Lochtenberg and Commissioner of Taxation (Taxation)
[2018] AATA 4667
•30 November 2018
Lochtenberg and Commissioner of Taxation (Taxation) [2018] AATA 4667 (30 November 2018)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2017/1929 and 2017/1931
Re:Mark Lochtenberg
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Ms G Lazanas, Senior Member
Date:30 November 2018
Place:Sydney
1.The objection decision regarding the amended assessments for income tax for the years ended 30 June 2007, 2008 and 2009 is affirmed.
2.The objection decision regarding the shortfall interest charge for the year ended 30 June 2007 is set aside and substituted with a decision allowing remission to the shortfall interest charge base rate where not otherwise remitted by the Commissioner.
............................[SGD]............................................
Ms G Lazanas, Senior Member
CATCHWORDS
TAXATION – INCOME – taxpayer participated in employee incentive profit participation plan – taxpayer worked in Australia then Switzerland – amount payable after termination of employment – amount assessable as ordinary income as it represented deferred compensation for services – taxpayer resident of Australia when income derived - whether income exempt as foreign earnings derived from foreign service – whether undissected amount – amount divided into Swiss component and Australian component for Swiss tax purposes – objection decision as to income tax affirmed
TAXATION – SHORTFALL INTEREST CHARGE – whether further remission appropriate –– objection decision as to shortfall interest charge set aside and substituted with decision allowing remission to the base rate where not otherwise remitted
LEGISLATION
Income Tax Assessment Act 1936 (Cth), ss 23AG, 27A
Income Tax Assessment Act 1997 (Cth), s 82-130
Taxation Administration Act 1953 (Cth), ss 14ZYA, 14ZZK, Schedule 1, s 280-160
CASES
Blank v Commissioner of Taxation (2014) 95 ATR 1
Blank v Commissioner of Taxation (No 2) (2014) 98 ATR 379
Blank v Commissioner of Taxation (2015) 242 FCR 96
Blank v Commissioner of Taxation (2016) 258 CLR 439
Coxon v Williams (Inspector of Taxes) [1988] STC 593
Leonard v Blanchard (Inspector of Taxes) [1993] STC 259
Lopez v Deputy Commissioner of Taxation [2004] FCA 756
Lopez v Deputy Commissioner of Taxation [2005] FCAFC 157
McLaurin v McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381
Platten (Inspector of Taxes) v Brown [1986] STC 514
Varnam (Inspector of Taxes) v Deeble [1985] STC 308REASONS FOR DECISION
Ms G Lazanas, Senior Member
30 November 2018
INTRODUCTION
Mr Mark Lochtenberg, the applicant in this proceeding, is in dispute with the Commissioner of Taxation as to the tax treatment of payments he received from Glencore International AG (GIAG) in the years of income ended 30 June 2007, 30 June 2008 and 30 June 2009 (the relevant years), in satisfaction of his entitlements under an employee profit participation plan. Mr Lochtenberg argued that s 23AG(1) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) applied so as to exempt part of the payments received by him, on the basis that those payments constitute “foreign earnings” derived by him from “foreign service” as an employee in Switzerland. The Commissioner of Taxation argued that Mr Lochtenberg is taxable on the entirety of the payments received.
The facts of this case are similar to those in Blank v Commissioner of Taxation (2016) 258 CLR 439 (Blank HC), a case that was decided by the High Court. Mr Lochtenberg and Mr Blank were both employees with the Glencore Group and participated in the Glencore employee incentive profit participation plan. Following the decision of the High court in Blank HC, it is common ground that the amount paid to Mr Lochtenberg by GIAG following the termination of his employment is deferred compensation and Mr Lochtenberg is taxable when he received the monies. However, Mr Lochtenberg contends that his situation is distinguishable from that of Mr Blank and he is not taxable on the entire amount because s 23AG(1) of the ITAA 1936 operates to exempt from Australian income tax part of the payments that he received from GIAG in the relevant years.
The application of s 23AG(1) of the ITAA 1936 is the key issue raised in these proceedings. The High Court was not required to consider the potential application of s 23AG(1) in Blank HC but that issue was considered by the primary judge in Blank v Commissioner of Taxation (No 2) (2014) 98 ATR 379 (Blank FCA No 2) and by the Full Court of the Federal Court in Blank v Commissioner of Taxation (2015) 242 FCR 96 (Blank FCAFC), to which it will be necessary to refer in some detail, after setting out the relevant facts.
The second issue (which only arises if Mr Lochtenberg fails in relation to the first issue) is whether the Commissioner erred in failing to exercise the discretion in s 280-160 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) to further remit, in whole or part, the shortfall interest charge (SIC) for the income year ended 30 June 2007.
Mr Lochtenberg, as the taxpayer, bears the onus of proof in relation to this tax dispute and must demonstrate in relation to the assessments of income tax for the relevant years, that the assessments are excessive and, in relation to the issue of SIC, that the Commissioner’s decision not to further remit the SIC should not have been made or should have been made differently: s 14ZZK of the TAA 1953.
RELEVANT FACTS
The relevant facts of this case are not controversial and, accordingly, the Tribunal’s findings are based on the concise factual background set out in the Applicant’s Outline of Submissions dated 5 October 2017, with which the Commissioner of Taxation agreed, and which referenced the following unchallenged evidence filed on behalf of Mr Lochtenberg:
(a)a witness statement of Mr Lochtenberg dated 21 July 2017 together with numerous documents;
(b)a witness statement of Mr John Sullivan, a former partner of the accounting firm PricewaterhouseCoopers (PWC), dated 21 July 2017 together with various documents;
(c)three affidavits of Mr Keith Mazzucchelli, a translator, which annexed English translations by him of certain documents in German.
Mr Lochtenberg also gave oral evidence at the hearing. I accept the evidence given by and on behalf of Mr Lochtenberg and make findings on the basis set out below.
Mr Lochtenberg is a company director. He has completed a Bachelor of Laws degree at the University of Liverpool, United Kingdom and, prior to joining the Glencore Group, worked in commodity trading specialising in the coal industry.
Sometime prior to 1993, Mr Lochtenberg commenced employment with Glencore Australia Pty Ltd (Glencore Australia) which was, at all relevant times, the Australian subsidiary of GIAG, a Swiss company. GIAG was, at all relevant times, a wholly owned subsidiary of Glencore Holding AG (GH), another Swiss company.
During 1993, Mr Lochtenberg was selected to participate in a profit participation plan operated by GIAG and GH (Glencore Profit Participation Plan).
The agreements that governed the Glencore Profit Participation Plan at the time were:
(a)Profit Participation Agreement, Version Newies 1993 (PPA 1993);
(b)Shareholder’s Agreement 1994 (SA 1994); and
(c)Equity Participation Agreement (EPA 1993).
Mr Lochtenberg executed the abovementioned documents at the commencement of his participation in the Glencore Profit Participation Plan.
In or around August 1996, Mr Lochtenberg and GIAG entered into an agreement titled “Amendment to the Profit Participation Agreement”.
In or around October 1999, Mr Lochtenberg and GIAG entered into an agreement titled “Profit Participation Agreement, Non-US 1999” (PPA 1999) which replaced the PPA 1993 and the EPA 1993.
Over the period from 1993 to 2000, while Mr Lochtenberg was employed and working for Glencore Australia, Mr Lochtenberg was allocated 950 units of Genusscheine (GS) in GIAG for no consideration, and the same number of shares in GH for which he paid the subscription amount of 50 Swiss Francs each, as set out in the table below:
Allocation Date
Number of GS issued
Number of shares in GH purchased during year beginning on Allocated Date
1 January 1993
150
150
1 January 1995
150
150
1 January 1996
200
200
1 January 1997
150
150
1 January 1998
150
150
1 January 2000
150
150
Total
950
950
On or around 30 April 2001, Mr Lochtenberg, GIAG and Glencore AG entered into an agreement titled “Incentive Profit Participation Agreement” (IPPA 2001). This agreement provided for the issue of Phantom Units (PU) instead of GS to participating employees. However, it did not affect the entitlement of employees who had received GS governed by the IPPA 1999.
With effect from 1 January 2001, GIAG and GH subsequently allocated to Mr Lochtenberg 50 PU under the IPPA 2001, and 50 shares in GH at 50 Swiss Francs each.
In around April 2001, Mr Lochtenberg was offered employment with GIAG to co-head its coal division which required him to relocate to Baar, in the Canton of Zug, Switzerland.
During July 2001, Mr Lochtenberg left his position with Glencore Australia and commenced employment with GIAG. He ceased to be a resident of Australia for tax purposes and became a resident of Switzerland for Swiss tax purposes.
Mr Lochtenberg worked as an employee of GIAG in Switzerland throughout the period from July 2001 to December 2003.
In or about August 2003, Mr Lochtenberg was considering ending his employment with GIAG. He contacted his tax advisor, Mr Sullivan of PWC to seek advice as to how the payment which he would receive on termination of his employment under the Glencore Profit Participation Plan would be taxed in Australia. Mr Sullivan met with Mr Lochtenberg in Switzerland in September 2003 and reviewed the relevant agreements relating to the Glencore Profit Participation Plan.
On or around 18 December 2003, Mr Lochtenberg informed GIAG that he wished to resign.
On 18 December 2003, Mr Eberhard Knoechel, the Chief Financial Officer of GIAG, gave Mr Lochtenberg a letter attaching a draft Declaration of Assignment and Release (Draft Declaration) and a provisional calculation of his total “profit participation”. This was expressed to be provisional because the appreciation for the year ended 31 December 2003 would not be known until about April or May 2004.
Around the same time, Mr Lochtenberg and Mr Knoechel had a conversation in which Mr Knoechel explained to Mr Lochtenberg that part of the payment reflecting the accumulated appreciation in his profit participation while he was a Swiss resident would be treated by the Swiss tax authorities as subject to income tax in the Canton of Zug, Switzerland.
On 13 January 2004, Mr Lochtenberg had a telephone conversation with Mr Knoechel in which they discussed the need to divide the final payment amount payable into two components, one being the accumulated appreciation during the time Mr Lochtenberg was employed in Australia (AU Component) and the other being the accumulated appreciation during the time he was employed in Switzerland (CH Component), which the Swiss tax authorities would regard as income subject to Swiss income tax. They also discussed the need to arrange a meeting with the Swiss tax authorities.
In early February 2004, Mr Sullivan met with Mr Lochtenberg and advised him that the amount he received from GIAG under the Glencore Profit Participation Plan would be taxable on capital account for Australian income tax purposes. This continued to be PWC’s view at all relevant times prior to the amendment of Mr Lochtenberg’s objection to include the ground relating to s 23AG(1) of the ITAA 1936 which occurred on or about 13 March 2014. The addition of the objection ground relating to s 23AG(1) followed the judgment of Edmonds J in Blank v Commissioner of Taxation (2014) 95 ATR 1 (Blank FCA) on 21 February 2014, which is discussed further below.
There were numerous discussions during January to March 2004 between Mr Lochtenberg, Mr Sullivan, Mr Knoechel and Mr Hans Sprieter, the Deputy Chief Financial Officer of GIAG, regarding the final calculation of the amount payable by GIAG to Mr Lochtenberg and the division of that amount into the AU Component and the CH Component.
On 4 May 2004, Mr Lochtenberg and Mr Sullivan attended a meeting with Mr Knoechel and Mr Sprieter in Baar, Switzerland at which Mr Knoechel provided a final calculation of the total amount payable to Mr Lochtenberg under the Glencore Profit Participation Plan of USD 30,387,785 (the Amount). The Amount was apportioned, as per two schedules, into the CH Component of USD18,192,540 and the AU Component of USD12,195,245. The two amounts were calculated to reflect the appreciation of Mr Lochtenberg’s profit participation during the periods of time he was a resident of Australia and Switzerland. That is, the AU Component was calculated to reflect the value of Mr Lochtenberg’s profit participation as at 30 June 2001 when he ceased to be a resident of Australia and therefore, also ended his employment with Glencore Australia, and the CH Component was the balance of the Amount for appreciation in value after that date, referable to his Swiss residency and his employment in Switzerland.
At the meeting, Mr Lochtenberg and Mr Sullivan discussed with Mr Knoechel the scheduling of the payments so that, instead of apportioning the Swiss Withholding Tax (Swiss WHT) throughout the duration of the 20 instalments, Swiss WHT was to be paid upfront to the relevant Swiss tax authority.
After the meeting, also on 4 May 2004, Mr Knoechel provided Mr Lochtenberg with a letter which enclosed the final form of the Declaration of Assignment and Release (the Declaration), to which was annexed as ‘Annex A’: (a) a profit participation calculation schedule dated 22 April 2004 showing the final calculation of the Amount payable, and (b) two profit participation calculation schedules dated 4 May 2004 which apportioned the Amount into the AU Component and the CH Component, as referred to above in [26].
On or around 5 May 2004, Mr Lochtenberg had a meeting with Mr Knoechel and two officers from the tax authority of the Swiss Canton of Zug to confirm that the CH Component would be the part of the Amount subject to income tax in the Canton of Zug. After that meeting, Mr Lochtenberg executed the Declaration, the draft of which he had been given by GIAG on 18 December 2003, as noted in [21] above. Having negotiated his Swiss tax obligations, Mr Lochtenberg then returned to Australia.
On or around 28 September 2004, GIAG and Mr Lochtenberg entered into an agreement (the September 2004 Agreement). The agreement was in German, and an English translation was also provided by GIAG to Mr Lochtenberg. Relevantly, the September 2004 Agreement:
(a)documented the agreement made on or around 4 May 2004 and recorded in the Declaration and its annexures that the Amount would be apportioned into the CH Component of USD18,192,540 and the AU Component of USD12,195,245;
(b)varied the time for payment of the instalments of the Amount to facilitate the upfront payment of Mr Lochtenberg’s Swiss tax liability; and
(c)formalised the ruling by the Swiss tax authority that Mr Lochtenberg’s Swiss tax liability would be limited to tax on the CH Component.
Between 1 April 2005 and 1 January 2009, while a resident of Australia, Mr Lochtenberg received quarterly instalments from GIAG, namely, two separate payments, one relating to the AU Component, and one relating to the CH Component as evident from his USD currency bank account statements which were in evidence.
On or around 6 December 2006, Mr Lochtenberg was sent a copy of the Zug Canton tax assessment. Mr Lochtenberg paid a total of Swiss WHT of USD 5,849,658.61 and Swiss income tax of CHF1,032,027.45.
PROCEDURAL HISTORY OF TAX DISPUTE
On 17 May 2010, the Commissioner of Taxation provided Mr Lochtenberg with a Notification of Risk Review for the relevant years. Following some preliminary work, on 21 March 2012, the Commissioner notified Mr Lochtenberg of his intention to audit him with respect to the payments he received during the relevant years as a former executive of the Glencore Group.
Following some further work and correspondence between the Commissioner and Mr Lochtenberg, on 5 March 2013, the Commissioner issued a letter to Mr Lochtenberg regarding the finalisation of the tax audit.
On 16 December 2013, the Commissioner issued the following Amended Assessments to Mr Lochtenberg on the basis that the payments to Mr Lochtenberg are assessable under
s 27A of the ITAA 1936 or Division 82 of the Income Tax Assessment Act 1997 (ITAA 1997) as eligible termination payments:
Year ending
Amended Taxable Income ($)
Amended Assessed Tax Payable ($)
Medicare Levy
Shortfall Interest Charge ($)
Total Tax Shortfall ($)
2007
$11,299,602.00
$2,918,451.20
$169,464.03
$547,477.94
$3,111,188.96
2008
$7,439,581.00
$1,535,634.09
$111,593.71
$161,216.99
$1,046,105.64
2009
$4,474,454.00
$701,838.27
$67,116.81
$135,745.61
$962,033.70
On or about 5 February 2014, Mr Lochtenberg lodged Objections to the Amended Assessments for the relevant years through his tax agent, PWC.
On 21 February 2014, the Federal Court handed down its judgment in Blank v Commissioner of Taxation (2014) 95 ATR 1 (also referred to in these reasons as Blank FCA). Edmonds J held that the payments received by Mr Blank with respect to his profit participation in the Glencore profit participation plan in the income years ended 30 June 2007 to 30 June 2010 were assessable as ordinary income. His Honour concluded that the payments were deferred compensation as a reward for services rendered and were not paid to Mr Blank in consequence of the termination of his employment (for the purposes of s 27A(1) of the ITAA 1936 and s 82-130(1) of the ITAA 1997).
On 13 March 2014, Mr Lochtenberg lodged amended Objections for the years ending 30 June 2007, 30 June 2008 and 30 June 2009 through PWC to include as an additional ground the application of s 23AG(1) of the ITAA 1936 as Edmonds J held in Blank FCA that the payments made to Mr Blank were not in consequence of the termination of employment and therefore not characterised as eligible termination payments but assessable as ordinary income in the form of deferred compensation. Specifically, it was contended by Mr Lochtenberg in his amended Objections that “in the event that any part of an amount… is assessable as ordinary income, then that sum or any part of that amount, is exempt from tax pursuant to s 23AG of the ITAA 1936”.
On 22 May 2014, the Federal Court handed down its judgment in Blank FCA No 2, concerning, amongst other issues, the application of s 23AG and the timing of derivation.
On 29 October 2015, the Full Federal Court handed down its judgment in Blank FCAFC and, by majority, upheld the judgment of Edmonds J that the payments made by GI to Mr Blank were ordinary income. All three judges of the Full Court also canvassed the issue of s 23AG(1) of the ITAA 1936 in considerable detail, to which I will turn shortly.
On 16 February 2016, the Commissioner issued a final Statement of Audit Position to Mr Lochtenberg.
On 24 March 2016, Mr Lochtenberg sent a letter to the Commissioner responding to the Commissioner’s Statement of Audit Position.
On 9 November 2016, the High Court handed down its judgment in Blank HC, upholding the judgment of the Full Court.
On 23 November 2016, Mr Lochtenberg sent a letter to the Commissioner and made submissions on administrative penalties and s 23AG(1).
On 3 February 2017, the Commissioner issued to Mr Lochtenberg a Notice of Objection Decision. Notably, Mr Lochtenberg’s objection to the imposition of administrative penalty was allowed in full and is therefore, no longer in issue.
On 4 April 2017, Mr Lochtenberg lodged with the Tribunal an Application for Review of the Commissioner’s Objection Decision.
On 12 July 2017, the Commissioner issued to Mr Lochtenberg the Notices of Amended Assessment for the years ended 30 June 2007 and 30 June 2008.
DOES SECTION 23AG(1) OF THE INCOME TAX ASSESSMENT ACT 1936 APPLY?
The key tax issue turns on the interpretation and application of s 23AG(1) of the ITAA 1936 and the jurisprudence canvassing its operation, including, the judgments in the Blank cases.
Prior to 1 July 2009, and in each of the relevant years, namely, the years ended 30 June 2007, 2008 and 2009, s 23AG relevantly stated as follows:
23AG Exemption of income earned in overseas employment
(1) Where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service are exempt from tax.
......
(7) In this section:
…
foreign earnings means income consisting of earnings, salary, wages, commission, bonuses or allowances, or of amounts included in a person’s assessable income under Division 13A…
foreign service means service in a foreign country as the holder of an office or in the capacity of an employee.
Section 23AG broadly contains two relevant parts – an operative exemption in sub-section (1) and exceptions to the exemption in sub-section (2). The exceptions are not relevant in the present case and are accordingly not referenced. Therefore, for s 23AG to apply in the present case, the following requirements in sub-section (1) must be met:
(a)the taxpayer must be a natural person;
(b)at the time of derivation of the income, the taxpayer must be a resident of Australia;
(c)the taxpayer must have been engaged in service in a foreign country as a holder of an office or in the capacity of an employee for a continuous period of not less than 91 days;
(d)the income must be earnings, salary, wages, commission, bonuses or allowances; and
(e)the income must be derived by the taxpayer from the taxpayer’s service in a foreign country referred to in para (c).
It was common ground that each of the abovementioned requirements of sub-section (1) is met apart from paragraph (e). The key issue is, therefore, whether any part of the Amount received by Mr Lochtenberg is income derived from his service as an employee of GIAG in Switzerland. Mr Lochtenberg argued that each instalment of the CH Component received by him in the relevant years satisfied this requirement and he was, therefore, exempt from tax pursuant to s 23AG(1) in relation to the entirety of the CH Component. On the other hand, the Commissioner stated that Mr Lochtenberg’s position was indistinguishable from Blank’s case and the Amount in its entirety was taxable in Australia.
It is appropriate having regard to the similarity in the factual background and to the abovementioned judgments to start with Blank’s case and to then address the more specific arguments of the parties with reference to Mr Lochtenberg’s documents.
The High Court in Blank HC held that the payments to the taxpayer in that case, Mr Vaughan Blank, were income according to ordinary concepts as deferred compensation for services rendered as an employee and therefore assessable under s 6-5 of the ITAA 1997. It is, therefore, not in dispute in this proceeding that the Amount received by Mr Lochtenberg is deferred compensation and, therefore, subject to the application of s 23AG, assessable under s 6-5 as ordinary income. As noted above, the High Court in Blank HC was not required to consider the potential application of s 23AG.
At the time of Mr Blank’s retirement on 31 December 2006, he was an employee of Glencore Australia and had been an employee of that company since 2 January 2002. In the period from November 1991 to 1 January 2002 he had been employed by GIAG or other subsidiaries of GIAG outside Australia. During the period of his employment in and outside Australia he had participated in Glencore’s profit participation plan under the same agreements as Mr Lochtenberg and, in addition, under later agreements by virtue of the fact that Mr Blank’s employment with Glencore was longer than that of Mr Lochtenberg.
At the time of his retirement from Glencore Australia, Mr Blank held rights under an agreement entitled ‘Incentive Profit Participation Plan 2005’ (IPPA 2005), a similar agreement to the IPPA 2001 to which Mr Lochtenberg was a party, except that the IPPA 2005 superseded all the earlier profit participation agreements. The amount which became payable to Mr Blank under that agreement was a lump sum.
It was held by Edmonds J in Blank FCA No 2 and by the Full Court on appeal in Blank FCAFC that no part of the amount Mr Blank received was exempt under s 23AG(1). Mr Blank argued that while the amount he received was an undissected lump sum, it could be apportioned as between the periods when he was engaged in foreign service and service that was not foreign service. He put forward alternative methods of making such an apportionment. However, his argument was rejected on the basis that s 23AG(1) could not apply where the amount concerned was an undissected lump sum.
In Blank FCA No 2, Edmonds J relevantly held, as follows:
35 First, as noted above, the operative exemption from tax is created by s 23AG(1); it requires the foreign earnings to be derived from foreign service; this means, in my view, exclusively from foreign service and not from service which is in part foreign service and in part service which is not foreign service.
36 Secondly, the only way in which some portion of the amount can qualify for exemption is if that portion can be said to be derived exclusively from foreign service. It is not possible to identify any portion of the amount as being derived exclusively from foreign service because the amount was not calculated by reference to days of service. The amount was “calculated on the basis of the results of GI (IPP). Solely for the purpose of calculating the amount of IPP, AG has issued to GI GS pursuant to Section [ [ sic ] ] 657CO which shall serve as PPU for the purpose of calculating the Employee's IPP as provided in A.2. below”: Clause A.1.1. of the instrument pursuant to which the IPPA 2005 was constituted: see R [36]. The amount is a “single, undissected amount” to use the words of the High Court in McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381, and its apportionment is not appropriate: “In such a case the amount must be considered as a whole: Du Cros v Ryall (1935) 19 TC 444 .”
37 Thirdly, s 23AG(1) does not contain the words “to the extent to which” the foreign earnings are derived from foreign service, such as to accommodate a dissection or apportionment of the kind contemplated by s 51(1) of the ITAA 1936, according to some reasonable method: see Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 .
….
40 Fourthly, the fact that the parliament provided for a partial exemption in s 23AG(2) when s 23AG was first inserted into the ITAA 1936 where the continuous period of foreign service was less than 365 but not less than 91 days, calculated by reference to the proportion of the number of days service as a fraction of 365 multiplied by the foreign earnings, may suggest that if an apportionment of the kind now pressed by the applicant was intended, it would have been provided for in the statute. Tellingly, it was not.
41 Unfair as it may seem, I am of the view that apportionment of the amount into two portions, one being exclusively for foreign service and the other being exclusively for service in Australia, so as to enable the former to trigger the exemption from tax afforded by s 23AG(1) , is neither appropriate nor possible. It follows, in my view, that the applicant's contentions at 7 above cannot succeed and, on that ground alone, leave to re-open must be refused.
The reasoning of Edmonds J turned on the fact that the amount received by Mr Blank was an undissected lump sum and the conclusion that s 23AG did not accommodate the apportionment of an undissected amount.
In Blank FCAFC, the Full Court unanimously rejected Mr Blank’s appeal from the primary judge’s decision about s 23AG(1). Although lengthy, it is apt to set out the following extracts from the reasoning of Kenny and Robertson JJ:
99 As already stated, the appellant submitted that the primary judge misconstrued s 23AG because his Honour read the provision as if it applied only to “foreign earnings derived ... exclusively from that foreign service”; and that the better view was that s 23AG permitted an apportionment between the number of days spent in foreign service and the number of days not spent in foreign service, alternatively, between PPUs (GS) issued before he became an Australian resident and the PPUs (Phantom Units) issued after he became an Australian resident.
100 Section 23AG(1) exempts only foreign earnings derived by a taxpayer from foreign service engaged in by him: cf. Lopez v Federal Commissioner of Taxation [2005] FCAFC 157; 143 FCR 574 at [77] (Ryan, Lander and Crennan JJ). Plainly enough, a taxpayer may receive an amount that is made up of income from foreign service and income from Australian service, in which case the amount can be separated into exempt and assessable income (assuming s 23AG(2) has no application). The provision can, however, only apply where there is the requisite connection between the taxpayer’s foreign earnings and foreign service. Not all foreign earnings will be derived from foreign service; and not all foreign service will give rise to foreign earnings.
101 The expression “derived … from … foreign service” in s 23AG(1) shows that the requisite statutory enquiry is different from that in the former s 23(q) (referring to “derived … from sources out of Australia) or s 6AB of the ITAA 1936 (“derived from sources in a foreign country”). As a Full Court of this Court noted in Chaudri v Federal Commissioner of Taxation [2001] FCA 554; 109 FCR 416 at [14] (Hill, Drummond and Goldberg JJ), before the introduction of the first version of s 23AG in 1986, there was some disagreement as to whether or not the source of personal services income was referable to the place where the contract of employment was made or the place where the services were performed. Section 23AG(1) requires no such constructional choice. It does, however, require that the taxpayer’s foreign earnings are derived from foreign service.
102 In this case, no part of the Amount can be accurately characterised as earnings “derived … from … foreign service”, as opposed to earnings derived from foreign and Australian service. This becomes clear when the bases for apportionment suggested by the appellant are considered. In this circumstance, such authorities as Commissioner of Taxation (NSW) v Meeks [1915] HCA 34; 19 CLR 568, Mount Morgan Gold Mining Co Ltd v Commissioner of Income Tax (Qld) [1923] HCA 37; 33 CLR 76, Commissioner of Taxation v Cam & Sons Ltd (1936) 36 SR (NSW) 544, Australian Machinery and Investment Company v Deputy Commissioner of Taxation [1946] HCA 65; 180 CLR 9, Federal Commissioner of Taxation v French [1957] HCA 73; 98 CLR 389 (concerning s 23(q)) and Roadshow Distributors Pty Ltd v Commissioner of State Revenue [1998] 1 VR 535 – on which the appellant relied – provide little assistance. This is because the suggested bases of apportionment do not result in an amount of earnings that meets the statutory description in s 23AG(1).
103 The appellant first submitted that an appropriate method of apportionment in this case was to have regard to the number of days in foreign service compared with the number of days not in foreign service. The appellant proposed that this should be ascertained by comparing the number of days he spent as an employee of the Glencore Group in service in foreign countries (claimed as 3,686) compared with the number of days he spent as an employee of Glencore Australia in service in Australia (claimed as 1,825 days).
104 The Amount, which constituted the earnings at issue, represented the appellant’s aggregated share of the profits earned by GI as at the termination of his employment, as calculated under the IPPA 2005. As explained below, under the IPPA 2005 (as under the previous profit participation agreements) the Amount was incapable of apportionment as between earnings from foreign service, on the one hand, and earnings not from foreign service on the other because the agreed method of calculating that Amount did not allow for that distinction to be made. The Amount was incapable of being calculated on a per diem basis as the appellant proposed. The appellant’s entitlement to the Amount depended on his allocation of vested PPUs (whether GS or Phantom Units) and GI’s profits during particular periods, aggregated at the relevant Notice Date (here, the termination of his employment). The calculation was made irrespective of the days on which the appellant was employed at any particular place. No integer in the calculation PPUs or otherwise was affected by the place in which the appellant rendered services to a Glencore Group company. Furthermore, the agreed calculation contemplated periods that would not align with the proportional per diem basis proposed by the appellant. For instance, the appellant’s proposed proportional per diem basis did not attempt to align the number of days of the appellant’s service in foreign countries with GI’s profits in the same time span or spans. The vesting period requirement further confirms that any attempted per diem formula would be an artificial and inappropriate basis for apportionment.
105 While it may be possible to take apart the agreed formula and to create another formula that permitted a proportional per diem calculation referable to foreign and non-foreign service, this is not the formula that the parties agreed should be used to arrive at the Amount that would be paid to the appellant on the termination of his employment. The Amount was a single figure, calculated in an agreed way at an agreed time. Even if the IPP per PPU during a particular period could be ascertained on a daily basis, and whether that day was spent in foreign service or non-foreign service could be determined (a more nuanced approach than that proposed by the appellant), the calculation of the Amount required an aggregation of the IPP per PPU over the entire period in which each PPU stood in the appellant’s name, from the point of allocation until the Notice Date. In the appellant’s case, this entire period covered both the period of the appellant’s employment in “foreign service” and his employment in non-foreign service. In calculating the Amount it was irrelevant that the appellant had been allocated a PPU at the time when he said he was employed in foreign service. No part of the Amount can be properly described as earnings “derived … from … foreign service”. Rather, the whole of the Amount was aptly described as derived from both foreign service and non-foreign service.
……
107 The appellant’s second proposed basis for apportionment fares no better in the present context, and encounters the same difficulties as the first proposed basis. The appellant proposed an apportionment between PPUs (GS) issued before he became an Australian resident and the PPUs (Phantom Units) issued after he became an Australian resident. It was common ground that the appellant had 1,200 GS at the time he came to Australia. The appellant claimed nearly $124 million was exempt by reason of an apportionment based on the fact that the GS were granted in the course of his employment in South Africa, Switzerland and Hong Kong. The claimed amount of $124 million represented the proportion of his share of the profits (calculated under the IPPA 2005 as at the Notice Date) that was said to be referrable to the 1,200 GS. There are a number of difficulties with this analysis.
108 Again, the calculation of the Amount (as agreed) was by reference to all PPUs (whether GS or Phantom Units) that had been allocated to the appellant. The calculation was made by reference to the aggregate of GI’s profits during particular periods at the Notice Date. Thus, the PPUs allocated when the appellant was employed outside Australia continued as integers of the calculation of the Amount, or, to put it another way, the appellant’s share of GI’s profits at any particular time, including while he was in Australia, was determined by reference to all PPUs allocated to him regardless of where he had been employed when any particular PPU was allocated to him. The appellant’s location at any particular time was irrelevant to the ascertainment of these profits.
……..
110 Senior counsel for the appellant submitted that the primary judge’s “central error” was that he mistakenly treated as determinative that “the mere fact that apportionment [was] required where a sum is received which can relate to foreign service and service which is not”. This was not an error made by the primary judge. The primary judge’s point was a different one: namely, that the method agreed on to calculate the Amount made it impossible to apportion the Amount as the appellant wished. In our view the primary judge correctly stated in his 22 May reasons (Blank [2014] FCA 517 at [36]):
It is not possible to identify any portion of the Amount as being derived exclusively from foreign service because the Amount was not calculated by reference to days of service. The Amount was “calculated on the basis of the results of GI (IPP). Solely for the purpose of calculating the amount of IPP, AG has issued to GI GS pursuant to Section [sic] 657CO which shall serve as PPU for the purpose of calculating the Employee’s IPP as provided in A.2. below”: Clause A.1.1. of the instrument pursuant to which the IPPA 2005 was constituted … . The Amount is a “single, undissected amount” to use the words of the High Court in McLaurin v Federal Commissioner of Taxation (1960–1961) 104 CLR 381 at 391, and its apportionment is not appropriate: “In such a case the amount must be considered as a whole: Du Cros v Ryall (1935) 19 TC 444 at 453”.
Pagone J, who dissented on the issue of whether the amount received by Mr Blank was ordinary income, agreed with Kenny and Robertson JJ that s 23AG(1) would not have applied and stated, as follows at [36]:
In his 22 May 2014 reasons, the primary judge explained his refusal of the appellant’s application for leave to re-open on the basis that the appellant’s argument with regard to s 23AG had insufficient merit to warrant the grant of leave: Blank v Commissioner of Taxation (No 2) [2014] FCA 517 at [41]. But for this, his Honour would apparently have granted the leave sought: Blank [2014] FCA 517 at [14], [23]. His Honour saw little merit in the appellant’s submission that some part of the payments qualified as “foreign earnings derived by [him] from … foreign service” and was thus exempt from tax under s 23AG(1) of the ITAA 1936. Whilst, in his Honour’s view, the payments qualified as “foreign earnings”, his Honour considered that they were not exempt under s 23AG(1) because the payments were not derived by the appellant from “foreign service”: Blank [2014] FCA 517 at [31]. This was because the payments were derived by the appellant from both foreign and Australian service and that was not enough to qualify for an exemption from tax. For the reasons his Honour stated, he did not consider that apportionment was either appropriate or possible.
Counsel for Mr Lochtenberg acknowledged that under the IPPA 1999 and the IPPA 2001, (like the IPPA 2005 which was discussed in Blank’s case), the amount payable on termination of employment is not calculated by reference to the periods of service in Australia or a foreign country. However, counsel for Mr Lochtenberg argued that unlike Blank’s case, in the present case, the parties had agreed an express apportionment of the amount payable to Mr Lochtenberg as between the portion referable to the period in which he was employed in Switzerland (from 1 July 2001 to 31 December 2003) and the period referable to his earlier employment in Australia (the period up to 30 June 2001). That is, the amount payable to Mr Lochtenberg was said not to be an undissected lump sum as was the case with Mr Blank.
Counsel for Mr Lochtenberg emphasised that the apportionment arises by reason of an agreement reached by Mr Lochtenberg and GIAG on 4 May 2004 which was embodied in the Declaration signed by Mr Lochtenberg on 5 May 2004. Additionally, the apportionment was documented in the 28 September 2004 Agreement for Swiss tax purposes. As already noted above, the apportionment was calculated to reflect the appreciation of Mr Lochtenberg’s profit participation during the period of time he worked for Glencore in Australia and Switzerland, respectively. It was undertaken to comply with Mr Lochtenberg’s Swiss tax obligations. It arose in circumstances where the Amount became due by reason of the termination of Mr Lochtenberg’s employment and the subsequent signing by Mr Lochtenberg of the Declaration which recorded the apportionment. Moreover, the actual payments made by GIAG to Mr Lochtenberg reflected this apportionment in that he received, for each relevant instalment, two separate payments into his USD foreign currency bank account, one representing the CH Component and another representing the AU Component. The critical question for the Tribunal is whether that apportionment satisfied the terms of s 23AG(1) so as to exempt the CH Component from Australian income tax.
Counsel for Mr Lochtenberg also emphasised the importance of the legal effect of the Declaration and the necessity to consider the terms of the PPA 1999 and the IPPA 2001 which were the agreements governing Mr Lochtenberg’s participation in the Glencore Profit Participation Plan at the time of termination of his employment. Accordingly, it is appropriate to set out the relevant terms of those agreements in full.
The PPA 1999 relevantly provided as follows:
“A. 1 Definition
GI Grants EMPLOYEE a participation in the results of GI, in the form of (a) “Genusscheine” (GS) as per section 657 of the Swiss Code of Obligations (CO) and (b) a contractual claim hereunder, both defined herein and collectively referred to as Profit Participation.
A.2 Calculation
A2.1 The basis for the calculation of EMPLOYEE’s Profit Participation shall be the net income as stated in the consolidated statement of income of the consolidated financial statements of GI as audited by GI’s statutory auditors… all adjustments to be calculated as per Annex A hereof (Net Income for Profit Participation).
A.2.2. Such Net Income for Profit Participation shall be calculated once yearly as of December 31 of each year or such other date as of which GI closes its business year (Measuring Date) and the claims for Profit Participation shall finally be determined by GI’s auditors. Profit Participation shall begin as of such date the GS are allocated (Allocation Date). The first basis for the calculation of Profit Participation shall be the consolidated financial statements of GI expressed in in US$ as at December 31 of the year of the Allocation Date.
A.2.3. Such Net Income for Profit Participation shall be divided by the number of GS actually allocated and participating as of a respective Measuring Date or Allocation Date and then multiplied by the number of GS actually held by EMPLOYEE as of such Measuring Date or Allocation Date (Periodical Profit Participation) …
A.2.4 The Periodical Profit Participation for each issue of GS to EMPLOYEE shall be aggregated over the period EMPLOYEE holds such GS from the Allocation Date to and including the last day of the month (a) notice of termination of EMPLOYEE by GI or subsidiary is received either by the EMPLOYEE or by the employing company or (b) in case of death or permanent disability of the month of occurrence of such event (Notice Date) … The last Measuring Date shall be December 31 of the year of the Notice Date.
…
A.3.3 Upon the end of the employment of the EMPLOYEE by GI or a Subsidiary any GS held by the EMPLOYEE shall be returned to GI together with a declaration of assignment and general release substantially in the form as per Annex C hereof.
…
A.5. Due Date
The Profit Participation will become due 30 days after the Notice Date, provided that all GS held by the EMPLOYEE at such date have been returned to GI together with a declaration of assignment and general release substantially in the form as per Annex C hereof.
Clause A.6 required the amount which became due under clause A.5 to be paid by 20 equal quarterly instalments over a period of 5 years (with provision for a provisional calculation pending final determination of the Profit Participation by the auditors).
The IPPA 2001 relevantly provided as follows:
“A.1.1 GI Grants EMPLOYEE deferred compensation which will be calculated on the basis of the results of GI (Profit Participation) …
A.2 Calculation
A.2.1 The basis for the calculation of EMPLOYEE’s Profit Participation shall be the net income as stated in consolidated statement of income of the consolidated financial statements of GI as audited by GI’s statutory auditors … all adjustments to be calculated as per Annex A hereof (Net Income for Profit Participation).
A.2.2. Such Net Income for Profit Participation shall be calculated once yearly as of December 31 of each year or such other date as of which GI closes its business year (Measuring Date) and the claims for Profit Participation shall finally be determined by GI’s auditors. Profit Participation shall begin as of such date as PHANTOM UNITS are allocated (Allocation Date). The first basis for the calculation of Profit Participation shall be the consolidated financial statements of GI expressed in US$ as at December 31 of the year of the Allocation Date.
A.2.3 Such Net Income for Profit Participation shall be divided by the number of GS actually allocated and participating as of a respective Measuring Date or Allocation Date, whether issued by AG under the PLAN and this Agreement and held by GI … or issued by GI and held directly by employees of GI or employees of any of its SUBSIDIARIES pursuant to … allocated to EMPLOYEE as of such Measuring Date or Allocation Date (Periodical Profit Participation) …
A.2.4 The Periodical Profit Participation for each issue of PHANTOM UNITS to EMPLOYEE shall be aggregated over the period the EMPLOYEE holds such PHANTOM UNITS from the Allocation Date to and including the last day of the month (a) notice of termination of EMPLOYEE by GI or Subsidiary is received either by EMPLOYEE or by the employing company or (b) in case of death or permanent disability of the month of occurrence of such event (Notice Date) … The last Measuring Date shall be December 31 of the year of the Notice Date.
…
A.3.3 Upon the end of the employment of the EMPLOYEE by GI or a Subsidiary … the EMPLOYEE shall execute and remit to GI a declaration of assignment and general release substantially in the form as per Annex C hereof.
…
A.5 Due Date
The Profit Participation will become due 30 days after the Notice Date, provided that a declaration of assignment and general release substantially in the form as per Annex C hereof has been executed by the EMPLOYEE and submitted to GI.
The obligation of GIAG in clause A.5 of the IPPA 2001 was subject to the same proviso as in clause A.5 of the PPA 1999. That is, the IPPA 2001 contained similar provisions to the PPA 1999 regarding the payment of the amount which became due under clause A.5 by 20 instalments over 5 years.
The effect of clause A.5 of each of the PPA 1999 and the IPPA 2001 is that payment of the amount of deferred compensation (referred to as the “Profit Participation”) was contingent on the fulfilment of the condition that Mr Lochtenberg execute a declaration of assignment and general release in the form annexed to each agreement as Annex C, which pursuant to clause A3.3 he promised to do. This was said to be a condition precedent to GIAG’s obligation to perform the contract such that the Profit Participation would not mature into a debt until that condition was fulfilled.
As already noted above, GIAG specifically requested him to sign the Draft Declaration by its letter dated 18 December 2003. However, Mr Lochtenberg and GIAG entered into discussions to allocate the Amount between his period of service and residency in Switzerland and his period of service and residency in Australia in order to satisfy his Swiss tax obligations.
Consequently, Mr Lochtenberg argued that GIAG’s obligation to pay the Amount to him did not mature into a debt until 5 May 2004 when Mr Lochtenberg signed the Declaration, being the revised form of declaration of assignment and release which GIAG requested him to sign by its letter dated 4 May 2004. That letter relevantly stated as follows:
As well enclosed, in triplicate, are calculations of your profit participation for the shares (Annex A):
Total all shares cumulative participation up and including the year 2003;
All shares, value as per July 1, 2001 (AUS part);
All shares, value July 1, 012DEC31, 03 (CH part).
Payment will be effected as discussed this afternoon. Hope to have found a reasonable solution.
The ‘Annex A’ referred to as an enclosure with the letter referred to immediately above comprised 3 schedules. The first schedule was the calculation of the total amount payable (USD30,387,785); the second was a calculation of the ‘Value from July, 01 to December 31, 03’ (being the CH Component of USD18,192,540); and the third was the calculation of the ‘Value from January 1, 1993 to June 30, 2001’ (being the AU Component of USD12,195,245). Annex A was incorporated in and annexed to the Declaration which Mr Lochtenberg signed on 5 May 2004.
Counsel for Mr Lochtenberg argued the letter referred to in [70] above together with the Declaration enclosed with it constituted a variation of the IPPA 2001 (and PPA 1999) by substituting a new form of declaration of assignment and general release in lieu of Annex C to each agreement. That is, the effect of these documents was that the parties had allocated the Amount as between Mr Lochtenberg’s period of service in Switzerland (the CH Component) and his period of service in Australia (the AU Component). It was on this basis that Mr Lochtenberg argued his documents were very different to Mr Blank’s situation and, accordingly, the CH Component was exempt from Australian tax under
s 23AG(1).Additionally, it was argued for Mr Lochtenberg, that the September 2004 Agreement between Mr Lochtenberg and GIAG operated to vary the terms on which the Amount is to be paid, and that it reinforced, in clause 2, the same apportionment of the Amount as between the CH Component and the AU Component as recorded in Annex A to the Declaration. In particular:
(a)Clause 1 of the September 2004 Agreement varied the date of the first instalment (specified to be US$6,077,557) from 30 January 2004 to 31 December 2004. It also varied the amount of the first instalment from 5% of the amount due to 20% of the amount due.
(b)Recital B and clause 2 refer to the division of the amount into two components, the CH Component and AU Component and provided that the Swiss WHT will be paid out of the first instalment.
It followed, Mr Lochtenberg argued, that the CH Component of the Amount he received under the Glencore Profit Participation Plan is exempt from Australian income tax pursuant to s 23AG(1) of the ITAA 1936 because:
(a)the CH Component was calculated to reflect the appreciation of his profit participation during the period he worked for GIAG in Switzerland; and
(b)the CH Component had the requisite connection with his foreign service such that it has the character of foreign earnings derived by him from his foreign service.
Accordingly, it was on the basis of the asserted variation of the Glencore Profit Participation Plan documents that Mr Lochtenberg argued his situation was in sharp contrast to Blank’s case, because he said the Amount was apportioned into an amount referable to his service in Australia and an amount referable to his service in Switzerland. This apportionment was agreed by Mr Lochtenberg and GIAG prior to the Amount becoming due as a debt and was recorded in the Declaration. This agreement was then formally documented in the September 2004 Agreement, which was approved by the Swiss tax authorities. Each instalment of the Amount paid to Mr Lochtenberg was in separate amounts reflecting the CH Component and the AU Component.
Counsel for Mr Lochtenberg cited Lopez v Deputy Commissioner of Taxation [2004] FCA 756 (affirmed on appeal, [2005] FCAFC 157), where Lee J said the following at [55], as to the importance of looking at the terms of the agreements to determine how the payments, namely, the CH Component and the AU Component, came home to the taxpayer:
To determine for the purpose of s 23AG(1) the source or activities from which the amounts received by the applicant may be said to be derived it is necessary to look to the agreements made between the applicant and Meisei to see if they describe how those sums “came home” to the applicant. If the terms of the agreements are not consistent with the relevant facts surrounding the payments then it will be necessary to have regard to more than the terms of those documents (see: Federal Coke Co Pty Ltd v Commissioner of Taxation (Cth) (1977) 34 FLR 375 per Brennan J at 404; Reuter v Commissioner of Taxation (Cth) (1993) 27 ATR 256 at 262).
Counsel for Mr Lochtenberg also argued this is a case where the apportionment of the Amount into the AU Component and CH Component was “ascertainable by calculation” because of the agreement reached between GIAG and Mr Lochtenberg prior to execution of the Declaration. In this regard, reliance was placed on McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381 at 391.
Finally, counsel for Mr Lochtenberg also cited several UK authorities including Varnam (Inspector of Taxes) v Deeble [1985] STC 308, Platten (Inspector of Taxes) v Brown Brown v Platten (Inspector of Taxes) [1986] STC 514, Coxon v Williams (Inspector of Taxes) [1988] STC 593 and Leonard v Blanchard (Inspector of Taxes) [1993] STC 259 for the general proposition that if there is no express contractual allocation for working out amounts “attributable to duties performed outside the United Kingdom” as was the relevant statutory test in those cases, the attribution was to be made with respect to the days on which such duties were performed. In Platten (Inspector of Taxes) v Brown [1986] STC 514, for example, Hoffmann J stated at 520:
It requires one to ask, first, how as a matter of contract the emoluments are apportioned. If there is no specific apportionment to overseas duties, the apportionment must be made on a time basis…The next step, as it seems to me, is to ask whether the salary for any given day is or is not to be attributed to duties performed abroad. This question must be answered as a matter of contract between the parties, as if it had for some reason been a material question in a contractual dispute.
Similarly, in Leonard v Blanchard (Inspector of Taxes) [1993] STC 259, Nourse LJ, with whom Mann LJ agreed, held at 262 - 263:
…in a case where the emoluments are paid under a contract of employment which differentiates neither between the locations where duties are performed nor between days on which they are or are not performed I can see no reason in logic or common sense for attributing to Parliament any such intention as [the taxpayer] has contended for. There is no ground for holding that the salary is payable on any basis other than that of 1/365th of the whole for each and every day of the year. The position is even clearer where, as here, the contact expressly provides for paid holiday and paid absence on account of sickness or disability.
The Commissioner argued that the CH Component is not foreign earnings derived from foreign service within the meaning of s 23AG(1) for several reasons.
First, as with Mr Blank’s position, it was argued there was no requisite connection between the earnings (being the Amount) and the foreign service of Mr Lochtenberg. The Amount represented the aggregated share of the profits of GI to which Mr Lochtenberg was entitled by reason of the GS (or PU) and shares Mr Lochtenberg had accumulated over his employment with the Glencore Group. The Amount was not, according to the Commissioner, calculated by reference to either the period of time or the place in which Mr Lochtenberg was employed or performed services for the Glencore Group.
Secondly, counsel for the Commissioner argued that Mr Lochtenberg’s arrangements, including the agreement he entered with GIAG on 5 May 2004, and the Declaration, did not alter the way his entitlements were to be calculated in respect of his accumulated GS (or PU) and shares. According to the Commissioner, the effect of the Declaration was to record that Mr Lochtenberg’s entitlements under the PPA 1999 and the IPPA 2001 were to be satisfied by payment of the Amount. Also, while Annex A to the Declaration divided the Amount between its value for 1 January 1993 to 30 June 2001 (USD12,195,245) and its value from 1 July 2001 to 31 December 2003 (USD18,192,540), that was a division of the total Amount which had already been calculated as per the terms of the PPA 1999 and the IPPA 2001. The division did not have the effect of making or converting any part of the Amount as “derived … from foreign service” within the meaning of s 23AG(1).
Thirdly, the same position pertained to discussions leading to the September 2004 Agreement executed by the parties. It recorded an ex post facto division of the Amount. The Amount had already been ascertained by reference to the value of Mr Lochtenberg’s entitlements under the PPA 1999 and the IPPA 2001 and did not depend to any degree on Mr Lochtenberg’s foreign service. In this regard, counsel for the Commissioner stated that the observations of Kenny and Robertson JJ in Blank FCAFC extracted above at [59] were directly applicable. Fourthly, and relatedly, the discussions and the September 2004 Agreement which Mr Lochtenberg relied on to distinguish his situation from that of Mr Blank, occurred after the period of foreign service and it was neither logical nor possible to retrospectively re-characterise his earnings as being derived from foreign service after the foreign service is complete.
Fifthly, the division of the Amount reflected in the September 2004 Agreement was referable to the appreciation in the value of Mr Lochtenberg’s GS (or PU) and shares, (all of which had been earlier allocated while he was in Australia), while he was a resident of Switzerland. That calculation was considered appropriate to determine his Swiss tax obligations and was not a calculation referable to foreign service. The division was made, in other words, to reflect his share of the profits of GI for the period he lived and worked in Switzerland, as distinct from any assessment of the value of the services he performed while working in Switzerland.
Finally, counsel for the Commissioner pointed out that both Edmonds J at first instance in Blank FCA No 2 at [35] - [40] and, separately, Pagone J in the Full Court (Blank FCAFC at [149]) expressed the view that s 23AG(1) of the ITAA 1936 does not contemplate apportionment as in delineating between amounts derived from foreign service and amounts not from foreign service and, therefore, as Mr Lochtenberg did not claim the whole of the Amount is exempt under s 23AG(1), his reliance on that section so as to exempt part of the Amount was doomed to fail.
I agree with the submissions advanced on behalf of the Commissioner and, accordingly, have concluded that the better view is that s 23AG(1) of the ITAA 1936 does not apply so as to exempt the CH Component from income tax in Australia. My view is that the payments received from GIAG were not derived by Mr Lochtenberg from his foreign service and he, therefore failed to prove the assessments issued to him for tax in respect of the years ended 30 June 2007, 2008 and 2009 were excessive. The difficulty with Mr Lochtenberg’s arguments is that, similar to Mr Blank, Mr Lochtenberg became entitled to receive the Amount as at the termination of his employment and the Amount he was entitled to receive represented the aggregated share of the profits earned by GI during certain periods, as calculated under both the PPA 1999 and the IPPA 2001. The calculation of the Amount depended on Mr Lochtenberg’s allocation of GS and shares under the PPA 1999, and his allocation of PU and shares under the IPPA 2001. It was calculated by reference to GI’s profits during particular periods, which were aggregated at the relevant Notice Date, being the termination date of Mr Lochtenberg’s employment. This is evident from the terms of the PPA 1999 and the IPPA 2001 extracted above at [64] and [66]. That calculation which had to be performed by the Glencore Group with reference to its profits had no regard to Mr Lochtenberg’s place of employment.
While I accept the Amount was divided into the CH Component and the AU Component for Swiss tax purposes, and that Mr Lochtenberg did receive separate payments representing the CH Component and the AU Component in respect of each instalment payment, I reject the argument that that division, or the Declaration and the September 2004 Agreement, changed the basis of Mr Lochtenberg’s entitlement to the Amount. I do not accept that the discussions that ensued between Mr Lochtenberg and GIAG resulted in a variation of the PPA 1999 and IPPA 2001 such that Mr Lochtenberg received two amounts, one for foreign service and the other for non-foreign service. This is because both the Declaration and the September 2004 Agreement reference the calculation of the Amount and, on their own terms, the CH Component and the AU Component were components of the Amount, which had already been calculated and agreed before the division was negotiated. The division of the Amount was for another purpose, namely, Swiss tax purposes. I accept that for Swiss tax purposes, the Swiss tax authorities were apparently satisfied for Mr Lochtenberg to work out the accumulated appreciation of his entitlements for the period while he was a resident in Switzerland. However, that does not render that part of the Amount as foreign earnings derived from foreign service.
It is clear from the findings of fact that Mr Lochtenberg was entitled to receive the Amount and it was payable to him irrespective of Mr Lochtenberg’s days of service in Switzerland or the value of the services he performed in Switzerland. It represented deferred compensation payable to him, regardless of where he worked for the Glencore Group because of the terms of the Glencore Profit Participation Plan documents. It follows that Mr Lochtenberg did not “derive” the Amount from foreign service as it was not due to him for his service in a foreign country. Accordingly, there was no correlation or nexus between the CH Component and his foreign service.
Furthermore, even though there was a division of the Amount for Swiss tax purposes, based on Mr Lochtenberg’s period of residence and work in Switzerland, similar to the UK cases referred to by counsel for Mr Lochtenberg discussed in [78] and [79] above, that apportionment is not permitted under s 23AG(1) of the ITAA 1936. The statutory test concerns itself with “any foreign earnings derived by the person from that foreign service” being exempt from tax. No apportionment is contemplated by the statutory test. In this regard, the views of Edmonds J in Blank FCA No 2 at [35] - [40] and of Pagone J in the Full Court (Blank FCAFC at [149]) that s 23AG(1) of the ITAA 1936 are both definitive and binding on the Tribunal. Therefore, the CH Component, being part of the Amount, cannot be characterised as having been derived by Mr Lochtenberg from foreign service.
I am fortified in my conclusion by the fact that Mr Lochtenberg had been allocated all his GS (or PU) and shares in the Glencore Profit Participation Plan while he was a resident in Australia and before he worked for the Glencore Group in Switzerland. He was entitled to receive the Amount under the Glencore Profit Participation Plan (which was calculated by reference to particular periods) whether he worked in a foreign country or in Australia. The fact that he was liable to Swiss income tax in relation to part of the Amount, namely, referable to the CH Component, had to do with his negotiations with the Swiss tax authorities regarding the period of his residency in Switzerland and has no bearing on his Australian income tax position. It does not follow, for example, that his agreement with his employer and the Swiss tax authorities means that the AU Component is the only part taxable in Australia. He is taxable in Australia on the Amount because, like Mr Blank, he received the payments representing deferred compensation when he was a resident of Australia and because s 23AG(1) does not apply so as to exempt the Amount or any part of it.
SHOULD THE SHORTFALL INTEREST CHARGE BE REMITTED, IN WHOLE OR IN PART, IN RESPECT OF THE YEAR ENDED 30 JUNE 2007?
The second issue which arises because of the conclusion that s 23AG(1) does not apply, is whether the Tribunal should exercise the discretion under s 280-160 of Schedule 1 to the TAA 1953 to remit the SIC payable by Mr Lochtenberg for the 2007 income year.
Broadly, the SIC applies when an income tax assessment is amended resulting in an increased tax liability: s280-100(1). It applies to the tax shortfall amount, namely, the amount of the increase, from the due date of the original assessment to the day before the notice of amended assessment is issued, being the shortfall period: s 280-100(2).
Mr Lochtenberg was issued with an amended assessment of income tax for the year ended 30 June 2007 on 16 December 2013, having earlier lodged his income tax return for the 2007 income year on 28 March 2008. In other words, the shortfall period was approximately five years. (I note that the precise shortfall period depends on the due date of the original assessment). The T-Documents before the Tribunal reveal that on 16 November 2012, Mr Lochtenberg consented to extend the limited amendment period for the 2007 income year to 29 March 2013. On 18 March 2013, Mr Lochtenberg again provided his consent to the Commissioner to further extend the limited amendment period for the 2007 income year, as well as the 2008 income year, to 20 December 2013.
The SIC is different to the General Interest Charge (GIC) which applies if any part of the tax shortfall or SIC remains unpaid after the due date, in which event the GIC applies automatically to the unpaid amount. Both the SIC and the GIC are imposed on a daily compounding basis, however, the SIC rate is significantly less than the GIC rate in recognition of the fact that taxpayers are usually unaware of a tax shortfall until the Commissioner has issued an amended assessment. The SIC for a day is worked out by adding 3 percentage points to the base interest rate for that day (determined quarterly), then dividing the total by 365 days (or 366 for a leap year): s 280-105(1) and (2) of Schedule 1 to the TAA 1953.
The Commissioner has the discretion to remit the SIC if he considers it fair and reasonable to do so. Section 280-160 provides as follows:
280-160 Remitting shortfall interest charge
(1) The Commissioner may remit all or a part of an amount of * shortfall interest charge you are liable to pay if the Commissioner considers it fair and reasonable to do so.
(2) Without limiting subsection (1), in deciding whether to remit, the Commissioner must have regard to:
(a) the principle that remission should not occur just because the benefit you received from the temporary use of the shortfall amount is less than the * shortfall interest charge; and
(b) the principle that remission should occur where the circumstances justify the Commonwealth bearing part or all of the cost of delayed payments.
A taxpayer may object in the manner set out in Part IVC of the TAA 1953 against an adverse remission decision by the Commissioner but only if the amount not remitted is more than 20 per cent of the additional amount of tax payable, which is the case here. The unremitted SIC in dispute was $547,477.94.
The Commissioner stated in his objection decision that he would not exercise his discretion to further remit Mr Lochtenberg’s unremitted SIC for the 2007 income year because of the following matters:
(a)the audit decision of 5 March 2013 had taken into account all of the factors beyond Mr Lochtenberg’s control that were responsible for the duration of the shortfall amount for the 2007 income year;
(b)full remission had already been granted for the periods of the Commissioner’s audit/risk review inactivity of 30 days or more, and further part or full remissions were granted to adopt the standard period of review for that income year;
(c)the fact the Commissioner had come to the view that Mr Lochtenberg had exercised reasonable care for the 2007 income year does not entitle Mr Lochtenberg to further remission of SIC;
(d)the fact the characterisation of Mr Lochtenberg’s profit participation payments as ordinary income is a complex issue does not entitle Mr Lochtenberg to further remission of SIC; and
(e)Mr Lochtenberg’s overall circumstances do not justify the Commonwealth further “bearing part or all of the cost of delayed payments” as per s 280-160(2) of Schedule 1 to the TAA 1953.
At the hearing, Mr Lochtenberg additionally submitted that it is fair and reasonable for there to be a further remission of the SIC because:
(a)he had engaged with PWC to consider the tax treatment of the amounts received under Glencore’s Profit Participation Plan, once he had decided he would end his employment with GIAG;
(b)he and PWC had co-operated with the Commissioner in good faith and in a timely manner throughout the audit and objection process;
(c)in Blank’s case, the Commissioner had originally accepted that s 23AG(1) applied to a portion of the payments to the taxpayer, even though the total amount was an undissected lump sum: Blank FCA at [18]. It followed that the argument put forward by Mr Lochtenberg about the operation of s 23AG(1) did not come as a surprise to the Commissioner;
(d)Mr Lochtenberg’s objection to the amended assessment dated 16 December 2013 in respect to the relevant years was lodged promptly on 5 February 2014;
(e)there was a long period of inactivity from the ATO between 5 February 2014 and 18 February 2016 when a subsequent audit paper was provided to Mr Lochtenberg. Further, the Commissioner’s objection decision was not issued until 3 February 2017;
(f)there were four proceedings in Blank’s case which were relevant to the characterisation of the amount received and, apparently, the ATO would not consider Mr Lochtenberg’s matter until finalisation of the pending appeals in the Blank case;
(g)in the Commissioner’s objection decision, the Commissioner determined that Mr Lochtenberg had exercised reasonable care, and remitted Mr Lochtenberg’s administrative penalties in full in respect to the years ended 30 June 2007 and 30 June 2008; and
(h)after the Commissioner’s objection decision was issued, Mr Lochtenberg entered into a 50/50 arrangement with the Commissioner promptly and paid an amount of $2,039,905.12 to the Commissioner on 16 March 2017.
At the hearing, counsel for the Commissioner further submitted that the only contention made on behalf of Mr Lochtenberg of conceivable relevance is that listed at paragraph (f) in [98] above, namely, the contention that the Commissioner waited until the finalisation of the Blank proceedings before determining Mr Lochtenberg’s objection. Counsel for the Commissioner defended the Commissioner’s position as being a reasonable course to take in circumstances where Mr Lochtenberg had similarly argued that the payments to him were capital and not income (remembering that the s 23AG(1) ground was only added to Mr Lochtenberg’s grounds of objection on 13 March 2014 following the decision in Blank FCA). The Commissioner further submitted that it could be inferred that Mr Lochtenberg was content with that course as he did not issue a notice to the Commissioner under s 14ZYA of the TAA 1953 requiring the Commissioner to make an objection decision within 60 days. Finally, the Commissioner says Mr Lochtenberg could have paid the tax in issue in order to stop interest accruing and that he should not gain a benefit from failing to do so.
I had some difficulty with the relevance of all of the submissions put to the Tribunal on behalf of both Mr Lochtenberg and the Commissioner in relation to the remission of SIC. This was because both parties addressed the period in respect of which SIC remission was sought as being from 4 April 2014 (being 60 days from the lodgement of Mr Lochtenberg’s objection) to 3 February 2017 (being the date of the Commissioner’s objection decision), that is, not the shortfall period. As also indicated immediately above in [98] – [99], both counsel also referenced many events which occurred after the amended assessments were issued by the Commissioner, that is, again outside of the shortfall period. They were, in other words, not solely addressing the shortfall period with which the SIC is concerned and appeared to conflate the SIC and the GIC periods.
Notwithstanding, I was persuaded that it is fair and reasonable to further remit the SIC to the base rate for the entire shortfall period relevant to the assessment for the 2007 income year, to the extent that the SIC had not already been remitted in full or in part by the Commissioner. I have taken into account, in addition to the factors set out in s 280-160(2), the fact that a very considerable period of time had elapsed between when Mr Lochtenberg lodged his income tax return for the year ended 30 June 2007 and when the Commissioner issued him with an amended assessment for that year on 16 December 2013. Mr Lochtenberg had fully co-operated with the Commissioner, including by consenting to not one but two requests by the Commissioner for extensions of the time limits for the amended assessments (see [93] above). I was satisfied that Mr Lochtenberg’s overall circumstances justify the Commonwealth further bearing part of the cost of delayed payments in accordance with s 280-160(2) of Schedule 1 to the TAA 1953.
CONCLUSION
For the reasons set out above, I have decided that the objection decision regarding the amended assessments for income tax for the years ended 30 June 2007, 2008 and 2009 is affirmed. With respect to the SIC, I have decided that the objection decision regarding the SIC for the year ended 30 June 2007 is set aside and substituted with a decision allowing remission to the SIC base rate to the extent that the Commissioner has not already remitted the SIC in full or in part.
I certify that the preceding 102 (one hundred and two) paragraphs are a true copy of the reasons for the decision herein of Ms G Lazanas, Senior Member
................................[SGD]........................................
Associate
Dated: 30 November 2018
Date(s) of hearing: 13 October 2017 Counsel for the Applicant: Mr M Richmond and Ms M O'Brien Solicitors for the Applicant: Munro Lawyers Counsel for the Respondent: Mr M O'Meara Solicitors for the Respondent: ATO Review & Dispute Resolution
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