which the amount can become payable other than termination by the employer. But we submit that we are right on that point because you would expect something very clear in the agreement to say or have the effect that an accrued entitlement of $65 million, as was the case in the 2005 year, would be wiped out by reason of termination by the employer for some reason such as misconduct. There is nothing in the agreement to indicate any qualification on the entitlement. As I said, it is not conditional upon service of any form, whether satisfactory or otherwise.
Rather, the amount that is payable is dependent upon the performance of Glencore, that is, its profitability, which will depend upon numerous factors other than the employment performance of the taxpayer. The seventh factor is that it is not payable by the employer. It is payable by the operating company.
FRENCH CJ: Sorry, have we skipped the sixth?
GORDON J: Yes.
MR RICHMOND: The sixth – well, it is not dependent. The amount payable is not dependent upon – well, is dependent upon profit not services and that profit is to do with a number of factors that have nothing to do with the performance of the particular taxpayer. The seventh is that it is not payable by the employer. The eighth is that it is in addition to the remuneration that the employee is entitled to which is not said to be, in any sense, inadequate.
Based upon what was said in Hayes’ Case – and the reference is in the material – that is a relevant matter in determining whether the amount is compensation. The accruing entitlement, as I mentioned earlier, is found in the accounts of Glencore International and the reference there is volume 2, page 820.
GAGELER J: Do we need to know something about the applicable accounting standard to make something of that?
MR RICHMOND: Your Honour, no. It is an indication that Glencore regarded the obligation as being an existing obligation to pay a sum of money in the future that it recorded in its accounts – in the shareholders’ funds – part of the balance sheet – an accruing entitlement of the employees to an amount of money, so recognition that there was an amount that would become due in the future in the event of the exercise of the rights.
KIEFEL J: Was that a compliance requirement with the law of obligations of Switzerland?
MR RICHMOND: No, apparently it is a US accounting standards ‑ ‑ ‑
GORDON J: It sort of cuts both ways, does it not, though? It is the change in the standard that led to the inclusion of the item in the accounts and before that it had not been treated that way.
MR RICHMOND: True, your Honour, but I am just noting that the entity that has the obligation to pay the amount records by reason of a change in accounting standards that fact in its accounts from 2005. It refers to the entitlement in a more general way, for example, at page 758, for an earlier year no sum of money is recorded. In the later year, 2005, a sum of money is recorded but the submission is that at just one factor, supporting the proposition, that there is a right from the start and not simply a right arising on exercise.
Now, I think I will move to the ETP issue and we will rely upon our oral outline at this stage for the second and third issue, that is Myer and the timing issue referred to at paragraphs 4 through to 7 and go straight to the ETP issue. I can deal with those matters in reply if necessary but in relation to the ETP issue, the key words in the definitions of ‘eligible termination payment” and “employment termination payment” are “in consequence of”. They state the required nexus between the payment that the taxpayer receives and the termination of his employment.
Before taking your Honours to Reseck and Le Grand, we seek to state five propositions which assist, we submit, in construing the words “in consequence of” in this context. First, the starting point is the text of the statute and the words “that issue in consequence of” have an ordinary meaning which is “as a result of” and that imports a causal connection. We give authorities for that proposition in our reply at footnote 7.
GAGELER J: Sorry, would you mind just taking us to the statute to start with.
MR RICHMOND: Yes, your Honour. So, for the 2007 year, it is section 27A, which is found in volume 2 of the CCH edition at page 1473. This is a payment in respect of the taxpayer in consequence of the termination of any employment other than certain payments.
For the 2008 and subsequent years the concept is found in section 82‑130 of the 1997 Act, which your Honours have. It provides that:
A payment is an employment termination payment if:
(a)it is received by you:
(i)in consequence of the termination of your employment –
or certain other matters. The key words here are “in consequence of the termination”. The second point is that the phrase is “in consequence of”, not “as a consequence of”. The section requires that one can say that the receipt is in consequence of the termination, not merely that it is a consequence of the termination. The use of the word “in” suggests that the causal link must be more than a “but for” test for a tenuous connection, we would submit.
Third, the modern approach to determining questions of causation requires that the question be determined in a commonsense way and without the application of a “but for” test. This Court said as much in March v Stramare and also in the Medlin decision. We have given references to those cases in paragraph 8 of the outline.
FRENCH CJ: Where it is used in the context of attribution of responsibility, we are dealing with a statutory text here. So we look at its purpose.
MR RICHMOND: Yes, your Honour, but the way in which – we would submit that the secondary context here does not suggest that a different approach should be taken to the determination of whether the amount at issue here is in consequence of a relevant event, being termination, in part for the reasons I have just given, that the text is “in consequence” not “as a consequence”.
FRENCH CJ: I just find that an odd transplant.
MR RICHMOND: Yes. One must be careful not to transplant but the context here is firstly a taxing statute which brings into assessable income an amount and, given the breadth of causal links, if you take a “but for” test, it is very wide. It has been recognised many times that “but for” picks up all sorts of contributing elements and has therefore uncertainty in scope.
It is inappropriate to apply, unless there is a good reason to do so, such a broad causal connection when a better approach is to look for a causal link in the way that the courts have recognised it is to be applied in the different context, albeit part of negligence and so on. That gives you a clearer way of identifying the relevant causal nexus than the “but for” test does.
The fourth proposition is that the commonsense, pragmatic approach to causation that the courts have preferred, particularly in those two cases, does not allow that the occasion for a result is to be treated as the cause of it. That point was made by the Master of the Rolls in the Banque Bruxelles Lambert Case. We have given the reference in our outline at paragraph 8. The mere fact that something is the occasion of a result does not make it the cause of it.
FRENCH CJ: Does that mean anything more than concurrency does not then buy causation? I am not sure what the occasion is excluding.
MR RICHMOND: If I could just take your Honour to what the Master of the Rolls said in Banque Bruxelles Lambert at page 406, between lines E and F on the page, and he cites March v Stramare as one case in support of this approach:
It is also plain that an event is not regarded in law as causative if it does no more than provide the occasion for the result complained of ‑
The way we read that is that the Master of the Rolls is adopting what was said in March v Stramare about the “but for” test not being the correct approach. The “but for” test looks to, amongst other things, things which are the occasion for a result and that is sufficient to make them one of the causes. Our view here is that termination is the occasion for the payment but not the cause of it.
The fifth proposition is that, when you look at the legislative history of section 27A and the concept of an eligible termination payment, it supports the view that one should not apply a “but for” approach. We have handed up to your Honours the legislative history, which is the explanatory memorandum to the 1936 Act which introduced section 26(d). If your Honours have page 276 of the explanatory memorandum, footnote (b) is an explanation of the purpose for introducing 26(d) in its then form to replace the former provision, which is shown on the other page, 277, at paragraph (f). So previously what was brought to tax was five per cent:
of the capital amount of a retiring allowance or gratuity which is paid in a lump sum.
That is paragraph (f) of the 1922 Act. Then the 1936 Act introduced section 26(d), which had a different test of five per cent “of the capital amount of any allowance” et cetera paid “in consequence of retirement”. Paragraph (b) explains that the purpose of extending the nexus to “in consequence of” was to include assessable income amounts received as compensation for the termination of employment.
We have given your Honours reference to the case of Briers v AtlasTiles [1978] VR 151. At page 164 his Honour explains that the reason for this change was to overcome the effect of Scott’s Case, a decision of the Full Court of New South Wales Supreme Court, which had held that damages for wrongful dismissal were not within the old provision because they could not be classified as a retirement allowance.
So, the genesis of the words “in consequence of” was to overcome Scott’s Case and to ensure that amounts that were paid as compensation for loss, such as damages for wrongful dismissal, would be caught. We submit that legislative history indicates that the words “in consequence of” were not intended to bring to tax amounts that would be connected to retirement in a “but for” sense but, rather, to ensure that amounts received in compensation were for loss of employment.
GAGELER J: So do the exceptions from the definition bear on the scope of the definition?
MR RICHMOND: Your Honour, we would submit, no. Exclusionary provisions can be construed as being indicative of abundant caution that the intention is to ensure that it is not – to resolve doubt that particular amounts that are in the exclusions are not otherwise caught. So, we would submit, one cannot draw from the exclusions anything more than – as a matter of abundant caution they were put there to ensure that such amounts would not be caught.
We submit that one cannot take from the exclusions “in consequence of” was intended to be broader than looking for termination as being the cause in an effective causal sense, that is to say resulted termination in the sense accepted in this Court in March v Stramare and later cases.
If I can now take the Court to Reseck, which is the only decision of this Court on this provision. We would note that it is a case about section 26(d) – it is essentially the same form as it was when the 1936 Act was enacted as set out in the explanatory memorandum I have just taken your Honours to. Importantly, that was a statute which was both, as Justice Gibbs said at page 50, a charging provision and a relieving provision. It brought to tax 5 per cent of the capital amount of the retiring allowance. So, in a sense, it was both a concessionary provision as well as a charging provision, charging because it brought into tax things that were not otherwise assessable, but concessionary because of the 5 per cent limit.
His Honour deals with the causal nexus required at page 51, at the top of the page. But we submit that his Honour’s approach, as well as that of Justice Jacobs, is influenced by the fact that this is a relieving and charging provision as opposed to the current provision which is a purely charging provision.
So the test is stated by his Honour at the top of page 51. Justice Jacobs takes a different approach on page 56 at about point 2 of the page and his Honour does say that the test:
does not import causation but rather a “following on”.
We submit that it is not easy to reconcile the two different approaches taken by their Honours and that is perhaps borne out by the way the Federal Court has approached the words “in consequence of” in subsequent cases. But Justice Goldberg in Le Grand sought to reconcile the different approaches by positing the test that he stated at paragraph 33 in Le Grand’s Case, if your Honours could turn to Le Grand, and the relevant passages are at paragraphs 33 and 34. His Honour’s earlier discussion of the issue starting at about paragraph 27 indicates the differing approaches taken by members of the court in McIntosh’s Case in trying to deal with the differing approaches in Reseck.
But Justice Goldberg reconciles the two approaches in the passage in paragraph 33 and particularly at the top of the page, the sentence commencing “The thrust of the judgments”, and the test his Honour states is whether:
the payment follows on from, and is an effect or result, in a causal sense, of that circumstance.
Now, subsequent decisions of the Federal Court have endorsed Justice Goldberg’s approach and we submit that the position has been now reached, subject to what this Court decides, that causal nexus is required and that the causal nexus should not involve a “but for” approach to the matter, for the reasons I stated.
GAGELER J: What should it involve?
MR RICHMOND: You should ask the question whether the payment was caused by the termination of the employment applying commonsense and pragmatic approaches to the matter, but not accepting the fact that termination was the occasion for the payment as being sufficient because that is not enough under the common law approach to causation to lead the result to be the cause of the event, which is the occasion.
GAGELER J: Well, March v Stramare has been overtaken by statute I think in every Australian State. Every statute now says “but for” is enough, unless there is a policy reason to cut it back. You just want us to go to the common law and apply ‑ ‑ ‑
MR RICHMOND: Yes, indeed, your Honour.
GAGELER J: ‑ ‑ ‑ commonsense to a tax statute.
MR RICHMOND: Yes, your Honour, because that is the approach which the courts have accepted is the way the common law does it because it reflects what the common man in the street would regard as the proper approach, because the common man in the street would not accept that a “but for” test tells you the answer because many, many events in the past - the “but for” test, the cause of an event that occurs a subsequent time.
Rather, one is looking for, particularly in a taxing context where what this is doing is bringing to tax amounts, in this case quite significant amounts, to taxation, one expects some clarity around the nature of a causal nexus and not the width that is brought about by the “but for” requirement. That is particularly so when, in a case like this one, there is the prospect of double taxation because we would submit on our analysis and the approach taken by Justice Pagone, that these rights, as and when they were granted, were assessable as ordinary income or under section 26(e) and the effect of a broad approach to what is in consequence of termination is to bring to tax some part of that amount again as statutory income under the ETP provisions.
FRENCH CJ: The causal analysis works on the basis that termination is a sufficient condition for what you would say is the exercise of the right or the other side of that, as vesting - paying of the money, and that is a cause/effect relationship except that ‑ ‑ ‑–
MR RICHMOND: We accept that in a “but for” sense, with causal nexus set aside, but we submit that the “but for” approach is not the correct approach.
FRENCH CJ: I am just trying to work out what more you need. If you resign from your employment and your employer says, “I’m going to give you a termination payment” or it is a condition of your employment that you are entitled to some sort of accumulation termination payment ‑ ‑ ‑
MR RICHMOND: Certainly, your Honour, if it is a retirement allowance ‑ ‑ ‑
FRENCH CJ: You can label that “but for” ‑ ‑ ‑
MR RICHMOND: If we have a retirement allowance that is an amount that is payable on retirement, then that is within this concept.
FRENCH CJ: Well, but for the retirement you would not get the payment.
MR RICHMOND: Yes.
FRENCH CJ: So what more is there that brings it within the scope of the eligible termination payment but does not exist in this case?
MR RICHMOND: In this case, what has really happened is that the employee has been granted rights over a period that equate into a shareholder. In fact, he along with the other employees who have these rights are the shareholders of the Glencore enterprise at the relevant time. The time when he can cash in his entitlement, that is, dispose of his shares and other rights, is one of several times.
One of those is termination, but there are others – death or disability. If he had died in 2005, his employment would have terminated by reason of that event but one would not have said that the payment was in consequence of the termination of the employment; it would have been in consequence of his death, even though death was also a termination of his employment. He could also, as was commonly a practice, have negotiated for cashing in of his rights prior to termination of the employment.
So, because there are a number of different events which can lead to the rights being cashed in for the sum which has accrued up till that time, we submit it cannot be said that termination is more than the occasion. It is not the cause, it is merely the occasion for the payment. If the only circumstance in which the payment could be made was termination that might be different. But, here, there are a number of different circumstances and termination is only one of them.
GAGELER J: Is that the whole answer, that there are multiple triggers?
MR RICHMOND: It is not – it is the principal answer. We have summarised propositions, really, at paragraph 9.
GORDON J: Your point at paragraph 9, though, as I understand it, is simply that there were preconditions to the payment being made, i.e. termination was not the one event that brought it about. Am I being unfair to you in the way in which I read paragraph ‑ ‑ ‑
MR RICHMOND: Your Honour, if you are saying that is the only reason we give.
GORDON J: Well, you say here:
Termination of that employment was neither necessary nor sufficient to generate receipt –
What you are doing – as I understand, your argument is that because these rights existed beforehand they were the cause or the ‑ ‑ ‑
MR RICHMOND: Yes.
GORDON J: ‑ ‑ ‑ event that brought it about. It was not the termination.
MR RICHMOND: Yes. The termination was the occasion for receiving the sum of money which had, at that stage, accrued.
FRENCH CJ: In the circumstances, it was sufficient.
MR RICHMOND: It was sufficient.
FRENCH CJ: I mean, it depends how you slice it, I suppose.
MR RICHMOND: Your Honour, it was not in this sense that he had to sign the declaration. If he had not signed the declaration, he would not have received the amount. The declaration was an instrument whereby he gave up his entire bundle for the two payments that he received.
FRENCH CJ: Then it was necessary.
MR RICHMOND: In the particular circumstances it was an event leading to the termination and the payment being made, that is, termination was. But as I said, it is no more than the occasion for the payment because there were other circumstances in which the very same amount would have been verbal.
GAGELER J: And that is the answer of commonsense, is it?
MR RICHMOND: Yes, it is. The primary judge took their approach at paragraph 105. I suppose, expanding upon the sufficiency point, termination was not sufficient because it was only a reason of having the rights granted at the earlier time that he received the amount. It was not a
necessary requirement because he could have cashed in the entitlements at that time, or an earlier time, as the evidence indicates had occurred with other employees.
Furthermore, he could have moved on to another Glencore company. So his termination of his employment with this particular Glencore entity was not the reason why he received the amount. If he had moved to another Glencore company, as he had in the past – he had moved three times from one Glencore subsidiary to another, his rights had continued throughout - if he had stayed with the Glencore group and moved to another jurisdiction then his accrued rights would have continued.
So it was not just the termination with this employer, it was the fact that he had terminated with this employer and did not continue with another employer in the Glencore group. That meant that the accrued amount became payable.
So what we have submitted in relation to causation is that it is not a “but for” test and it should be seen more as a search for the effective cause of the payment and that was an approach which Justice Heydon took in the Halloran Case which we refer to at paragraph 8. One looks for the effective cause but what is an effective cause is again the application of the March v Stramere approach of commonsense on the basis that the “but for” approach is not the correct approach. It is merely a negative.
If something is not a cause on a “but for” approach then it can be dismissed. If it is a cause and a “but for” approach, then one goes further and asks under the March v Stramere approach, well, is that the effective cause or is there something else which is the effective cause and in this case we say that there are other matters which are the effective cause and termination was merely the occasion for the payment being made.
Now, the point can be illustrated by contrasting this payment with those that are what we submit the words “in consequence of” were designed to catch which are retiring allowances and damages for unlawful dismissal. We can distinguish ourselves from those. They are the sorts of payments that are intended to be caught by the words “in consequence of”, not payments of this nature where termination is a mere occasion for the payment.
I see the time, your Honours. We rely upon what we say in our outline in relation to the valuation issue. I can deal with any matters that arise in reply.
FRENCH CJ: Thank you, Mr Richmond. Yes, Mr Solicitor.
MR GLEESON: Your Honours will see from our outline that there are three grounds upon which the Commissioner seeks to sustain the result below: firstly, that the payments were income according to ordinary concepts being deferred compensation for services rendered which is paragraphs 2 to 4 of the outline; secondly, they are income under the Myer principle, paragraphs 5 to 7; and, thirdly, it is an eligible termination payment under grounds, paragraphs 8 to 10 of the document.
If I could ask your Honours to go just to volume 1 to actually see the payments as received in fact, at page 423, that is the schedule of the 20 quarterly payments which were due to the appellant, due only because of termination and restitution as required.
The first two payments, one and two, in fact were applied at his direction by the payment withholding tax, and that is the subject of one of the grounds of proposed cross‑appeal, but there you have the 20 quarterly payments, and the Commissioner’s case is that those payments represent deferred compensation in consequence of his employment and therefore are ordinary income. If I could take your Honours to the legal principle first, first of all in Reseck v Federal Commissioner of Taxation (1975) 133 CLR 45 at 56, the proposition is stated by Justice Jacobs at about point 7:
It is well established that an amount paid in a lump sum in consequence of retirement from or termination of office or employment is income of that office or employment if it is deferred remuneration -
Then there is a reference to Henry v Foster (1931) and Dewhurst v Hunter (1932). Justice Jacobs goes on to say:
In the latter case, the decision of the Court of Appeal was reversed by the House of Lords on one of the three cases . . . But the principle as I have stated it was unaffected. The test applied in those decisions was in substance whether the amount received in a lump sum was part of the consideration for the services rendered in the office or employment. If it was, then it was income although payment was deferred. If it was not, then it was a capital amount.
So that is the legal principle that is applicable, and your Honours may recall that in those particular cases the payments in question were payments due to directors under the articles of association. One of them was a payment during the period of service and the second was a payment on retirement calculated by reference to the last five years’ earnings of the director, in turn related to profits. Now, that was held to be income as the payment was received.
Now, your Honours, the second case that we rely upon is Tagget v Federal Commissioner of Taxation (2010) 188 FCR 128, a decision of Justice Dowsett, Justice Jessup and your Honour Justice Gordon. Your Honours will see from the brief headnote that the case concerned whether a transfer of a parcel of land in the year 2005 was income in that year or whether it should be treated as income in an earlier year when certain conditional rights to the transfer had been established by contract. It was held it was income in the latter year and the relevant material is in two places.
Firstly in paragraph 21, there is a reference to two earlier decisions, firstly Barratt v FCT (1992) 36 FCR 222 at 231, and secondly Justice Dixon’s observations in Commissioner of Taxes (SA) v Executor Trustee and Agency Company of South Australia Ltd (1938) 63 CLR 108 at 155. Now, both those cases at some level of generality give some guidance to the exercise being conducted here, in particular Justice Dixon’s observation:
that the question was whether the rights in question had “come in” or “come home” to the taxpayer in a realised or immediately realisable form –
in the year said to be the year of income. Now, I will come later to the document but on no view could any of the possibilities adverted to by Mr Richmond satisfy a test that the rights had been realised or were immediately realisable in the year in which the GS or the contractual claim or the PPU was issued. Nothing was realised or immediately realisable until the 20 payments came along that I have taken your Honours to.
So that paragraph assists in terms of principle and then at paragraphs 30 to 33 in the application of principle Abbott v Philbin was distinguished on the ground that the options in that case were unconditional and could be exercised at any time without any further voluntary act of the grantor. That is an example of a right which was realised or immediately realisable in the year of grant and on no basis could that test be applied in the present case to find that there was income in the year of grant. At the end of that paragraph, the court observed:
What matters for present purposes is that –
in the earlier year:
in November 1998, he –
the grantee:
was not in a position to have –
called for the transfer of the land:
He was in the position of a person to whom conditional executory promises had been made, under which he would be remunerated for services rendered. Whether he would ever receive the contemplated remuneration was, in 1998, entirely a matter for the future.
That, we would submit, is applicable to this case. Your Honour Justice Keane asked Mr Richmond some questions and he accepted that it is not until termination, when one looks back over the aggregate performance of the company one can know whether one will receive any money.
In that sense, these are conditional executory promises. Remuneration for services rendered, whether you will ever receive anything depends on the position over the life of the company but critically at termination. That is the date that tells you whether there is any sum greater than zero. So we would submit that the approach adopted by Justice Dixon and by the Full Federal Court here applied to the present case comfortably allows one to reject Mr Richmond’s primary argument.
Your Honours, in the balance of that judgment, 31 to 33, there is some discussion of these points, that if one has a cash receipt to taxpayer, which is what Mr Blank is, one is focusing of course very much on the receipt, as opposed to whether there is a promise to pay in an earlier year and one is looking, as per paragraph 33, for whether the cash receipts taxpayer has actually received in money or kind something in the year said to be the year of income. That test simply is not satisfied here. Your Honours, that is the principle.
Could I then come firstly to what the agreement itself says, which is unequivocal on the point – that is, paragraph 3 of our outline – and then paragraph 4 to deal with the appellant’s argument. Your Honours, with the agreements, this morning’s questions have perhaps thrown up, amongst other things, that really one should start, even if briefly, at Article 657 of the Swiss Code of Obligations, then move to the articles of association, then move to the agreement itself. So if I could do it in that order. Article 657 of the Code is found at volume 3, page 883. This provides that:
The articles of incorporation –
of the Swiss company:
may foresee the creation of profit sharing certificates in favor of persons who are linked with the Company –
in one of a number of ways. For the present purposes it is the employee link that matters. Your Honour Justice Kiefel asked Mr Richmond about that. In this case the articles, as structured, draw the link with the employee, not with the shareholder because of course Mr Blank was not a shareholder of the company which created these profit sharing certificates. You are then told:
They must state the number of issued profit sharing certificates and the content of the rights attached thereto.
Then sub‑Article 2 contemplates three different forms of entitlement. The first is a claim “only to a share of the balance sheet profit”. That is the present case. The other two possibilities of “liquidation proceeds, or the right to subscribe to new shares” have not been taken up in the articles of this company.
Now, had the third option been taken up – that is, a right to subscribe for new shares – this might have been closer to an Abbott v Philbin case. That is not this case. Then we are told, in sub‑Article 3, no par value, it is not to be called a participation certificate and there is no contribution which is to be shown in the assets in the balance sheet. So already we can see that these creatures, to use a neutral word, are a significant distance removed from a conventional share in a company which creates rights by way of control, ownership and equity. In sub‑Article 4 there is a provision as to how these persons might be dealt with in certain circumstances. If the Court goes from there to the articles ‑ ‑ ‑
FRENCH CJ: Is one to see that as some kind of empowering clause under Swiss law?
MR GLEESON: Yes, creating the mechanism for there to be a creature in the articles.
FRENCH CJ: But not of itself a source of the obligations?
MR GLEESON: No, not at all – just the background.
KIEFEL J: Nor as recognising something that has occurred; it only permits it to occur and it requires it to be in the article.
MR GLEESON: Yes, and indeed in the present case the articles are more specific in their terms and then the agreement is more specific still. If I could just show those stages. The articles, at page 455 of volume 2, are the articles of Glencore International AG. Article 8 indicates in sub‑Article 1 that the:
profit sharing certificates which are intended for distribution to employees –
so that is the category that has been picked up – “employees”. The many references to there being shares are irrelevant to this case. Then, in sub‑Article 2, as has been noted, what the profit sharing certificate does is to grant:
upon restitution to the Company –
that is the essential element in the grant:
a claim to a cumulative portion of the balance sheet profit, to be determined by the general meeting of shareholders, during the period of ownership in the profit sharing certificate in proportion to the total number of profit sharing certificates effectively issued at any given time.
So pausing there, we have as an essential element in the certificate doing anything at all, the need to restore that certificate to the company. When we come to the ETP claim, the suggestion that termination is merely an occasion is really quite misconceived. It is termination leading to restitution which gives you the claim – that is an essential element. For this part of the case – that is the first part of the case – the importance is that the right only crystallises upon restitution of the certificate and, at that point, one will find out whether you are entitled to any money at all.
KIEFEL J: What is the nature of the right before it crystallises?
MR GLEESON: It is an inchoate right.
KEANE J: It is actually described, both in Article 657 and in Article 8.2, as a claim. In fact, as a claim distinguished from a right.
MR GLEESON: Your Honour is correct, and a claim which can only be advanced upon restitution. So, it is the ability in the future to advance a claim upon the company, provided you make restitution of the certificates. If you have assigned the certificates or lost them, or otherwise, you cannot make a claim but you make a claim and when you make that claim you then have these further elements to determine whether you are entitled to any money at all. That is where an exercise is to be done on a yearly basis. What were the profits each year as declared by the general meeting? What was your share of them which depends on what other certificates were on issue that year? Then, one does the cumulative aggregation exercise to see whether, on balance, you receive anything. So, that does not mean that something has come home to you in a realised or immediately realisable form in the year you receive the certificate.
KIEFEL J: Does it work something like this, that Article 657 of the Swiss Code enables a benefit to be provided? The company then incorporates that in the articles and makes a promise to the employee. Provisions of – a mechanism is put in place for the calculation of the satisfaction of that promise and the final step is a claim which will be met if restitution – if the body of documents acknowledging the promise are restored to the employer. Something like that?
MR GLEESON: Yes, that is it. Yes, that is it, your Honour.
FRENCH CJ: What is the source of the employee’s entitlement to call upon the certificate?
MR GLEESON: The immediate source is, in fact, the agreement I am coming to next which is the set of contractual rights.
FRENCH CJ: But, without out? I mean, you can issue a certificate without an agreement.
MR GLEESON: Well, you probably can, yes, yes.
FRENCH CJ: And, what is the source of the entitlement?
MR GLEESON: In that case it is the articles.
FRENCH CJ: If there is no relationship between the employee and the – the employee is not a shareholder, necessarily?
MR GLEESON: No, no. There does seem to need to be some dealing between the company and the employee whereby the certificate, as it is called, is made part of their legal relationship.
FRENCH CJ: This aspect may be in a foreign law zone, I suppose.
MR GLEESON: Yes, that is probably so, your Honour. Could I just observe on sub‑Article 2 that what it goes on to say is that if you cease to be an employee, you must:
on cessation transfer any profit sharing certificates to the Company –
and then it goes on to say there is:
no claim to any payment from the Company in respect of the restitution . . . certificates allocated with 24 months of the date of cessation, except if . . . due to death or disability.
So, the mechanism in the articles at least would be broad enough to contemplate the possibility that the employee might, during the period of employment, choose to make restitution and close off his or her claims against the company there and then.
The last time the employee can do this is on termination and that is where the third document then becomes more specific because when we come to the agreement it makes clear that option is not open to an employee. So the manner in which these particular profit‑sharing certificates are being issued is more specific than Article 8 and requires that they cannot be restored until termination so I will come to that in one moment.
Just to complete Article 8, we see from sub‑Article 3 that the certificates do not have any of the ordinary control rights that might be attached to shares and in sub‑Article 4 they have not picked up the second and third options of Article 657, which is any claim to liquidation proceeds or the right to subscribe to new shares. So their benefit is limited to the ability to make this claim upon the cumulative portion of the balance sheet profit.
Your Honours, for completeness, the other set of articles which come into play by 2005 are the articles of Glencore AG and they are at page 516 in the translation. They are in substantially similar form. The English translation of bonus papers is a loose translation for “Genussscheine” in the German. So 516 is in fact the articles under which the PPUs derive their ultimate source in the 2005 agreement. Can I go then next to the 2005 agreement first rather than the 1999 agreement which is volume 1 at page 1565.
GORDON J: I think it is 397.
MR GLEESON: Page 397, I am sorry. Could I take up first, your Honour the Chief Justice’s question about novation? This is a novation and a superseding of all prior arrangements and that is made clear on page 405 at clause C.7. So, from 2005 onwards, this is the document.
Now, coming back to the beginning of the document, Mr Richmond did not spend much time on the recitals. They are in fact important and there is no suggestion that they are a mistake or that they are inaccurate. The preamble says that Mr Blank “is a person employed by or engaged” otherwise by Glencore International and that company performed services for Glencore AG under an agreement:
the remuneration payable by AG to GI under the Service Agreement is determined with reference to the direct and indirect costs (including overhead expenses) incurred by the Service Provider –
and:
a significant portion of the services performed by the Employee are in connection with the services provided by the Service Provider for AG.
I just draw emphasis there to this telling us exactly what is the context for this agreement, which is the services and the work being done by the appellant for GI to enable it to perform its services for AG. So the entire heart of this document concerns the work being done by the appellant and it is in that context on page 398 that it is said that:
GI has adopted a plan of deferred compensation known as the “Incentive Profit Participation Plan for Selected Employees of Glencore International AG and its Subsidiaries” ‑
Now, your Honour Justice Gageler asked a question of Mr Richmond: what does he comprehend by “deferred compensation”? When one seeks to answer that question, this document makes clear it is compensation for the services being rendered by the appellant to Glencore International in order to enable it to provide its services in due course.
So the document has set this up as deferred compensation for services. So it has really given us the answer to the entire question, and these are not words by accident or mistake, they are clearly chosen with a careful view to their taxation consequences, knowing that there are multiple jurisdictions that might come to look at this document, and quite deliberately it was set up as deferred compensation for services and that is clear with the next recital:
in consideration of the services to be rendered by Employee to the Service Provider in connection with the Service Agreement, AG and GI have agreed that Employee should participate in such plan and Employee desires to participate ‑
So there is the link to services. Then the final recital acknowledges the need to be:
a shareholder under a separate shareholders’ agreement ‑
No doubt there is some linkage between the two agreements but they make perfectly clear that the benefits under this plan are linked to the service rendered as an employee and the benefits under the plan are not in any way a return on the shares, and the appellant’s attempt to link the two together miscarries.
Your Honours, in the substantive agreement, on page 400, those provisions of the recitals have been carried through, consistently so. So in clause A.1.1, it is a grant of:
deferred compensation which will be calculated on the basis of the results of GI ‑
It is called IPP. Then we are told it is:
Solely for purposes of calculating the amount of IPP, AG has issued to GI GS pursuant to –
I think it is article 657 of the Code:
which shall serve as PPU for the purpose of calculating Employee’s IPP ‑
So there it is – deferred compensation, compensation for services, and the GS serve as the method of calculating how much you get. As your Honour Justice Gordon put in questions, they serve relatedly to be the creatures that need to be restored in order to receive money if money is to follow. It is of some significance in A.1.2 – again, we are told they are issued solely for the purpose of implementing the plan and calculating the deferred compensation:
Employee shall not have nor be deemed to have any interested whatsoever in the GS.
So, whatever these creatures are, they are not creatures which can be the subject of interests in the employee and they do not grant any right to the assets of any of the companies. We then have the structuring clause, A.2, of calculation. The important point, for present purposes, is simply that the calculation is done notionally, as it were, each year but ultimately aggregated and as A.2.5 indicates:
If, at the Notice Date, the aggregated Periodical IPP of Employee is negative –
then the result is zero, nothing is to be paid. So, if one stands back and asks, as the appellant is doing his work each year, what is he getting, what does he have, the answer is that in some contingent sense he is in a stage where he may in the future have a claim to money but whether there will ultimately be any claim he can make really depends upon four variables. The first is how long he lives. The second is how long he remains in employment which is partly his choice and partly the company’s choice. The third is how profitable the group is over each year and the whole period. The fourth is how many other PPUs are on issue in each year.
GORDON J: There is a fifth, is there not? It is also discretion as to how well he performs as to whether he gets additional PPU.
MR GLEESON: Whether he gets additional PPUs. While it seems that you cannot take away existing PPUs, what you can do is either not allocate future PPUs or you can issue a disproportionate amount to other people to reward them more. So they are all the elements along the way and the result of which is when terminated, if he provides restitution, he can make a claim which may or may not see him receive some money.
Your Honours, coming to A.3, there were some questions this morning about what happened to the former GSs when this agreement came in. In the end, Mr Richmond agreed with the question from your Honour the Chief Justice, I believe, which was effectively that there are 1,600 PPUs allocated under this document. That is page 410. They have the same numbers and allocation dates as the GS under the earlier agreement and in that sense they supersede them and we agree with that.
So, A.3.3 is the critical clause which means that the restitution cannot occur prior to the notice date. That is why I say this is more specific and confined than the articles might have permitted. You cannot remain employed and seek restitution. You have to either terminate or be terminated in order to move to the stage of restitution.
There were some questions this morning about what would happen if there was dismissal for cause and perhaps there is the reverse situation if there was unilateral repudiation by the employee just walking off and not putting the notice. The Commissioner’s position is that he does not wish to put a specific construction submission on that precise point because it was not sufficiently argued each side below and it may involve Swiss law. But the Commissioner’s position is the case can be decided without having to resolve that construction question. There is enough contingency in this document without having to add that extra one.
But what is critical is, on any view, it will only be if you reach the notice date which is hinged to termination that one gets to restitution and then gets to a possible money payment. We do at least go this far, your Honours. If your Honours could go back to 399 to the definition of “Notice Date” - and this is relevant both to this ground and to the ETP ground - Mr Richmond seemed to put that termination was but one of a range of ways in which one could make restitution and get money. Well, that is wrong.
“Notice date” means the month of termination - notice of termination is appropriately received; or (b), “death or permanent disability”, each of which would involve the end of one’s employment; or (c) “such other date agreed to be the Notice Date”. I think this is where fairness needs to go both ways. As to paragraph (c), “such other date agreed to be the Notice Date”, there was no debate below about that being the ability to accelerate restitution prior to termination of employment, and it should not be treated as some basis to expand this case beyond what the notice date is about, which is the person leaving employment.
In any event, since we are dealing with an income tax statute, what we should be looking at is what happened here, and what happened here was that this person terminated his employment, sought to make restitution and got paid. That is the case we are dealing with. We should not be dealing with some speculation about what would happen if Mr Blank had tried to factor his rights or if he had tried to reach some agreement with the company which it was not bound to reach with him.
FRENCH CJ: So, on the basis that 2005 is a novation, on your characterisation what it does is to confer upon Mr Blank a set of contractual entitlements, subject to various conditions, mirroring or derived from notional GSs held by AG from GI and so forth and reflecting what has happened in the previous history, but essentially one looks within the framework of the contract itself for the source of his legal rights.
MR GLEESON: Yes.
FRENCH CJ: One gets some content by reference to some of the history.
MR GLEESON: Yes.
FRENCH CJ: But he does not get any separate distinct entitlement derived from GSs – apart from the shares, of course, there are the shares as well.
MR GLEESON: No, and the whole intent was for whatever reason to rework this structure so that these creatures were being issued by the holding company rather than the operating company ‑ ‑ ‑
FRENCH CJ: Well, they then become a kind of notional creature because they are used as a basis of calculation.
MR GLEESON: Yes, and so, if you ask what is there after 2005, what you have is a basis for contractual calculation and that is it. Your Honours, could I then just – A.4 on page 402, that is the basis for the Swiss taxation treatment, the 55/45 split, which in turn explains the cross‑appeal issue. Then A.5:
The IPP will become due as of the Due Date, provided that a declaration . . . has been executed –
and the due date has been defined as 30 days after the notice date and, if we just look at the declaration for one moment at page 411 that he has to sign, it is apparent that there must be a termination in order to make restitution, the employee must confirm termination. He then is to receive two sums. The first is a sum paid under this agreement and the second is a sum for the shares. Now, they are separate sums for separate rights. Any suggestion that it is some global sum for both is denied by this language.
He then relinquishes the claim to payments. There is the reference again, the “claim to payments”. He assigns the shares and then clause C over the page is the split, the tax split, and then clauses D, E, F and G are further provisions effecting the final severance of the employment relationship.
So there is an ability to set off payments, there is a release of claims in connection with the employment and so on, and there is the termination of the IPP; confidentiality of the obligations continue. So the whole way this is structured is on a termination of employment, with conventional termination provisions, then you give up your claims and you get your money.
Now, what that tends to indicate is that, going back to the definition of “Notice Date” – if this point is still being pressed – item 13(c) on page 399, “such other date agreed to be the Notice Date” cannot sensibly be a date while the employee remains in employment because you could never give a declaration. It is a reference to some extension of the one month period.
FRENCH CJ: What is he relinquishing when he:
relinquishes his claim to payments with respect to . . . GS allocated in his name –
at page 411, given the nature of the contract as we have just discussed it?
MR GLEESON: If one answers that economically, not legally, for one moment, the valuers have a large debate about the backward‑looking and the forward‑looking component of these claims, and at any point in time, if you relinquish your claim, you will realise such value as may have been building up, but you terminate your ability to share in any future value.
That is what you are really relinquishing; your ability to hang in there and hope there will be continued future profits in which you might share. But you are also, by bringing everything to an end, closing out the backward‑looking value and you are giving up the chance of a future, but you are also avoiding the prospect the future becomes very gloomy and you end up with zero. You are essentially giving up – it is almost a counterfactual, a claim that you might otherwise make at a future date had you remained in employment and faced whatever circumstances later prevailed.
This, of course, is relevant to, when I come back to the ETP – the suggestion that termination is some mere background occasion for this is completely belied by the document at page 411. Termination, certainly as this man got his money, was a necessary condition. Without termination, he could not get a cent.
If one wants to use the language, termination was one of a set of sufficient conditions as well; termination plus this document generated the payment. The final, of course, is important is that the precise date of termination will determine the amount, if any, you get. So, termination, putting those matters together, could never be dismissed as falling outside the ETP statute.
Your Honours, just to complete the agreement itself, it is under clause A.5 that the IPP becomes due, and A.6 is the payment in instalments. Clause A.9.2 is further evidence of the character of the payment. There is an agreement for US federal income tax purposes that:
the payments made . . . hereunder represent compensation being paid in consideration of the services . . . rendered by the Employee to the Service Provider.
Well, there it is.
GORDON J: “Services to be rendered”. I think it is future rather than past.
MR GLEESON: Yes, your Honour is correct. It does say that, yes.
GAGELER J: What do we take from that, for Australian tax purposes?
MR GLEESON: Well, I think in the light of the last question, it is probably neutral, your Honour. Clause C is a set of circumstances in which you may end up getting nothing because your claim will be subordinated to other claims and could I then just dwell on clause C.2? That, we submit, has a lot more force than Mr Richmond has given it.
There are two elements to it. The primary element is a promise not to deal, to use a single word, with the rights under the agreement, but it is about the most comprehensive negative covenant one could imagine. You cannot do any of those things, I will not read them all out, but they include, you are not to give:
any rights in connection with the rights and claims granted or issued hereunder and/or the Plan –
So, you cannot assign the agreement, you cannot assign the rights under it. You are promising not to grant rights even in connection with the rights.
Now, when Mr Richmond comes to his first way of turning these rights to pecuniary account, what he seems to contemplate is that the employee goes to a third party and says, how much will you pay me if I promise you that when I terminate I will hand over to you whatever I receive under my claim and then he concedes that the first question the hypothetical purchaser asks is, when are you terminating, what assurances are you giving me and his answer to that is in the end, there will need to be a promise of some sort; either a promise I will terminate my employment on “X” future date or I will terminate it whenever you wish me to terminate it, whenever it suits you.
Now, we would apprehend that to enter that sort of collateral deal, that is a synthetic transaction, most likely would be a breach of the first limb of clause C.2 because this would be the employee seeking to grant:
rights in connection with the rights and claims granted or issued –
under the agreement. And it would be a hypothetical deal which would strike at the entire heart of the relationship between Glencore and the employee and it would do that for the reason that is apparent in the note holder’s document at page 571 that the Court was taken to. If I could just go to that but keep page 404 open. What Mr Richmond is contemplating is that an employee has in effect closed out the entirety of his exposure to the fortunes of the Glencore Group because he or she has received a fixed sum of money now and he or she will leave the group either at a fixed future date or when the third party directs him to do so.
Now, what that would do is completely deny the last paragraph of page 471. There would no longer be the alignment of interests of management and key employees with Glencore. This employee would no longer ‑ ‑ ‑
FRENCH CJ: This is the last paragraph of page 571, is it not?
MR GLEESON: Page 571; I am sorry, your Honour. This employee would no longer be effectively investing his own capital in the company because he has closed out his entire financial risk. He would no longer be motivated to take a long‑term view of the overall performance or to protect capital. So the entire incentivising effect of the PPUs is destroyed if a person is permitted to engage in this sort of side deal. We would submit that the first limb of clause C.2 would not contemplate even that sort of transaction. One could imagine the fury of Glencore if they were told that this sort of transaction had been entered.
While your Honours have 571 the other critical feature of course which has been raised in questions is that the second paragraph indicates on at least three occasions the centrality of termination of employment to the ability to make this claim and receive any money. In particular, the middle paragraph says:
Upon the termination of an employee shareholder’s employment, the amount of the employee shareholder’s share of the consolidated shareholders’ funds is converted on the balance sheet into debt. For each of the five years after termination of employment, 20 per cent of an employee shareholder’s portion of the consolidated shareholders’ funds is accounted for as short‑term debt –
and so on. So that debt claim that is referred to there is the payment under the IPPA which comes due on termination. What has happened, as this document says in non‑legalese, is that one’s contingent ability to share in profits has been turned into a debt claim. And if one asks, when was the income realised or immediately realisable, the answer is upon termination of employment. If one asks the ETP question, was this received in consequence of termination of employment, obviously, yes.
So, your Honours, that is the first limb of clause C.2. On the second limb Mr Richmond says, that is looking rather promising because the employee can try to assign the rights to a company controlled by capital or votes. He seems to contemplate that, although Mr Blank is in control of this personal holding company, it might be a 51‑49. He lets some investors into the company and that is a way to start realising some values. But observe the final proviso, provided GI has given its prior written consent for such assignment.
That is not a means of immediate realisation of his rights. At most, that is an ability to go to this employer and say, what I am thinking of doing is factoring my rights. I want to go into business with a third party. I want to bring them into my personal holding company. What do you think? Now, were such a transaction entered and approved, one would then look at its income character, but the hypothetical prospect of such a transaction, requiring consent of Glencore, does not bear on the nature of the rights here.
Just while your Honours have that part of volume 1, could I just go to one other page to look at the reality of the appellant’s argument? If your Honours go to pages 424 and 425 and test the appellant’s argument and if we just take 1 January 1993 – 50 units are issued. In that year, if we go down to the annual profit, the profit participation was US$302 per unit. Page 425 shows us mathematically he notionally had $15,000 as his share of profits for that year.
What is Mr Richmond’s case? Is his case that he would return, had he been an Australian resident, $15,000 in that year? No, that is not his case because his case is what he would return as income – 50 PPUs or 50 GSs. That is what he says is his income.
So, one then asks, what amount of money would he be returning in that first year as his income? On his theory, what he would do is he would return an amount of money and it is impossible to know what it is, but an amount of money which reflected two things: firstly, a backward‑looking component, namely, the prospect that the $15,000 would not be eroded by future profits, and then a forward‑looking component which would be a share in the profits of the company for such future years as he were to remain in employment. It is almost impossible to regard that as an immediately realisable gain he has received in that year.
If we look at page 425, we see that fortunately for Glencore its fortunes were good up to 2001 and then excellent in the following five or six years. What is the amount of income that would have been returned in 1993, referable to the 50 PPUs which he held until 2006? On the Commissioner’s approach, one simply says it is when you restore those 50 PPUs to the company on termination that you crystallise and accrue a payment and that is the point at which income can be derived.
Could I just give your Honours one further example of it? If your Honours look at the 2001/2002 years, one can see that he was issued an extra 300 in one year and an extra 100 in the other year. He was issued those after he became an Australian resident.
On the theory of the appellant’s case, what he should have done in the 2002 and the 2003 tax years is return the 300 and the 100 PPUs as income. How possibly would he have placed a value on those PPUs? If I can just show your Honours in one piece of expert evidence at page 228 at the bottom, Mr Lonergan, as the valuer for the appellant, agreed that on his valuation logic you would place about $20 million value on the 300 PPUs issued in the 2002 year – that is applying his backward‑looking, forward‑looking and so on logic.
So even though at that point in time he has not received a cent in his pocket, even though he cannot receive a cent until he terminates, and even though when he terminates there may end up being nothing there, the logic of the appellant’s case was he was meant to return $20 million in that 2002 year, which of course he never did because he never lodged a return. Those elements just provide some context to whether this is a realised or immediately realisable gain.
Your Honours, I have completed paragraphs 2 and 3 of the outline and part of paragraph 4. As to paragraph 4, the reasons against applying the Abbott v Philbin‑type approach, the first two reasons depend upon the nature of the PPUs or the GSs or the phantom units, their essential role being the method of calculating the amount which will be payable on the claim after restitution and no more than that.
The third reason concerns how we would ask the Court to approach Abbott v Philbin. We would characterise the present case as the PPU granting a single indivisible executory promise or perhaps claim to pay an amount of money which would remain uncertain and variable until an uncertain future date. Now, if that is what it is, if that is a fair characterisation, that is a world removed from the creature being dealt with in Abbott v Philbin or in any of the cases that followed it.
The only point I want to add on that proposition is that at some point this morning Mr Richmond in fact went so far as to say – I think this is correct – that a promise to pay a sum of money at a future date perhaps contingent in some way should be treated the same as a share or the same as a recognised species of commerce, even with the cash receipts taxpayer, on his theory that whenever you have a promise to receive a sum of money you might be able to factor that promise to some third party.
Now, if that were right, that would in any case where there was a promise to pay money at a future date, require you to treat the promise as income on grant of the promise and that, we submit, is an extrapolation which should not follow from Abbott v Philbin.
Your Honours, there is only one other case in that Abbott v Philbin line that I wish to go to. It is not the Supreme Court decision in the United Kingdom, because that case is just distinguishable. That is about shares where the argument was that the shares should be treated as a mere device to receive cash, and it was rejected. So that is distinguishable. But the case I did consider I need to take the Court to is Donaldson (1974) 1 NSWLR 627, as it is perhaps the high point of this strand of Mr Richmond’s argument.
The reason this might be the high point of his argument is that on page 632, letters C to D, the terms of the options were such that they were not immediately exercisable, there was a period of service required, and then there was a set exercise period. So it takes one factually one step beyond Abbott v Philbin where the option could be exercised immediately. The restriction on transfer is at page 636, letters F to G.
Page 643, E to G, is the central part of the decision of Sir Nigel Bowen - 643, E to G - and it really commences with the same type of test as Justice Dixon had applied which Tagget followed, namely, we are looking at whether something “‘comes in’ to the taxpayer”, is there something which is “enjoyed or capable of being enjoyed” in the year of income. Now, that is relatively similar to language which says is it realised or immediately realisable in the year of income. What is then rejected is a proposition that the option rights did not come in in the year of income. The options needed to be assessed by their nature.
Then Sir Nigel Bowen dealt with two arguments. The first is they could not be exercised in the year of income, and he rejected that on the ground that that is confusing the fruit with the tree; and the second is they were non‑transferable, and he rejected that on the ground that, well, meals are not transferable:
What is made assessable income . . . is the value to the taxpayer of the benefit allowed, given or granted . . . the rights conferred on him which others lack.
Now, we would urge that some caution be applied in transferring those statements from the particular factual context to the present case where one is dealing with promises to pay money, and where one is dealing with a promise to pay money, it is not helpful for the purpose of income tax law to distinguish the promise from the performance of the promise.
One cannot say the promise as given is income and then the performance can never be income. One needs to look closely at the particular case and ordinarily the opposite will be true, which is with a cash receipts taxpayer it is the performance which will be the coming in of the benefit.
GORDON J: Can I ask you two questions about that? One is over the page at 644, Chief Justice Bowen identifies the principle in different language. Does that affect your analysis?
MR GLEESON: Which letter is your Honour referring to there?
GORDON J: At A he says:
that does not affect the principle that, where such rights are given they are present rights, though exercisable in the future, and confer an immediate benefit upon the taxpayer which he enjoys as the owner of them.
MR GLEESON: It is language appropriate to that case and the sort of issue he was there dealing with. Our caution is that if one is trying to translate that to executory conditional promises to pay money, it is not an appropriate statement of the principle and, in the next paragraph when his Honour contemplates the two ways in which you might be able to turn it to account, the first is the Abbott v Philbin analogy of doing a side deal where you place it in the power of another person to dictate when you will exercise the option and then you will be able to transfer to that person a species of shares, and then the second is the resumption approach of what would I give rather than fail to obtain these rights.
But, if one took a homely example of a person who took up work on 15 June, PAYE, salary payable one monthly in arrears, that person will return that income in the following year. They will return it when the promise is performed. They will not return that as a cash receipts taxpayer on 15 June even though they have got a promise in that year, and even though the person would, on the resumption analogy, give something in order not to lose the promise.
In my submission, that illustrates that these sorts of tests that are being applied to species of property like options and shares do not readily transfer when one is simply talking about promises to pay money and money itself. Your Honours, concluding point 4, I have dealt with assignment, paragraph d, the stapling point does not take the case anywhere and at paragraph f our ultimate proposition is that an unperformed conditional promise to pay money in the future is not a relevant benefit within section 26(e).
Your Honours, could I turn to the Myer Emporium point which is an alternative. It comes into the case in this way. If contrary to our argument you regard the GSs or the PPUs or the phantom units as a relevant form of right or asset and if, contrary to our argument, you regard restitution as a realisation of the right, that does not end the case because the implicit assumption in Mr Richmond’s argument, and he has made it explicit this morning, is that the rights were capital in nature when acquired.
If they were capital in nature when acquired, and all the other assumptions are correct, then his conclusion on this part is correct. But his implicit assumption is that the PPUs and the like were acquired on the capital account. The point of Myer Emporium is to indicate that there can be circumstances where assets are acquired on the revenue account such that a later realisation of that asset is itself on the revenue account.
FRENCH CJ: What is the asset? Is it the 2005 contract? This comes back to the question we were discussing before.
MR GLEESON: Yes, yes. I am attempting here to take his case at its highest. The ultimate answer to your Honour’s question is yes. It can only be the 2005 contract because the other creatures by this stage are novated, but Mr Richmond wishes to start the case at an earlier point in time and say in 1993 I had 50 PPUs, or 50 GSs, and he wants to say they are a right. What happened in 2007 – admittedly, there was a bit of novation in the middle – I realised ‑ ‑ ‑
FRENCH CJ: A bit of novation?
MR GLEESON: Well, he agrees “novation” but he is not really a novation man, novation is not good for his case, but his case is in 2007 he realised a right obtained in 1993 and upgraded in 2005. I hope that is not too crude; that is his case.
Now, that still does not get him there unless that which he acquired, either in 1993 or 2005, was acquired on the capital account. The point of Myer Emporium, if I could go to it, is there can be cases where assets are acquired with a particular profit‑making purpose and scheme stamped over them from the outset, such that they are acquired on the revenue account and they are disposed of on the revenue account.
Now, Myer is reported at (1987) 163 CLR 199 and just from the first paragraph of the headnote we have all the facts we need. The company lends $80 million to another company for seven‑plus years at 12.5 per cent per annum interest. Stopping there, if they were the only facts, the interest would be income as received in each of the seven years. However, shortly after the company assigned the right to the interest for a lump sum of $45 million paid immediately. That second transaction was in contemplation at the time the first transaction was entered.
So the plan from the outset was I will lend the 80 million, I will acquire the right to the future interest but I will immediately dispose of it for a lump sum, held, $45 million is income. Why? Because the rights to the loan agreement and the interest were acquired on the revenue account, acquired on the revenue account because there was always the plan to realise them in this particular way. That is the principle set out at page 209, last paragraph:
But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case.
Now, the appellant’s primary response to this is to say your Honours should read this proposition as applicable only to taxpayers who already carry on a business who then enter into a transaction outside the ordinary course of that business but with this character which places it on the revenue account.
Our answer to that is that reads the principle in Myer too narrowly. It does not matter whether you are carrying on another business; the question is in respect to a particular asset, if you acquire it, with a very particular profit‑making purpose attached to it, you acquire it on the revenue account and the proceeds of realisation are also on the revenue account. That is the proposition of law.
The other authority we have given your Honours which we submit is consistent with this is Westfield v Commissioner of Taxation (1991) 28 FCR 333. There is some discussion of Myer and perhaps if I could pick it up at page 341 in Justice Hill’s judgment, with whom Justices Lockhart and Gummow agreed, just below the reference to Californian Copper Syndicate v Harris in 1905 is a reference to Lord Justice Clerk posing the question this way:
“Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit‑making?”
And perhaps at page 344, just to even tighten the test, about halfway down the first full paragraph, this is said:
Secondly, where a transaction falls outside the ordinary scope of the business, so as not to be part of that business, there must exist, in my opinion, a purpose of profit‑making by the very means by which the profit was in fact made.
Now, Mr Richmond says, well, there you see the qualification. We are only talking about people already carrying on a business. We say the principle is more general: have you acquired an asset where you have from the outset a specific purpose or means of making profit and you make the profit by that means. So, an example might ‑ ‑ ‑
FRENCH CJ: So, what happens if you buy a house as an investment property with a view to making a capital gain?
MR GLEESON: In the ordinary case, you will not be in Myer territory, but in a case where you buy a house, having lined up a person to whom you are going to resell it two weeks later for a profit and you carry out that resale, then you may be in Myer territory. So, that is the ‑ ‑ ‑
GORDON J: So, is it the connection of the sort of back‑to‑back deal that makes a difference? Is that what it is?
MR GLEESON: A back‑to‑back deal is one example of the illustration that you have stamped your acquisition with a very specific mode of achieving a profit.
GORDON J: That is because the circumstances on the wide and exact scrutiny demonstrate that there was a profit‑making purpose but how do you apply that here?
MR GLEESON: It is applied here in this sense – I will just focus on 2005 – that the PPUs as acquired under that agreement against our case were acquired in a circumstance where there was only ever one way, one substantive way they could be turned to account, which is restitution on termination. So if you make a profit, you are making it by the very means which has been set up from the outset as the means to realise the asset, as opposed to a generalised intention, I buy a house, there could be many times and many people that I might try and sell it to in the future.
GORDON J: So if I have a single purpose entity that acquires a shopping centre, I have 12 of them, is that caught, because I intend to sell the shopping centre? I just do not know what the defining characteristic is which distinguishes it from the example the Chief Justice gave.
MR GLEESON: The defining characteristic is what Justice Hill said on the final page of Westfield near the bottom of the page:
While a profit‑making scheme may lack specificity of detail, the mode of achieving that profit must be one contemplated by the
taxpayer as at least one of the alternatives by which the profit could be realised.
In fact, it then deals fairly closely with your Honour’s example. In a case where the scheme involved:
the acquisition and resale of land, there was, at the time of acquisition, no purpose of resale of land, but only the possibility (present, one may observe, in the case of every acquisition of land) that the land may be resold.
Not good enough. So the distinguishing feature is that the 2005 agreement and the earlier ones establish that the way in which you will turn the PPUs to account is through restitution under the terms of that agreement. That goes to whether you have acquired them on the capital account or the revenue account.
There are two elements to it, your Honour Justice Gordon, that bring it in this category. One is the only way you can make the profit is through the agreement which is, at the end of the day, you realise. The second is it is not a case where you could even make any profits along the way. You cannot share in the profits; you can only realise the profit through the restitution.
Your Honours, just in terms of how we are going, we probably have about 40 minutes to go. We have about 10 minutes on the ETP, and then I am going to ask Mr Hmelnitsky to deal with the – there are the two cross‑appeal grounds where we need leave from the Court. The first ground is those two payments as to which year they fall in, and that, we submit, deserves special leave not just because of the money, but because it really is a similar issue to ones we are dealing with today as to when income is derived.
The second ground is the truly alternative capital gains cost base issue, which we trust we do not get to, but if we were wrong on all the income issues and this is a capital gain, there has been no conclusive determination to date on the cost base, and there is, we would say, an issue of principle which either this Court ‑ ‑ ‑
FRENCH CJ: There would be an issue as to how that is dealt with, I suppose?
MR GLEESON: How that is dealt with; either your Honours consider that there is an issue of principle that we have raised in it and deal with it, or your Honours remit it. They are the matters we have left.
FRENCH CJ: Yes, all right, thank you. We will adjourn until 10.15 tomorrow morning.
AT 4.14 PM THE MATTER WAS ADJOURNED
UNTIL WEDNESDAY, 24 AUGUST 2016
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