De Figueiredo and Commissioner of Taxation (Taxation)
[2018] AATA 62
•23 January 2018
De Figueiredo and Commissioner of Taxation (Taxation) [2018] AATA 62 (23 January 2018)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2017/0317
Re:Rubens De Figueiredo
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Ms G Lazanas, Senior Member
Date:23 January 2018
Place:Sydney
The objection decision made by the Commissioner is affirmed.
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Ms G Lazanas, Senior Member
CATCHWORDS
TAXATION AND REVENUE – income tax – taxpayer participated in employee profit participation plan and granted entitlements when overseas – employer company involved in reorganisation and initial public offering – taxpayer granted new shares in exchange for entitlements in employee profit participation plan when resident of Australia – whether assessable income – whether income derived – objection decision affirmed
LEGISLATION
Income Tax Assessment Act 1997 (Cth), s 6-5
Taxation Administration Act 1953 (Cth), s 14ZZK
CASES
Blank v Commissioner of Taxation (2016) 258 CLR 439
Commissioner of Taxation v McNeil (2007) 229 CLR 656
Federal Commissioner of Taxation v White (2010) 79 ATR 498
Sent v Federal Commissioner of Taxation (2012) 208 FCR 462
Tagget v Federal Commissioner of Taxation (2010) 188 FCR 128
REASONS FOR DECISION
Ms G Lazanas, Senior Member
23 January 2018
The taxpayer, Mr Rubens De Figueiredo, is in dispute with the Commissioner of Taxation as to whether his assessable income for the year ended 30 June 2011 includes an amount of $3,610,467. The determination of that issue depends on whether Mr De Figueiredo derived that amount as assessable income by reason of an issue of 16 shares to him in May 2011 made in the course of a restructure and initial public offering (IPO) conducted by the Glencore International group of companies (Glencore Group).
Mr De Figueiredo was an engineer employed by one or more subsidiaries in the Glencore Group. The Glencore Group operates one of the world’s largest international commodity trading businesses. Mr De Figueiredo had been issued with certain shares and units under an employee profit participation plan in 2006 and 2008 when he worked for the Glencore Group in Zambia, before becoming a resident of Australia. These entitlements were exchanged for the issue of 16 new shares to Mr De Figueiredo in May 2011 as part of the IPO and related restructuring transactions involving the Glencore Group. At that point in time, Mr De Figueiredo was working for a subsidiary in the Glencore Group in Australia and he was a resident of Australia.
Some of the factual circumstances and issues traversed in the present dispute are similar to those canvassed in the decision of the High Court in Blank v Commissioner of Taxation (2016) 258 CLR 439, where the High Court relevantly decided that Mr Blank, a former employee of the Glencore Group, was assessable on an amount received as a lump sum as income according to ordinary concepts, as the payment was deferred compensation.
Mr De Figueiredo sought to distinguish his tax dispute from Blank’s case on several grounds, including that he did not receive any payment and there was no “triggering point” as, unlike Mr Blank, he did not terminate his employment with the Glencore Group. He said he did not receive any money or value from his entitlements under the employee profit participation plan while working in Australia. He argued, therefore, that it was not an issue, as in Blank’s case of whether a payment was to be characterised as income. In one sense, he is right and Blank’s case is not decisive in relation to his dispute. This is because his case is not a characterisation case and the resolution of his dispute turns on whether he derived assessable income when the 16 new shares were issued to him as part of the IPO and restructure of the Glencore Group. Mr De Figueiredo, as the taxpayer, bears the onus of proving that the assessment issued to him by the Commissioner including the amount of $3,610,467 is excessive: s 14ZZK(b)(ii) of the Taxation Administration Act 1953.
I have decided that the Commissioner is correct in disallowing Mr De Figueiredo’s objection and, for the reasons set out below, Mr De Figueiredo’s assessable income for the relevant year includes the amount of $3,610,467 on the basis that he derived that amount in the year ended 30 June 2011.
FACTUAL BACKGROUND AND EVIDENCE
The factual context is not in dispute. Nor was Mr De Figueiredo, the only person who gave evidence in the proceedings, cross-examined by counsel for the Commissioner. The following summary is substantially based on the Commissioner’s Written Outline of Submissions dated 14 September 2017 and the T-Documents that were before the Tribunal.
The Glencore Group and Mr De Figueiredo’s employment
Prior to May 2011 the Glencore Group was relevantly structured as follows. Glencore Holdings AG (GHAG) and Glencore LTE AG (GLTE) owned 85% and 15% respectively of Glencore International AG (GIAG), a company incorporated in Switzerland. The remainder of the Glencore Group of companies sat under GIAG. The shares in GHAG and GLTE were, in turn, owned by the senior employees of the Glencore Group who were invited and agreed to participate, from time to time, in employee profit participation plans.
In 1998 Mr De Figueiredo became an employee of a subsidiary of GIAG and was assigned to work in Peru and later, in Zambia, where he stayed until December 2008. Mr De Figueiredo arrived in Australia in early 2009 to take up a position working in the mines of Cobar, New South Wales. He was a resident of Australia from that time until in or about July 2012 when he departed for Brazil.
Profit participation agreements and shareholder agreements
In June 2006 Mr De Figueiredo was selected to participate in the Glencore Group’s employee profit participation plan. Mr De Figueiredo said that this was in recognition of his efforts and good results in improving the production of the mines in Zambia. Consequently, Mr De Figueiredo entered into two agreements on 30 June 2006, a Shareholders Agreement (SA) with GHAG and an Incentive Profit Participation Agreement (IPPA) with GIAG and Glencore AG (AG). The SA and IPPA were “stapled” in the sense that the IPPA was only effective if the employee had executed the SA and purchased shares in GHAG equal to the number of Profit Participation Units (PPUs) allocated to the employee under the IPPA (cl. B.1). The terms of both the SA and the IPPA varied over time by virtue of different reiterations of those agreements, however, the rights and obligations remained materially the same for present purposes.
On 1 July 2006, under the SA, Mr De Figueiredo was allocated 15 PPUs and Mr De Figueiredo was issued 15 shares in GHAG at a par value of CHF 50 dependent on his execution of the SA and the IPPA.
On 1 January 2008, he was allocated a further 30 PPUs and on 30 September 2008 he purchased a further 30 shares in GHAG at a par value of CHF 50.
The shares in GHAG were inalienable except with the consent of GHAG. That is, Mr De Figueiredo and every other employee could not sell, assign, transfer or otherwise deal with the shares in GHAG without the prior written consent of GHAG or the occurrence of a “triggering event” defined to include termination of employment or death or bankruptcy of the employee, or termination of the SA for any reason.
Under cl. A.1.1 of the IPPA GIAG granted to the employee deferred compensation calculated on the basis of the results of GIAG, that is, on the basis of incentive profit participation (IPP). For the purposes of calculating the IPP, GIAG issued to AG “Genussschein” (GS) - the German word for participation certificate - which were to serve as PPUs and were to be allocated to participating employees for the purposes of calculating the employee’s IPP, as per cl. A.1.2.
An employee’s IPP for each year was calculated by determining GIAG’s “Net Income for IPP” for that year, dividing it by the number of PPUs on issue and multiplying it by the number of PPUs allocated to the employee (cl. A.2.3). An employee’s IPP aggregated over each year of his or her employment until the employee’s termination, death or such other date as agreed between the employee and GIAG (Notice Date) (cl. A.2.4).
On the Notice Date the following things would happen:
(a)AG would purchase from GIAG the GS owned or held by GIAG with respect to the employee;
(b)GIAG would reallocate the PPUs in respect of the employee to a different employee; and
(c)the employee would execute a declaration of assignment and release, the effect of which was to release the employee’s rights under the IPPA in consideration for payment of the aggregated IPP in 20 quarterly instalments with interest (cl. A.3, A.6 and A.7).
The Glencore Group restructure and IPO
In March 2011 the Glencore Group announced its intention to conduct an IPO of 15-20% of its shares on the London and Hong Kong stock exchanges through the incorporation of a new holding company Glencore International plc (Glencore plc) and an offer of shares in the new Glencore plc.
As a preparatory step for the IPO, the Glencore Group also announced its intention to undertake a corporate reorganisation (Reorganisation). An information sheet issued to Glencore employees on 4 March 2011 explained the relevant purpose and effect of the Reorganisation, as follows:
Although there are a number of separate steps, the net effect of the Reorganisation for you is that your PPUs and shares in Glencore Holding will be exchanged for shares in Glencore International plc.
The value of your PPUs as at 31 December 2010 is stated in your Fact Sheet. As a result of the Reorganisation, your PPUs will ultimately be exchanged for Glencore International plc shares with a value (calculated at the IPO offer price) equivalent to this amount.
In the reorganisation, your Glencore Holding shares are valued according to the amount by which the total value of the Glencore group implied by the IPO offer price exceeds the total value of the outstanding PPUs as at 31 December 2010. Each issued Glencore Holding share and Glencore L.T.E share will have an equal share of this “premium” value.
Between March and May 2011, as part of the Reorganisation, Mr De Figueiredo executed a new Shareholders Agreement with GHAG, GIAG, AG and Glencore plc (New SA) and an Agency Agreement with Revelstoke Ltd (the Agent and Agency Agreement, as appropriate). Mr De Figueiredo also executed a One-Year Shareholder Lock-Up Deed Poll, under which he agreed not to dispose of, sell, hedge or otherwise deal with his shares in Glencore plc for a period of 12 months after the completion of the IPO (Lock-Up Deed).
The Recitals to the New SA recorded as follows:
(A) The Glencore group is owned and controlled by its employees.
(B) GH has sold to the Shareholder, and the Shareholder has purchased from GH, GH shares.
(C) Periodically, the Shareholder may be allocated additional GH Shares by GH which shall also be governed by this Agreement.
(D) In view of a proposed IPO of the Glencore group (the “IPO”), it is planned to reorganise the Glencore group companies pursuant to a number of steps (together the “Reorganisation”) including the following:
(i) The Shareholder will assign to Revelstoke Limited as agent (the “Agent”), who will hold on behalf of the Shareholder, as the beneficial owner, all of the Shareholder’s claims and Genusscheine under any profit participation agreement or the like with GI and/or any other company of the Glencore group to which the Shareholder is a party (each such agreement a “PA” and together the “PAs”; each such claim a “PPU” and together the “PPUs”; and the aforementioned assignment the “Assignment”).
(ii) The Agent will, on the Shareholders’ direction, contribute the PPUs to GH and in exchange GH will increase its share capital by issuing new shares of equivalent value to the Agent, who will hold them on behalf of the Shareholder (the “GH Capital Increase”).
(iii) GH and Glencore L.T.E AG, Baar, Switzerland (“LTE”), will be merged into GI.
(iv) GI will be acquired by GPLC, which in consideration will issue GPLC shares and which will become the new top company for the Glencore group.
(E) This Agreement shall replace the current shareholders’ agreement between the Shareholder and GH and amend certain provisions of the PAs.
The New SA replaced the original and updated versions of all Shareholders’ Agreements. It applied during the transition period until the completion of the IPO, when it was terminated (cl. 4.4(b)(iii)). The New SA relevantly provided, as follows:
(a)the value of PPUs issued to the Shareholder would not increase after 31 December 2010 (cl. 2.1.2);
(b)the assignment of the PPUs to the Agent did not require the consent of GIAG or AG (cl. 2.1.1);
(c)the IPPA would terminate on GHAG issuing to the Agent (on behalf of the Shareholder) new shares of equivalent value to the Shareholder’s PPUs (cl. 2.1.3); and
(d)the PPUs would be terminated automatically upon the completion of Step 2 of the Reorganisation (cl.2.1.3) (see further below as to the steps).
The Agency Agreement provided, amongst other things, as follows:
(a)effective immediately on the “IPO Pricing” (defined, in effect, as the determination of the price for the shares in Glencore plc as part of the IPO), the Shareholder assigned to the Agent the legal ownership of his GHAG shares and his PPUs to be held for his account and benefit and to comply with the terms of the Agency Agreement (cl. 2);
(b)immediately after the IPO Pricing, the Agent would contribute all of the Shareholder’s PPUs to GHAG and GHAG would issue shares to the Agent (new GH shares) (cl. 3.1.1);
(c)the number of new GH shares issued to the Agent on behalf of the Shareholder would reflect the aggregate value of his PPUs as at 31 December 2010 (cl. 3.1 and 3.2).
On 18 May 2011, the “IPO Pricing” as defined in the Agency Agreement was set at 530 pence for each Glencore plc share. That triggered the operation of the New SA and the Agency Agreement with the effect that Mr De Figueiredo, through the Agent, contributed the 45 PPUs he held to GHAG and the Agent was issued by GHAG on behalf of Mr De Figueiredo 16 new GH shares to a value of $3,610,467. This step involving the issue by GHAG of new shares, namely the “new GH shares”, and it is referred to as “Step 2 of the Reorganisation”. For reasons discussed below, this is the critical step for Mr De Figueiredo’s tax situation.
The Reorganisation was then completed by the following steps:
(a)GHAG and GLTE merged with GIAG under Swiss law. The shares in GHAG and GLTE were cancelled and GIAG issued shares to the Agent to be held by it for (inter alia) Mr De Figueiredo in proportion to his percentage interest in GHAG immediately prior to the step (including the new GH shares) (Agency Agreement, cl. 4.1 and 5.1);
(b)The Agent then contributed all of the PPUs and the shares in GIAG it held to Glencore plc in exchange for Glencore plc. The Agent held the shares in Glencore plc for the beneficial interest of Mr De Figueiredo in the same proportion it held the shares in GHAG for his benefit (Agency Agreement, cl. 6.1 and 6.3).
THE ISSUES
The issue to be determined by the Tribunal is whether the amount of $3,610,467 is included in Mr De Figueiredo’s assessable income under s 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the transfer of his PPUs and associated rights to GHAG at Step 2 of the Reorganisation, in return for the 16 new GH shares.
There are subsidiary issues with respect to whether Mr De Figueiredo had an assessable capital gain as a result of other steps in the Reorganisation but the parties agreed if my conclusion was that the amount of $3,610,467 is to be included in Mr De Figueiredo’s assessable income, it would be unnecessary to consider the capital gains tax issues.
DID MR DE FIGUERIEDO DERIVE ASSESSABLE INCOME BY TRANSFERRING HIS PPUS TO GHAG IN EXCHANGE FOR 16 NEW GH SHARES?
Mr De Figueiredo submitted that his tax situation was different to Blank’s case because his entitlements under the employee profit participation plan were never paid to him. He said that the High Court’s reasoning in Blank’s case is limited to those circumstances where there was a payment of a cash amount as deferred compensation. He acknowledged that if he had received a payment, then it would be assessable income but only because he would have had a “triggering event”. He said that to tax him in respect of the value of the 16 new shares in GHAG issued to him in May 2011 was unfair because there simply wasn’t a “triggering event”. Unlike Mr Blank’s scenario, his employment was not terminated. He said, in the absence of entitlements paid (or payable) to him, the Commissioner’s proposition that the value of the 16 new GHAG shares were to be included in his assessable income falls away.
Mr De Figueiredo also submitted that the 16 new GH shares issued to him did not involve a crystallization of any value to him. Rather, the New SA and the Agency Agreement evidence that the issue of new shares was in exchange or substitution for the contribution of assets to GHAG (the PPUs and shares) in his capacity as an existing shareholder of GHAG. He said the Glencore Group was ultimately owned by the senior employees and his interest in the Glencore Group continued afterwards on the same fractional basis as beforehand. The 16 new GH shares were of the same monetary value as his previous entitlements under the IPPA. He also submitted that the fact the new shares were in substitution for his rights under the IPPA clearly indicated that he received no additional benefit while in Australia. He said his position was no different to the example of where he held shares in a Brazilian company when arriving in Australia and he left Australia with the same shares. He said the Commissioner did not charge him tax because it was clearly understood that he did not realise any gain with those Brazilian shares during his stay in Australia.
Finally, he said that Mr Blank was issued PPUs both before and after he arrived in Australia for services rendered both in and out of Australia, whereas he was granted his PPUs when working in Zambia. He said he later disposed of his 16 new shares in GH after departing Australia.
I agree with the submissions of counsel for the Commissioner that Mr De Figueiredo derived assessable income in May 2011 in the amount of $3,610,467 when he was issued the 16 new GH shares. My approach is informed by the judgment of the High Court in Blank’s case but that case is not decisive of the issue in the present case. I will explain why this is so.
I agree with counsel for the Commissioner that Blank’s case is the starting point for the analysis because Mr De Figueiredo’s rights under the IPPA were relevantly identical to those considered by the High Court. It follows that, if amounts had been paid to Mr De Figueiredo pursuant to the IPPA, they would have been ordinary income assessable to him under s 6-5 of the ITAA 1997, on all fours with Blank’s case. The following extracts from the judgment of the High Court are binding authority for that proposition:
[63] As the majority of the Full Court correctly concluded, what the IPPA 2005 conferred on Mr Blank was an executory and conditional promise to pay an amount at a future date determined by reference to the PPU allocated to Mr Blank. The fact that the Amount was paid after the termination of the contract of service, by a person other than the employer (here, GI) and separately to ordinary wages, salary or bonuses, does not detract from its characterization as income if the payment is, as here, a recognized incident of the employment.
…
[74] For those reasons, the appeal should be dismissed. The Amount was ordinary income of Mr Blank. It was deferred compensation for services Mr Blank rendered as an employee and therefore, on receipt, formed part of his assessable income pursuant to s 6-5 of the 1997 Act.
However, Mr De Figueiredo did not receive payment of his IPP under the IPPA and so his case requires some further analysis.
Instead of an outright payment and instead of satisfying his entitlement under the IPPA, Mr De Figueiredo was issued 16 new GH shares to the value of $3,610,467 as part of the Reorganisation in substitution for his PPUs under the IPPA. While Mr De Figueiredo held the PPUs, he had a conditional executory promise to be paid deferred compensation that was “entirely a matter for the future”: see Tagget v Federal Commissioner of Taxation (2010) 188 FCR 128 at [30]. Mr Blank’s position was the same except that Mr Blank’s position changed when the “triggering event” happened, namely, the termination of his employment with the Glencore Group. Mr De Figueiredo’s position also changed when, as part of the Reorganisation, he agreed to transfer his entitlements to GHAG in return for 16 new GH shares. That is, he (through the Agent) received the 16 new GH shares in substitution for his rights under the IPPA.
At that point in time, Mr De Figueiredo derived as income an amount equal to the market value of the 16 new GH shares as he became the beneficial owner of the 16 new GH shares, free and clear of any contingencies. Critically, at that time, it could no longer be said that Mr De Figueiredo had merely a contingent right to receive the entitlement nor that the entitlement was “a matter for the future”. In Tagget’s case, it was accepted that the taxpayer had not derived the income when he was not in a position to call for the transfer of land to him, as consideration for services he had rendered many years earlier, as the rights in question were conditional executory promises. It was held in Tagget’s case that the taxpayer only derived the income when there was no longer any contingency about the transfer. Similarly, in Sent v Federal Commissioner of Taxation (2012) 208 FCR 462, the Full Federal Court held that the taxpayer in that case derived income when he, or his nominee, was issued shares in substitution for his bonus entitlements. In Sent’s case, the taxpayer had both accrued and contingent bonus entitlements under an employment agreement that were replaced by an absolute entitlement to be issued with shares and the shares issued were free and clear of any contingency as to services provided or to be provided. The Full Court held at [29] that “[t]here would be nothing to deny derivation, in the sense of the shares ‘coming home’, at the time they were issued”. The same analysis applies to Mr De Figueiredo’s tax position.
Furthermore, even though Mr De Figueiredo received shares and not a payment of money, it was still income. This is in accordance with the decision in Commissioner of Taxation v McNeil (2007) 229 CLR 656 where the High Court at [51] recognised as income the sell-back rights granted to a custodian for the absolute benefit of the taxpayer with the income being equal to the market value of those rights. Similarly, in Federal Commissioner of Taxation v White (2010) 79 ATR 498 at [25], Gordon J relevantly stated: “income does not have to be received as money. It is sufficient if it is received in the form of money’s worth”.
Finally, the fact of Mr De Figueiredo having executed a Lock-Up Deed restricting him from disposing of the shares in Glencore plc which were subsequently issued to the Agent on his behalf as part of the Reorganisation does not detract from the fact that Mr De Figueiredo had the absolute beneficial interest in the 16 new GH shares. Mr De Figueiredo’s rights were, at that point, not defeasible or subject to any conditions.
Of course, Mr De Figueiredo’s tax predicament arises because, at the time of the issue of the 16 new GH shares, Mr De Figueiredo was an Australian resident. His assessable income for the year ended 30 June 2011 includes income according to ordinary concepts derived directly or indirectly from all sources: s 6-5(2) of the ITAA 1997. In determining the existence of a derivation of income and when it occurred, s 6-5(4) of the ITAA 1997 states that the taxpayer is taken “to have received the amount as soon as it [was] applied or dealt with in any way on [his] behalf or as [he directed].” There is no question here that the issue of the 16 new GH shares had the character of income in Mr De Figueiredo’s hands when he received them in May 2011 based on Blank’s case, as per the extracts set out at [30] above.
CONCLUSION
For the reasons set out above, I have decided Mr De Figueiredo has failed to discharge the burden of proving that the assessment issued to him by the Commissioner for the year ended 30 June 2011 is excessive. Accordingly, the Commissioner’s objection decision is correct and should be affirmed.
I certify that the preceding 37 (thirty-seven) paragraphs are a true copy of the reasons for the decision herein of Ms G Lazanas, Senior Member
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Associate
Dated: 23 January 2018
Date(s) of hearing: 21 September 2017 Date final submissions received: 22 September 2017 Applicant: Self-represented Counsel for the Respondent: Mr M O'Meara Solicitors for the Respondent: ATO Review and Dispute Resolution
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