Mangat and Commissioner of Taxation (Taxation)
[2018] AATA 3012
•21 August 2018
Mangat and Commissioner of Taxation (Taxation) [2018] AATA 3012 (21 August 2018)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2016/5665
Re:Manveen Mangat
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Ms G Lazanas, Senior Member
Date:21 August 2018
Place:Sydney
The objection decision regarding income tax for the year ended 30 June 2013 is affirmed.
The objection decision regarding the administrative penalty is set aside and remitted to the Commissioner with a direction to issue an assessment of administrative penalty at the rate of 40% of the tax shortfall in respect of the year ended 30 June 2013.
......................[sgd]..............................................
Ms G Lazanas, Senior Member
CATCHWORDS
TAXATION – INCOME – EMPLOYEE SHARE SCHEMES – date of acquisition of beneficial interest in right to acquire shares – whether more than 12 months before cancellation of options – whether capital gains tax discount applies – default assessment – imposition of administrative penalty due to failure to lodge tax return – penalty partially remitted – whether penalty should be further remitted – objection decision regarding income tax affirmed – objection decision regarding remission of penalty set aside and remitted
LEGISLATION
Income Tax Assessment Act 1936 (Cth), s 167
Income Tax Assessment Act 1997 (Cth), Div 83A, s 104-25, s 108-5, Sub-div 109-A, ss 115-10, 115-25, Sub-div 130-D, s 974-75, s 995-1
Taxation Administration Act 1953 (Cth), s 14ZZK; Sch 1 ss 284-75, 284-90, 298-20
CASES
Davies v Deputy Commissioner of Taxation (2015) 234 FCR 93
Federal Commissioner of Taxation v McWilliam (2012) 204 FCR 478
Fowler v Federal Commissioner of Taxation (2013) 212 FCR 149
Fraunschiel v Federal Commissioner of Taxation (1989) 20 ATR 955
Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57
Re Taxpayer and Federal Commissioner of Taxation [2012] AATA 142
Re Van and Federal Commissioner of Taxation [2002] 51 ATR 1153Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 212 FCR 483
SECONDARY MATERIALS
Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009
REASONS FOR DECISION
Ms G Lazanas, Senior Member
21 August 2018
Dr Manveen Mangat claims she is entitled to a discount capital gain in relation to the cancellation of 150,000 shares that were held by her in Virtus Health Pty Ltd (VH) pursuant to an employee share scheme. Whether she is entitled to the capital gain discount turns on the date of acquisition of her interest in the employee share scheme (ESS interest) and whether she acquired the ESS interest at least 12 months before the cancellation of shares on 12 June 2013.
The Commissioner of Taxation says that Dr Mangat failed to prove that the date she acquired the ESS interest was at least 12 months before the cancellation of the shares and so failed to prove that the amended assessment of income tax issued to her was excessive. The Commissioner had also assessed Dr Mangat as liable to an administrative penalty at the rate of 75% on the basis that she failed to lodge her return and that return was necessary for the Commissioner to determine a tax-related liability, but he subsequently remitted the penalty to the rate of 50% of the tax shortfall. Dr Mangat complained that this penalty was excessive, that her return was not necessary to calculate her tax and that the penalty should be further remitted.
As the taxpayer, Dr Mangat bears the burden of proving that the assessments of income tax and penalty are excessive and, additionally, that the decision not to further remit the penalties should not have been made or should have been made differently: s 14ZZK(b) of the Taxation Administration Act 1953 (TAA). Although the Commissioner had issued a default assessment to Dr Mangat under s 167 of the Income Tax Assessment Act 1936 (ITAA 1936), the arguments before me were confined to the issue of the ESS interest and I have accordingly proceeded on the same basis.
I have decided that Dr Mangat is not entitled to claim the capital gain discount as I was not persuaded that she acquired her ESS interest more than 12 months before the cancellation event. In relation to the issue of the administrative penalty, I was persuaded by Dr Mangat that the administrative penalty on the tax shortfall should be further remitted and have determined the appropriate penalty rate to be 40% of the tax shortfall.
THE ISSUES BEFORE THE TRIBUNAL
The essential issue is when did Dr Mangat acquire her ESS interest. If that date was at least 12 months before 12 June 2013, Dr Mangat is entitled to claim the capital gain discount in the year ended 30 June 2013. This is because to qualify as a discount capital gain, a capital gain must relevantly result from a CGT event happening to a CGT asset that was acquired by the taxpayer at least 12 months before the CGT event: s 115-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997).
Another issue is whether Dr Mangat is liable to pay an administrative penalty at the partially remitted rate of 50% under s 284-75(3) of Schedule 1 of the TAA. The next issue is, whether there are any factors that would warrant the further remission of the administrative penalty in full or in part under s 298-20 of Schedule 1 to the TAA, noting that the Commissioner had already remitted the penalty from the rate of 75% imposed at that level due to her failure to lodge her tax return.
THE FACTUAL BACKGROUND AND EVIDENCE
There was considerable disagreement between the parties as to the factual matrix and what the evidence proved. There were four witnesses who provided sworn written statements as well as oral evidence at the hearing. All four witnesses were also cross-examined by counsel for the Commissioner. It is necessary to record their evidence to demonstrate the difficult task for the Tribunal in determining what happened. Besides the T-Documents and Supplementary T-Documents filed and served by the Commissioner, there were several other VH documents produced by Dr Mangat at the hearing, in respect of which leave to file and serve late was granted a few days before the hearing. I will start with the evidence of Dr Mangat.
The Evidence of Dr Mangat
Dr Mangat is a medical practitioner specialising in obstetrics and gynaecology.
On 30 December 2011 she contracted with IVF Australia Pty Ltd (IVFA) and VH (also referred to as the Company), to be engaged as an independent contractor doctor for a 5-year term. Before turning to the terms of that contract, it is necessary to say something brief about how Dr Mangat became a contracted doctor of VH.
Dr Mangat says that during her 5th year of obstetrics and gynaecology training with the Royal Australian New Zealand College of Gynaecologists, she applied for Certification in Reproductive Endocrinology & Infertility (CREI), which is a 3-year training program. She started CREI training in 2010 and in her second year of CREI training, in 2011, she was approached by Dr Peter Illingworth, the medical director of IVFA. He wanted her to join IVFA and VH for training as well as long term career opportunities.
In mid to late 2011, Dr Mangat was in serious discussions and negotiations with Dr Illingworth and Mr John Moller, then the managing director of IVFA, for a position of contract doctor with IVFA and VH. Dr Mangat was also in discussions with other companies at about the same time. In her witness statement dated 18 May 2017[1], Dr Mangat stated that she recalled having a long meeting with Mr Moller in or about November 2011 during which, relevantly, words to the following effect were said:
Mr Moller:
We also provide equity incentives if you join as a contracted specialist. Although the contract provides that you will be locked in to work for us for 5 years following completion of your CREI training we are prepared to start the non-compete arrangements from when you commence working for us rather than when you complete your CREI training. Manny, you will be locked in no matter who you work for …
Dr Mangat:
On the basis that my initial term of 5 years commences from 30 December 2011, then rolling contract therafter with the no-compete taking effect from that date rather than upon my completion of my CREI I am agreeable to the terms of the engagement letter but any amendments to my stipend or entitlement to equity must all be effective from the date I commence work with the company and not from when I complete my CREI training.
Mr Moller:
Manny I am agreeable to those terms as we want you to be able to be part of IVFA – and further negotiations you have with us will be effective from the date you sign the engagement letter.[2]
[1] Exhibit A1.
[2] Exhibit A1, paragraph 19.
Dr Mangat claimed to have also been provided with a copy of the Virtus Health Share Offer Information Statement dated 16 December 2011 (the Share Offer) at the abovementioned meeting in about November 2011.[3] It is unclear how a document dated 16 December 2011 can be said to have been provided at a meeting “in about November 2011”, unless that meeting happened sometime in mid to late December 2011. I discuss the relevant terms of the Share Offer below.
[3] Exhibit A1, paragraph 20.
On 30 December 2011, another meeting took place and Dr Mangat accepted the position with IVFA and VH as a contract doctor and signed an engagement letter.[4] The letter was executed as a deed on behalf of IVFA by Mr John Moller as the managing director and Ms Sue Channon as the Chief Executive Officer (the Engagement Letter). The Engagement Letter relevantly provides, as follows:
[4] Exhibit A1, paragraph 21.
Virtus Health Ltd (Virtus), as the holding company of the Virtus Health group and IVF Australia Pty Limited (IVFA) are pleased to set out in this letter the basis on which we have agreed to work together. Upon signature of this letter by you, this letter will constitute a legally binding agreement between us.
In consideration of the mutual promises and undertakings set out below, the parties agree as follows:
1. Nature of Agreement
IVFA engages you as an independent contractor to provide the services (Services) set out in the attached Fees and Services Schedule and the first column of the attached Code of Conduct in accordance with the terms of this deed. The Fees and Services Schedule and the Virtus Code of Conduct (each as amended from time to time) form part of this deed.
…
6. Term
Subject to paragraph 7:
(a)this deed will commence with effect from 30th December 2011 (Effective Date) and continue for a period of five years (Initial Term); and
…
10. Competition restraint
10.1 Subject to paragraphs 10.9 and 10.10, during the Restraint Period you must not, without the consent of the Board, directly or indirectly, in any capacity and whether alone or with others:
(a) provide ART Services to a competing clinic or laboratory;
(b)establish or prepare to establish a competing private clinic or laboratory; or
(c)refer any patient to whom you provided ART Services or with whom you had dealings with at an IVFA clinic to a competing clinic or laboratory that provides the same ART Services as IVFA without IVFA’s consent.
…
10.11. The parties acknowledge and agree that:
(a)during the Term of this deed, you may be offered the opportunity to acquire shares in Virtus under the Virtus Share Option Plan or otherwise;
…
17. Relationship of parties
You are engaged as an independent contractor… Other than as expressly set out in this deed, you will not receive any benefits or payments which IVGA’s employees receive or to which they may be entitled to including but not limited to:
…
(d)Bonuses or distributions of cash or shares given by Virtus or IVFA to its employees; or
…
27. Whole agreement
This deed constitutes the entire agreement between us and supersedes and replaces all previous arrangements or understandings between us in connection with its subject matter. It covers all of what has been agreed between us and does not cover any additional services that may be the subject of separate discussions and agreement. For the avoidance of doubt, this paragraph does not apply to the subject matter contained in the Sale Agreement or to the shareholders deed governing the affairs of Virtus Health Pty Limited.
We look forward to a long and mutually rewarding relationship.
…
Enclosures:
- Fees and Services Schedule
- Code of Conduct
Dr Mangat claimed that the offer made to her included as part of her remuneration, in exchange for the restraint clause, 150,000 shares in VH at $4.71 per share.[5] However, as evident from the extracts above, the Engagement Letter was silent as to any offer of shares to Dr Mangat and instead referenced in clause 10.11 (see [13] above) the fact that the parties acknowledge and agree that Dr Mangat may be offered shares in VH during the term of the deed. Dr Mangat claimed that the Engagement Letter had a further schedule, namely a ‘Schedule A’ which contained the offer of shares in VH.[6] The Commissioner submitted that this was doubtful as, when Dr Mangat’s tax agent provided a copy of the Engagement Letter to the Commissioner on 17 June 2016 it contained no such schedule and, on the contrary, the Engagement Letter specifically referred, as indicated above at [13], to only two enclosures being the Fees and Services Schedule and the Code of Conduct. Moreover, the Commissioner pointed out the first time a ‘Schedule A’ document was provided to the Commissioner was upon the filing of Dr Mangat’s evidence in these proceedings in May 2017.
[5] Exhibit A1, paragraph 21.
[6] Exhibit A1, paragraph 39.
Relevantly, for present purposes, ‘Schedule A’ states as follows:
Manveen Mangat: Schedule A to Doctors Contract Dated 30th December 2011
·Remuneration:
While you are establishing your practice IVFA will pay you a stipend of $250,000 pa (+GST) for full service for a period of 12 months from the date you commence active practice with us (January 21st 2013).
…
·Restraint
IVFAustralia appreciates that for a consultant commencing their career immediately post the CREI qualification there needs to be a period of probation that allows the consultant to develop confidence in the IVFAustralia model and assess the value of the support that IVFAustralia will bring to your practice.
For this reason the following restraint periods apply:
- For 12 months from the date of commencement, the restraint clause in the attached contract is void.
- When and if the consultant is issued with and accepts ordinary shares or options in line with the company share and option incentive plan (i.e. 150,000 shares for 100 cycles) a six month restraint will apply.
- When you have received 250,000 ordinary shares or options in aggregate under the Virtus Health Incentive scheme the restraint clause will fall in line with the standard IVF Australia doctors contract.
·Share and Option Incentive plan
The Virtus Health Share and Option Incentive plan forms part of this offer.
In her witness statement, Dr Mangat stated that “the right to take up shares… was not subject to [her] meeting performance hurdles of 100 cycles”, contrary to what is set out in Schedule A.
Dr Mangat claimed to have also been provided with a copy of the Share Offer at the time of her meeting with Dr Illingworth and Ms Channon when she signed the Engagement Letter on 30 December 2011, having also deposed that the Share Offer was also previously provided to her in or about November 2011 (see [12] above). Relevantly, the Share Offer states, as follows:
This Offer Information Statement has been prepared to provide information on Virtus Health Pty Ltd to its employees and contractors who have been invited to subscribe for fully paid ordinary shares in the Company.[7]
Virtus Health Pty Ltd is pleased to invite eligible employees and contractors to subscribe for fully paid ordinary shares … on the terms set out in this document. …
The Board has exercised the discretion given to it under the Shareholder Deed to issue incentive shares and/or options to Non-Investor Shareholders approved by the Board. The offer is open to Eligible Persons. …
The Company wishes to issue new Shares at $4.71 per Share. …
The invitation will expire on Tuesday 31 January 2012 unless the Board in its absolute discretion decides to extend the closing date of the offer.)[8]
[7] Exhibit A5, page 1.
[8] Exhibit A5, page 4.
On 23 January 2012, Dr Mangat commenced work with IVFA as a CREI Fellow for a 1 year period until January 2013. This employment was pursuant to an Individual Employment Agreement signed on 2 February 2012 (the 2012 Employment Agreement). The 2012 Employment Agreement was a separate and independent agreement to the Engagement Letter (see [13] above) and, according to Dr Mangat, was standard practice as she still had her last year of sub-specialisation to complete.[9]
[9] Exhibit A1, paragraph 24.
The First Schedule attached to the 2012 Employment Agreement relevantly provided that Dr Mangat’s wages for the term 23 January 2012 to 18 January 2013 were $117,810 plus superannuation, the relevance of which I will turn to shortly. The 2012 Employment Agreement was silent as to any offer of shares by VH to Dr Mangat.
On 27 January 2012, Mr Moller emailed Dr Mangat and relevantly stated, in two separate emails, as follows:
One of the other things I’d like to talk to you about is the Virtus Health equity incentive scheme.
I’ve attached a summary document so that you can get your head around the mechanics but there are some aspects of it that are particularly relevant at the moment.[10]
…
The key opportunity is that we are able to make you a part of the equity incentive scheme (if you would like to) now rather than following your CREI.
There are a number of advantages in doing this now rather than later that I can talk you through.[11]
[10] Exhibit A1, paragraph 23 and Document 2.
[11] Exhibit A1, Document 2.
On 2 February 2012, Mr Moller emailed Dr Mangat about the Share Offer. Relevantly, Mr Moller stated, as follows:
Here’s the latest set of documents and accompanying email regarding the offer information statement. It looks like we’ll have a week or so beyond the draft closing date of 31 January.[12]
[12] Exhibit A1, paragraph 24 and Document 3.
An accompanying email that is referred to in the abovementioned email dated 2 February 2012 relevantly stated, as follows:
Please find attached an updated electronic version of the final Offer Information Statement and associated documents.
I have also attached “marked up” comparison documents of the Shareholders Deed, Offer Information Statement and Loan Documentation so that you and your advisors can easily see any changes that have occurred between the June draft documents and this final version.
The key thing that you need to do in order to participate in this offer is to:
Sign the Share Purchase Application Form on page 24 of the Offer Information Statement and return to Glenn Powers at Level 3, 176 Pacific Highway, Greenwich by 31 January 2012.
The total size of the share offer under the Offer Information Statement is limited by law and there is a chance that individual applications may be scaled back if the total offer is exceeded. If there is a scale back applicants will have the ability to top up any shortfall with options.
If you can be classified as a “sophisticated investor”, your application will not be scaled back. … A “sophisticated investor” is an individual (or associated entities) with net assets of at least $2.5 million or gross income for each of the last two financial years of at least A$250,000 a year. Many of our doctors should be eligible under the income threshold.
If you can be classified as a sophisticated investor could you ask your accountant to complete the “Sophisticated Investor Certificate” on the last page of the Offer Information Statement section and return with your application form.
Please note that the loan application does not need to be completed yet. We will contact you after 31 January 2012 to arrange this….[13]
[13] Exhibit A1, paragraph 25 and Document 4.
On 27 March 2012, Dr Mangat was advised by her then accountant by email that she would not qualify as a “sophisticated investor”. Dr Mangat contacted Mr Moller by email on the same day stating “[a]ttached is the reply from the accountant. How should we proceed?”.[14]
[14] Exhibit A1, Document 4.
On 30 March 2012, Mr Moller emailed Dr Mangat stating:
It looks like we have a new alternative for non-sophisticated investors that would put you in an identical position. PriceWaterhouse are working on this now.[15]
[15] Exhibit A1, Document 5.
On 1 May 2012, Dr Frank Quinn, a board representative of IVFA emailed a group of about 10 doctors including Dr Mangat about a potential sale of shares in IVFA and potential impacts on shareholders. Relevantly, his email stated:
Dear IVF doctor,
As you are aware Quadrant are looking to exit from Virtus Health. As part of the sale process several documents will be required to be reviewed by the doctor shareholding group. As an option holder, any changes may have an impact on your working future, and for this reason would like to draw your attention to some possible changes in preparation for a sale…. The only substantial change … is a change that would compel us to roll 50% of our shareholding into a trade sale.[16]
[16] Exhibit A1, Document 9.
On 8 May 2012, Dr Quinn emailed a larger group of people, including Dr Mangat, an updated version of draft papers for discussion planned for the following day in IVFA’s boardroom.
On 17 May 2012, Ms Channon sent a letter to Dr Mangat which advised as follows:
Dear (Shareholder/Option Holder – Manny Mangat)
I refer to our recent communications regarding the proposed sale of Virtus and the need to give prospective purchasers certainty around the level of shareholding available.
We noted in that communication that we would need to come back to you for a binding election closer to the conclusion of the sale process.
The working assumptions are:
·We anticipate concluding a sale of Virtus between June and September 2012;
…
·The options you hold will vest on a sale event. At the transaction, your options will be cancelled and you will be entitled to retain up to 50% of the net proceeds (gross proceeds less exercise price) with the remaining proceeds being reinvested in shares of the new investment company purchased by the owner.
Please tick one of the election boxes below to indicate (on a binding basis) your preferred choice of cash/ new purchaser shares arising out of the sale :..
We would appreciate the return of this advice by Friday 26th May 2012. …[17]
[17] Exhibit A1, Document 8, pages 48-49.
On 17 May 2012, PricewaterhouseCoopers (PWC) wrote to the Board Members of QPE Funds Management Pty Ltd being one of the investors in VH. The subject heading of the letter was “Income tax comments regarding the Mulgani Exit Event for New Doctors contracted to Virtus”. The letter relevantly stated as follows:
We understand that it is intended for this letter to be provided to the Doctors who have contracts with Virtus subsequent to the last issue of options or shares to current Virtus contractors and employees (“New Doctors”). We understand that these New Doctors will participate in the proposed exit by Quadrant of its investment in Virtus (known as “Project Mulgani” or the “Exit Event”).
We understand that these New Doctors will be provided with certain interests and payments as set out in this paper. …
Our comments are based on the following assumptions. …
There are 26 New Doctors. The New Doctors do not currently hold any options, shares or rights in or over Virtus. …
Virtus wishes to provide the New Doctors with 150,000 shares in Virtus with an issue price of $4.71, or an arrangement that ensures the Doctors are in the same economic position as if that is what they were offered under the Virtus Offer Information Statement dated 16 December 2011. …
We understand that 8 of these 26 New Doctors are Non-Sophisticated Investors. We further understand that due to legal reasons (Corporations Act and general Securities Law restrictions), Virtus is unable to issue shares to Non-Sophisticated Investors under the method proposed in the Offer Information Statement. New Doctors who are Non-Sophisticated Investors will instead receive a cash bonus and options in the purchaser such that they should be in the same economic position as New Doctors who are Sophisticated Investors.
The New Doctors are Australian tax residents who will hold their shares or options directly in their personal capacity…
No vesting conditions or performance hurdles will apply to any of the shares or options issued to the New Doctors.[18]
[18] Exhibit A1, Document 9.
Dr Mangat says in her witness statement that she was not classified as a “new doctor” at that time.[19] This appears to be contrary to other correspondence sent to Dr Mangat at or about the same time, including that discussed immediately below.
[19] Exhibit A1, paragraph 31.
On 13 July 2012, Dr Mangat received an email sent on behalf of Mr Glenn Powers, the Chief Financial Officer of VH, with the heading “Virtus Health Liquidity Event – Binding Share Sale - Incentives for New Doctors”. Mr Powers relevantly states as follows:
Dear Manny
Further to the letter you received on 18 May regarding the incentive arrangements for the new Doctors we wish to advise you that we have finalized our proposals with PWC and also our legal advisers ...
We also wish to advise you that we have two proposals which are slightly different and these are dependent on the nature of the liquidity event which may occur in the near future. The reason for this is that the separate proposals are tailored from a tax perspective to the different outcomes which could occur. The consistent features in each of the proposals are:
·Price of shares or options is $4.71 as originally proposed
·Number of options of shares is 150,000 as originally proposed
We have been advised that if we grant or issue shares before the nature of the liquidity event that we create a risk whereby the tax outcome for Doctors may not be as effective as it could be if we wait for the outcome of the liquidity event process. Accordingly we have decided to delay the issue or grant until we know the liquidity event outcome which will allow Virtus to maximise the benefit to Doctors participating in these new schemes.
We anticipate agreement with Quadrant and our advisers on the liquidity event outcome by the end of July. Unfortunately this process has taken longer than anticipated, hence the delay in finalizing your share and option arrangements. Please be assured that we are committed to an ongoing incentive arrangement for our doctors and we thank you again for your patience. … [20]
[20] Exhibit A7.
On 8 August 2012, Dr Mangat received a letter from Mr Powers with the subject heading “Virtus Health – Incentives for New Doctors and Liquidity Event”. The letter stated:
As you are aware we have been working with our tax and legal advisers to provide recently contracted Doctors with share and option incentives. This scheme was originally approved by the Virtus board in March 2011 and this letter updates the position set out in:
·my letter dated 18 May 2012; and
·my email dated 13 July 2012.
Virtus had expected an agreement with Quadrant and our advisers on the liquidity event outcome by the end of July. Unfortunately this process has taken longer than anticipated, hence the delay in finalizing your share and option arrangements. Although the sale process is continuing we have decided to proceed with the offer of shares or options as previously proposed with some enhancements as follows:
·Share and Loan offer for Sophisticated Investors – the approach taken is the same as originally proposed in the Offer Information Statement;
·Options for Non-Sophisticated Investors – Non-Sophisticated Investors will now receive an initial option grant package which puts them in the same position as the Sophisticated Investors
·There are some important changes to both approaches, notably vesting conditions and performance hurdles will NOT apply to either the initial issue of shares or initial grant of options, and future performance option grants will commence at a base of 100 cycles.
·Virtus will also provide a three year interest bearing loan to support the payment of tax where Doctors elect to retain 100% of their shares or options in any liquidity event which takes place in the next two years.
…
We are now pleased to provide you with documentation in support of the above opportunities as follows:
·Virtus Share Option Incentive Plans for Contracted Doctors
This plan provides Doctors who signed Virtus Doctor contracts prior to 1 January 2012 with two alternatives:
oShare Purchase program set out in paragraphs 2.0 to 2.3; this is only available to Sophisticated Investors
oShare Option Grants set out in paragraphs 3.0 to 3.3; this is available to non-Sophisticated Investors. The share options will be issued for zero consideration but on any liquidity event the first $4.71 per option will be deducted from the gross value of any share or option valuation.
…
oNon-Sophisticated Investors; please complete the following attachments:
§Share Purchase Application Form (if you have not already done so)
Following completion of your application you will be provided with an Option Certificate and your details will be entered into the Option Register.
It should be noted that other documents previously provided to New Doctors at the time of the issue of the Offer Information Statement remain relevant; …
We would be grateful if you could provide the documentation required by Friday 17 August 2012. …[21]
[21] Exhibit A9.
On 17 August 2012, by way of a Share Purchase Application Form, Dr Mangat applied for 150,000 options in VH. That form relevantly stated:
3. Return of this application form will constitute an offer to subscribe for Shares/Options in the Company in accordance with the terms and conditions set out in the Offer Information Statement to which this application form is attached…
5. This application form must be lodged with the Company by no later than 17th August 2012.[22]
[22] Exhibit A1, Document 11.
It is noted that the abovementioned Share Purchase Application Form which was completed and signed by Dr Mangat is a different form to that which was attached to the Share Offer dated 16 December 2011 referred to in [17] above, as that form stated that it was required to be lodged with the Company by no later than 31 January 2012.[23] The form that Dr Mangat completed was dated 17 August 2012. It is further noted that the Offer Information Statement to which the August 2012 Share Purchase Application Form was attached (see [32] above) was not put into evidence; only the Share Offer dated 16 December 2011 was produced by Dr Mangat at the hearing. In the circumstances, the Tribunal is unclear as to the terms and conditions which applied to the application made by Dr Mangat covered by her form for options dated 17 August 2012.
[23] Exhibit A5, pages 24-25.
On 30 August 2012, Mr Moller emailed Dr Mangat the ‘Schedule A’ document referred to in [15] above.[24] Mr Moller stated as follows:
Hi Manny
Here is the Schedule A that is an appendix to the IVFA contract.
I have started this arrangement from 10th September 21012 (sic), so please let me know if this date makes sense.
Sue, Glenn and I had a discussion about the terms of the offer, and our view is that this is an excellent offer, particularly with the additional steps that we have taken to include you in the equity incentive arrangement at the 2010 share price.
You are being issued 150,000 options at $4.71 while the effective market price is $6.88 at 30 June 2012. The effective discount is therefore $325,500.
After next week a CREI would be offered 50,000 options at $6.88 and would then only be issued additional options when they get to 50 and 100 cycles, and at the pricing at the time.
It is really important that we finalise all this documentation by Wednesday 5th September when we will formally be issuing the options as the new rules and pricing will apply from then.[25]
[24] Exhibit A1, Documents 13, 14 and 15.
[25] Exhibit A1, Document 13.
The proposed sale of shares in the Company referred to in [25] above did not eventuate and, by December 2012, VH ceased negotiations with all potential purchasers. In January 2013, it was decided to instead undertake an initial public offering (IPO) of VH.
In March 2013, Dr Mangat received an email from VH notifying her that the shareholder resolution had been passed to convert VH into a public company and that the process had been approved by the Australian Securities and Investments Commission.[26]
[26] Exhibit A1, paragraph 41.
On 13 June 2013, VH was listed on the Australian Stock Exchange. On this date, Dr Mangat’s 150,000 options were cancelled. Dr Mangat had also made an election on cancellation of her options to take 50% of the value of the cancelled options in cash proceeds ($271,500) with the balance of the consideration being reinvested in 39,206 shares in VH as a public company.[27]
[27] Exhibit A1, paragraph 42.
In summary, Dr Mangat’s oral and written evidence was that she had acquired the right to the options in VH as part of her remuneration when she signed the Engagement Letter on 30 December 2011 to join VH as an IVF contract doctor. She claimed that Schedule A was signed at the meeting on 30 December 2011. She also claimed she was offered 150,000 shares in VH at $4.71 per share on 30 December 2011, in return for her agreeing to the non-compete clause. She further stated that her right to take up the shares was not subject to her meeting any performance hurdles. Furthermore, she stated that, because of her being advised by her accountant in March 2012 that she did not qualify as a sophisticated investor, the original offer to her of 150,000 shares was changed in or about March 2012 to an offer of 150,000 options. In all other respects, she said the offer to her of options to acquire shares in VH remained unchanged from what she was originally offered. The same number of options were offered as the number of shares that were a component of her remuneration and at a strike price rate of $4.71, which was identical to the issue price for the shares. Dr Mangat stated she would not have been included in correspondence from Dr Quinn in May 2012 addressed to the doctor shareholder group had she not already been a shareholder or option holder (see [25] and [26] above). The same applied to the correspondence from Ms Channon dated 17 May 2012 (see [27] above). She also claimed not to be a “new doctor” for the purposes of the equity incentive arrangements. Finally, Dr Mangat said that each of the proposals made by VH over the course of negotiations regarding the sale of the Company was that VH would adhere to the original offer she says was made to her on 30 December 2011, that is, the price of the shares or options was $4.71 as originally proposed and the number of shares or options was 150,000 as originally proposed.
The Evidence of Dr Illingworth and Ms Channon
As noted above, Dr Illingworth is the medical director of VH. He stated that a central aspect of his role in the period 2009 to 2012 was to identify and attract to VH suitable prospective IVF medical practitioners. He was personally involved in early discussions with Dr Mangat and said that he attended a meeting in or around November 2011 with Dr Mangat and Mr Moller, when a formal offer of employment was made and Dr Mangat was also given a copy of the Company’s Share Offer at that time.
Dr Illingworth also stated that “it was finally agreed between VH and Dr Mangat that VH would offer Dr Mangat 150,000 shares but in return Dr Mangat would have to agree to a 5 year non-compete clause”.[28] When asked how he specifically knew that an offer of shares in VH had been made to Dr Mangat, he said that was the “standard approach” by which I understood him to mean it was the standard incentive for contracted doctors. He further stated that Schedule A was signed on the same date as the Engagement Letter but acknowledged under cross-examination that he was not present when the Engagement Letter was signed. He said his awareness of events was based on what Mr Moller told him as they regularly discussed the recruitment status of doctors.
[28] Exhibit A1, paragraph 9.
He was similarly aware from subsequent discussions with Mr Moller and Dr Mangat that after Dr Mangat had executed her Engagement Letter and commenced work with the Company, she obtained advice that she would not qualify as a sophisticated investor. Dr Illingworth said he was aware Dr Mangat was not the only contracted doctor in this position and, after obtaining advice from PWC, VH agreed to modify the right to acquire shares to a right to acquire options. He said he had seen the advice from PWC and he was aware that it was circulated to all the contracted doctors.
Ms Channon is a director and CEO of VH. She was one of the witnesses to the Engagement Letter. She recounted that at the time the offer of a doctor contract was made to Dr Mangat VH was in the process of generally offering shares to new and recently contracted doctors and the Share Offer dated 16 December 2011 was provided to Dr Mangat. She said she was aware VH made an offer to Dr Mangat that included the acquisition of 150,000 shares in the Company at an offer price of $4.71 per share, subject to meeting certain performance conditions relating to her contract. This was different to Dr Mangat’s evidence which was that she did not have to meet any performance conditions to qualify for the shares and later the options.
Ms Channon initially testified that the remuneration package was contained in Schedule A to the Engagement Letter dated 30 December 2011 and Schedule A was signed on the same date. However, under cross-examination, Ms Channon accepted that that could not be the case. This was because the increased stipend of $250,000 per annum, referenced in Schedule A, and which Ms Channon personally negotiated with Dr Mangat in or about August or September 2012, namely, after Dr Mangat successfully completed her CREI training, meant that Schedule A could not have been attached to the Engagement Letter and signed on 30 December 2011. In her witness statement, Ms Channon stated that at the time of the increase in Dr Mangat’s stipend to $250,000, VH prepared a new Schedule A to Dr Mangat’s contract of employment but that no alteration was made to the number of shares Dr Mangat had been offered.[29] Ms Channon also referenced VH having obtained advice from PWC to put those doctors who had entered into engagement letters with the Company prior to 31 December 2011 and who did not qualify as sophisticated investors in exactly the same position as if they were able to take up 150,000 shares.[30]
[29] Exhibit A3, paragraph 14.
[30] Exhibit A3, paragraph 16.
Ms Channon also deposed that VH’s Share Offer dated 16 December 2011 was not accepted by the Australian Stock Exchange and had to be withdrawn and replaced with another offer document dated on or about 8 August 2012 and that several doctors including Dr Mangat were granted shares or options under that revised document. As noted at [32] and [33] above, Dr Mangat’s Share Application Form was attached to a different (later) share offer document, most likely the one referred to as dated on or about 8 August 2012, but that was not in evidence before the Tribunal.
The Evidence of Mr Santoro
Mr Mario Santoro is an accountant by profession and the tax agent for Dr Mangat. He was appointed to act by Dr Mangat in early September 2015, having taken over from another firm of accountants. His first task was to attend to preparing Dr Mangat’s outstanding tax returns for the years 2004 - 2011 which were lodged by him on 11 December 2015. (Dr Mangat’s former accountant had only been instructed to act to bring her tax returns up to date in or about September 2014).
Amongst the papers provided to Mr Santoro by the former accountant was a copy of a default assessment warning letter dated 11 August 2015 sent by the Australian Taxation Office (ATO) in respect of Dr Mangat’s 2013 tax return. Mr Santoro said his office was in regular contact with the ATO regarding Dr Mangat’s affairs from November 2015. He said he had also had a conversation with Mr Powers at VH on 24 November 2015 requesting further information about Dr Mangat’s ESS interest.[31]
[31] Exhibit A4, paragraph 9.
On 27 January 2016, Mr Santoro received an email from Dr Mangat forwarding an email from Mr Powers stating that the ATO had requested VH issue Dr Mangat with a revised ESS interest statement for the 2013 year. The amended ESS interest statement from VH for Dr Mangat dated 25 January 2016 records a discount of $81,954 for the 2013 year. The earlier undated ‘IPO Summary’ for Dr Mangat stated that Dr Mangat had an ‘option offer’ for 150,000 options in the 2013 year at an exercise price of $4.71 and a net value of $494,195.10. The ‘IPO Summary’ also stated that Dr Mangat had a ‘cash entitlement on option settlement’ of $271,500 and 39,206 ‘shares issued from sale of options’.
Mr Santoro stated he was extremely surprised when he received the 2013 default assessment notice from the ATO for Dr Mangat in February 2016 because he says, “the ATO was aware we were having difficulty getting information from [VH] about the discount amount for the ESS [interest]”.[32] He says he immediately rang the ATO on 16 February 2016 and was advised the default assessment had been made in error and that he would need to lodge the 2013 return and then apply for remission of fines.[33] He again contacted the ATO on 29 February 2016 and was told by an ATO officer he needed to prepare and lodge an objection to the default assessment and arrange for Dr Mangat to enter into a tax payment plan which was then organised with Dr Mangat’s instructions. The objection was lodged on 12 April 2016 and the income tax return for the 2013 year was lodged on 21 June 2016. The net capital gain from the cancellation of the options was calculated by Mr Santoro, as follows:
Capital gain = $271,500 (capital proceeds) - $82,047 (cost base)
Capital gain = $189,453
Net capital gain (50% discount) = $94,726
[32] Exhibit A4, paragraph 13.
[33] Exhibit A4, paragraph 14.
Subsequently, the ATO contacted Mr Santoro to advise that Dr Mangat’s 2013 tax return was subject to audit. After some toing and froing in relation to various other deductions claimed in Dr Mangat’s tax return for the year ended 30 June 2013, the Commissioner issued the Notice of Objection Decision on 18 August 2016 with the only matter still in dispute with Dr Mangat being the tax treatment of her ESS interest and the imposition of penalties.
In his witness statement, Mr Santoro explained that when he prepared the income tax return for Dr Mangat for the 2013 year (see [48] above), he had not received any documentation or other information to indicate that Dr Mangat received any other consideration other than the cash payment of $271,500 on the cancellation of the options in June 2013.[34] That is, he says he was unaware that Dr Mangat had also received shares in VH as the public company, notwithstanding numerous discussions with Dr Mangat and separately with Mr Powers. He also stated it was his opinion that Dr Mangat is entitled to the 50% CGT discount because on all the material he had reviewed in Dr Mangat’s files, she acquired the ESS interest on 30 December 2011.[35]
[34] Exhibit A4, paragraph 23.
[35] Exhibit A4, paragraph 25.
PROCEDURAL HISTORY
It is necessary to record some of the other events which took place in relation to the dispute between Dr Mangat and the Commissioner.
On 12 June 2015, the Commissioner sent Dr Mangat a lodgment reminder letter in relation to her income tax return for the year ended 30 June 2013.
On 11 August 2015, the Commissioner sent a default assessment warning letter to Dr Mangat for the 2013 year. This letter advised Dr Mangat that if she failed to lodge her tax return, the Commissioner would issue a default assessment in respect of the 2013 year.
On 12 February 2016, the Commissioner issued to Dr Mangat for the 2013 year a notice of assessment of penalty in the amount of $163,133.25 for failure to lodge an income tax return on time, assessed at 75% of the tax-related liability.
On 15 February 2016, the Commissioner issued to Dr Mangat for the 2013 year a notice of assessment pursuant to s 167 of the ITAA 1936 assessing Dr Mangat to tax of $217,511.60. This was based on information that the Commissioner had received including from VH as Dr Mangat had not lodged her tax return for the year ended 30 June 2013.
On 12 April 2016, Dr Mangat objected against the abovementioned assessments issued to her and also attached a document titled ‘IPO Summary’ issued to her by VH to support her grounds. However, that IPO Summary included information that Dr Mangat was issued 150,000 options in the 2013 financial year and not in the 2012 year as contended by Dr Mangat. Amongst other things, Dr Mangat claimed in her objection that she received the right to acquire options in VH upon signing the Engagement Letter and that since this occurred more than 12 months before the cancellation of the options, she was entitled to a 50% discount when accounting for the capital gain. She further stated in her objection she only received a cash payment of $271,500 for the cancellation of the options and that she did not receive 39,206 shares in VH. She said the latter was a mistake in VH’s IPO Summary. As noted at [50] above, Mr Santoro now accepts (as does Dr Mangat) that this ground in Dr Mangat’s objection was in error. Dr Mangat claimed that both the IPO Summary and the revised ESS interest statement given to her by the Company incorrectly reported the ESS discount in the financial year ended 30 June 2013. Mr Santoro’s evidence was that the Company’s error in relation to the calculation of the discount had been corrected but that the year in which the ESS interest had been acquired by Dr Mangat had been overlooked. That is, no-one had focused on the fact the Company documents stated the ESS interests were issued to Dr Mangat in the 2013 financial year when they should have referenced the 2012 financial year.
On 18 August 2016, the Commissioner allowed, in part, Dr Mangat’s objection. Relevantly, the Commissioner allowed the ESS discount for the purposes of the cost base. The Commissioner also exercised his discretion to remit part of the administrative penalty, such that the penalty is 50% of the tax shortfall rather than 75%. However, the Commissioner disallowed Dr Mangat’s objection insofar as she sought to apply the 50% discount method in Div 115 of the ITAA 1997 in calculating her capital gains tax (CGT) liability in respect of the gain realised on the cancellation of the options. Additionally, the Commissioner determined that Dr Mangat had received 39,206 shares in VH as a result of the IPO, the market value of them being $222,690. Therefore, the Commissioner determined that the proceeds from the cancellation of the options at or about the time of the listing of VH was equal to $494,190 being the sum of the cash payment ($271,500) and the market value of the shares received ($222,690).
On 25 August 2016, the Commissioner issued to Dr Mangat for the 2013 year a notice of amended assessment, assessing her to an additional $75,193.75 in income tax and $12,146.59 in shortfall interest charge.
On 19 October 2016, Dr Mangat lodged an application with the Tribunal seeking review of the Commissioner’s objection decision.
EVALUATION OF THE EVIDENCE AND THE TRIBUNAL’S FINDINGS
The evidence of the witnesses fell well short of establishing that Dr Mangat had been made a specific offer of 150,000 shares (later converted to options) in VH at the price of $4.71 in or about November 2011, or at the time of the execution of the Engagement Letter on 30 December 2011. Specifically, I was not persuaded by Dr Mangat’s evidence that she acquired an enforceable right to receive the 150,000 shares when she says she did and, although some of the evidence of Dr Illingworth and Ms Channon supported Dr Mangat’s claims, their evidence, viewed in its entirety, was at odds with the contemporaneous documents before the Tribunal. Accordingly, because of several discrepancies, I found the most reliable and cogent evidence to be the contemporaneous documents, namely, the Engagement Letter, Schedule A, the correspondence passing between various persons throughout 2012 and the IPO Summary and the amended ESS interest statement issued by VH. I discuss these documents further below.
First, the Engagement Letter which was executed by Dr Mangat, Ms Channon and Mr Moller on 30 December 2011 did not reference the terms of any equity incentive arrangement. It relevantly stated at clause 10.11 that the parties agree that during the 5-year term of the deed, “[Dr Mangat] may be offered the opportunity to acquire shares in [VH]”. I find that the use of the word ‘may’ suggests the possibility of Dr Mangat being offered shares in the Company in the future, during the term of the deed, and not that she was offered shares or a right to receive shares at that time.
Secondly, contrary to Dr Mangat’s claims, I find that Schedule A was not executed on the same day as the Engagement Letter on 30 December 2011 and it did not form part of the Engagement Letter at that time. As noted at [13] - [14] above, Schedule A was plainly not identified as an attachment to the Engagement Letter. Further, I find that Schedule A was executed in or about August 2012. In this regard, Ms Channon confirmed under cross examination that Schedule A was prepared after Dr Mangat’s increased stipend of $250,000 per annum was agreed which took place in or about August or September 2012. Ms Channon specifically recalled that she personally renegotiated the increased stipend after Dr Mangat passed her exams in or about August or September 2012.
In the circumstances, I find that VH did not make an offer of 150,000 shares at the price of $4.71 per share when the Engagement Letter was executed on 30 December 2011 and, therefore, Dr Mangat did not acquire her ESS interest until later.
This finding is reinforced by Mr Moller’s emails in early 2012. For example, in his email to Dr Mangat dated 27 January 2012, Mr Moller states “[o]ne of the other things I’d like to talk to you about is the Virtus Health equity incentive scheme. I’ve attached a summary document….”. These statements do not cohere with Dr Mangat’s version of events that she had already been offered 150,000 shares in VH at a price of $4.71. Subsequently, Mr Moller stated in an email to Dr Mangat dated 30 March 2012 that VH was looking at a new alternative for non-sophisticated investors that would put Dr Mangat in an identical position and that PWC was working on this. I find that this latter correspondence is consistent with Dr Mangat having been interested in taking up equity and having generally discussed participation in VH’s equity incentive arrangement with Mr Moller, but the correspondence does not confirm that Dr Mangat had been made any offer.
In placing some emphasis on the emails sent by Mr Moller, I have specifically taken into account the fact that Mr Moller was negotiating the remuneration arrangements with Dr Mangat (see [11], [13], [20] – [24] above) and, accordingly, he would likely have been very knowledgeable as regards her remuneration package. Mr Moller was not called to give evidence. In this regard, the Tribunal was informed by counsel for Dr Mangat that Mr Moller no longer works at VH and was unable to be located.
I have not placed much weight on the correspondence that ensued in May 2012 including from Dr Quinn on 1 and 8 May 2012 or from Ms Channon to Dr Mangat dated 17 May 2012 (see [25] - [27] above). Dr Mangat argued that she would not have received this correspondence had she not already held options or entitlements to options, that is, she must have been a member of what she termed “the doctor shareholder group”. However, I was not satisfied that any of this correspondence confirmed she had already been made any offer of shares or options in VH or had any ESS interest. In any event, it was clear from the evidence of both Ms Channon and Dr Illingworth that VH entered into equity incentive arrangements with the fertility specialists from time to time and that it was the standard approach such that Dr Mangat may have had expectations of being made an offer but I was not persuaded there was anything definitive about Dr Mangat’s equity incentive arrangements at that time. For example, there was no evidence to support Dr Mangat’s proposition that Dr Quinn was only emailing doctors who held shares or options. There was also no evidence that Dr Quinn was privy to Dr Mangat’s confidential remuneration package.
With respect to Ms Channon’s letter dated 17 May 2012, it specifically invited shareholders and option holders to “tick one of the election boxes … to indicate (on a binding basis) your preferred choice of cash/new purchaser shares arising out of the sale … by 26th May 2012”. The fact that this letter was addressed to Dr Mangat suggests Dr Mangat was a shareholder or option holder, however, relevantly, no election was notified by Dr Mangat in response, as was required. That is, Dr Mangat did not act on the basis that she was a shareholder or option holder.
I also find that Dr Mangat was one of the “new doctors” that PWC broadly described in its letter dated 17 May 2012 as doctors who had joined VH subsequent to the last issue of options or shares to current contractors and employees, and who did not hold any options, shares or rights in or over VH (see [28] above). This finding is supported by the correspondence of the Chief Financial Officer of VH (Mr Glenn Powers), including his letter to Dr Mangat dated 8 August 2012 attaching the documentation for the offer of options for New Doctors, which Dr Mangat then completed. As discussed above at [33], Dr Mangat did not include in her evidence the Offer Information Statement to which the August 2012 Share Purchase Application Form was attached, which was the critical document, and instead only produced the earlier Share Offer dated 16 December 2011. However, it is incontrovertible that the Share Application Form that Dr Mangat ultimately completed for 150,000 options was part of the Share Offer Information Statement circulated to her in August 2012.
Finally, I find the IPO Summary as well as the revised ESS statement prepared by VH which refer to 150,000 options having been issued to Dr Mangat in the 2013 financial year were correct. These are independent records of VH which corroborate the equity incentive arrangement with Dr Mangat.
THE LEGISLATIVE PROVISIONS AND PRINCIPLES
The statutory provisions with respect to ESS interests and capital gains in relation to options are set out below (without the notes to the sections). All section references are to the ITAA 1997.
83A-10 Meaning of ESS interest and employee share scheme
(1) An ESS interest, in a company, is a beneficial interest in:
(a) a *share in the company; or
(b) a right to acquire a beneficial interest in a share in the company.
(2) An employee share scheme is a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of:
(a) the company; or
(b) *subsidiaries of the company;
in relation to the employees’ employment.
83A-15 What this Subdivision is about
Generally, a discount you receive on shares, rights or stapled securities you acquire under an employee share scheme is included in your assessable income when you acquire the beneficial interest in those shares, rights or securities.
You may be entitled to reduce the amount included in your assessable income if you meet certain conditions which seek to limit the concession to genuine schemes broadly available to all permanent employees who do not already have anything other than a minor interest in their employer.
The income year in which you are taxed may be deferred if there is a real risk of forfeiture, or you acquired the shares or securities under particular salary sacrifice arrangements (see Subdivision 83A-C).
If you are a foreign resident, only the part of the discount that relates to your employment in Australia is included in your assessable income.
Table of sections
Operative provisions
83A-20 Application of Subdivision
83A-25 Discount to be included in assessable income
83A-30 Amount for which discounted ESS interest acquired
83A-35 Reduction of amounts included in assessable income
83A-20 Application of Subdivision
(1) This Subdivision applies to an *ESS interest if you acquire the interest under an *employee share scheme at a discount.
(2) However, this Subdivision does not apply if the *ESS interest is a beneficial interest in a *share that you acquire as a result of exercising a right, if you acquired a beneficial interest in the right under an *employee share scheme.
83A-25 Discount to be included in assessable income
(1) Your assessable income for the income year in which you acquire the *ESS interest includes the discount given in relation to the interest.
(2) Treat an amount included in your assessable income under subsection (1) as being from a source other than an *Australian source to the extent that it relates to your employment outside Australia.
83A-30 Amount for which discounted ESS interest acquired
For the purposes of this Act (other than this Division), the *ESS interest (and the *share or right of which it forms part) is taken to have been acquired for its *market value (rather than for its discounted value).
130-75 Objects of Subdivision
The objects of this Subdivision are:
(a) to recognise that:
(i) Division 83A contains the primary rules for taxing gains on *ESS interests acquired under *employee share schemes; and
(ii) *capital gains and *capital losses on such interests should usually be disregarded during the period in which Division 83A applies to them; and
(b) to align the treatment of ESS interests under Division 83A and the CGT provisions by, for example:
(i) turning off certain special CGT rules; and
(ii) extending some of the deeming provisions of that Division into the CGT provisions; and
(c) to disregard *employee share trusts for most CGT purposes, by treating ESS interests owned by such trusts as being directly owned by the beneficiaries of the trusts.
130-80 ESS interests acquired under employee share schemes
Capital gains and losses
(1) Disregard any *capital gain or *capital loss to the extent that it results from a *CGT event if:
(a) the CGT event happens in relation to an *ESS interest you *acquire under an *employee share scheme; and
(b) the CGT event is not CGT event E4, G1 or K8; and
(c) if Subdivision 83A-B applies to the interest—the time of the acquisition is the time when the CGT event happens; and
(d) if Subdivision 83A-C applies to the interest:
(i) the time of the acquisition is the time when the CGT event happens; or
(ii) the CGT event happens on or before the *ESS deferred taxing point for the ESS interest.
(2) Subsection (1) does not apply if:
(a) Subdivision 83A-C applies to the *ESS interest; and
(b) the *CGT event happens because you forfeit or lose the ESS interest (other than by disposing of it) on or before the *ESS deferred taxing point for the interest.
General acquisition rule
(3) Subsection 109-5(2) (about when you acquire a CGT asset) does not apply to a *CGT asset and a *CGT event if:
(a) the CGT asset is:
(i) a *share; or
(ii) a right to acquire a beneficial interest in a share; and
(b) the CGT event is CGT event A1; and
(c) you acquire an *ESS interest; and
(d) the ESS interest is a beneficial interest in the share or right; and
(e) Subdivision 83A-B or 83A-C (about employee share schemes) applies to the ESS interest.
Market value substitution rule
(4) Sections 112-20 and 116-30 (about the market value substitution rule) do not apply to the extent that they relate to:
(a) you acquiring an *ESS interest to which Subdivision 83A-C (about employee share schemes) applies; or
(b) you:
(i) forfeiting an ESS interest; or
(ii) forfeiting or losing an ESS interest that is a beneficial interest in a right (without you having disposed of the interest or exercised the right);
if Subdivision 83A-B or 83A-C applies to the ESS interest (ignoring section 83A-310).
130-95 Shares and rights in relation to ESS interests
For the purposes of Part 3-1 (Capital gains and losses: general topics) and this Part, treat a *CGT event that happens in relation to a *share or right in the same way as a CGT event that happens in relation to an *ESS interest, if:
(a) Subdivision 83A-B or 83A-C (about employee share schemes) applies to the ESS interest; and
(b) the ESS interest forms part of the share or right.
Broadly, Div 83A of ITAA 1997 deals with employee share schemes. Essentially, that Division provides the rules by which the discount on an ESS interest is brought to tax in an income tax year.
Where a taxpayer acquires an ESS interest under an employee share scheme at a discount to market value, that discount is either brought to tax under Sub-div 83A-B in the year of acquisition of the ESS interest or, in certain circumstances, at a deferred time under Sub-div 83A-C. It is common ground that Sub-div 83A-C is not relevant in the present case.
Under Sub-div 83A-B, the discount is included in the taxpayer’s assessable income in the year in which the ESS interest is acquired and, for the purposes of the taxing Acts (other than Div 83A), the ESS interest (and the share or right of which it forms part) is taken to have been acquired for its market value rather than for its discounted value: ss 83A-35 and 83A-30. As noted above, s 83A-25 of the ITAA 1997 required Dr Mangat to include in her assessable income the discount she received on the ESS interest, in the income year in which she had acquired that interest, namely, according to her contentions, in the income tax year ended 30 June 2012.
While the word “acquire” is defined in s 995-1 of the ITAA 1997 for other purposes, when appearing in Div 83A the word is not referable to the defined term. Accordingly, the word “acquire” within Div 83A must be taken to have its ordinary meaning and interpreted according to general principles of statutory interpretation.
Where a taxpayer acquires a beneficial interest in a right (an indeterminate right), and that right later becomes a right to acquire a beneficial interest in a share, Div 83A applies as if the right had always been a right to acquire the beneficial interest in the share: s 83A-340.
Turning to the CGT provisions in the ITAA 1997, CGT event C2 happens where a taxpayer’s ownership of an intangible CGT asset ends by the asset being cancelled: s 104-25(1)(a). An option is a CGT asset: s 108-5.
To be a discount capital gain, a capital gain must, inter alia, result from a CGT event happening to a CGT asset that was acquired by the taxpayer at least 12 months before the CGT event: s 115-25(1). ‘Acquired’ for the purposes of s 115-25(1) of the ITAA 1997 is a defined term. Relevantly, a taxpayer ‘acquires’ a CGT asset in the circumstances and at the time worked out under Division 109. In general, a taxpayer ‘acquires’ a CGT asset when they become its owner: s 109-5(1). Under s 109-10, where a company issues or allots ‘equity interests’ in the company to a taxpayer, the taxpayer acquires the asset at the time when the contract is entered into or, if none, when the equity interest is issued or allotted. ‘Equity interests’ include interests issued by a company that give the holder a right to be issued with an equity interest in the company: s 974-75(1), item 4(a).
As to the interaction between Div 83A and the CGT provisions, Sub-div 130-D modifies the application of the CGT provisions to ESS interests. For the purposes of Part 3-1 of the ITAA 1997 (which includes s 115-25(1)), one is to treat a CGT event that happens in relation to a share or right in the same way as a CGT event that happens in relation to an ESS interest, if, relevantly, Sub-div 83A-B applies to the ESS interest and the ESS interest forms part of the share or right: s 130-95. This obscure provision is “explained” in the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009, in the following terms:
1.213 The employee share scheme rules and the CGT regime are based around different concepts. The employee share scheme rules tax ESS interests (beneficial interests in shares or rights), whilst the CGT regime refers to CGT assets and CGT events that are primarily based on ownership of the share or right itself.
1.214 The new law includes a specific provision [s 130-95] to ensure that an appropriate link is established between the concepts used in each of the regimes.
WHEN DID DR MANGAT ACQUIRE HER EMPLOYEE SHARE SCHEME INTEREST?
Dr Mangat submitted that she acquired her ESS interest on 30 December 2011 when she executed as a deed the Engagement Letter with the Company. Specifically, Dr Mangat maintained that Schedule A was also dated 30 December 2011 and formed part of that deed. Further, she submitted that once she commenced work with the Company on 23 January 2012, she not only had a contractual right to acquire the ESS interest offered as a component of her remuneration, she also had a right to specific performance in respect of her ESS interest.
Counsel for Dr Mangat argued that it was evident from Dr Mangat’s subsequent conduct and actions that she had acquired her ESS interest at the time of executing the Engagement Letter and that her actions should be considered for the purpose of determining what terms were included in her agreement with the Company. She relied on Re Taxpayer and Federal Commissioner of Taxation [2012] AATA 142, where it was relevantly stated at [19] that “subsequent conduct and actions can be taken into account [for] purposes other than the interpretation of the terms of the agreement. For example, in order to ascertain what is included in the terms of the agreement …”. In this regard, Dr Mangat’s counsel emphasised that shortly after commencing work with VH in January 2012, Dr Mangat sought alternative equity arrangements immediately after ascertaining she would not qualify as a sophisticated investor. Counsel for Dr Mangat also submitted that the objective facts are consistent with a conclusion that Dr Mangat and the Company intended in December 2011 to enter into binding relations premised on Dr Mangat’s remuneration including a right to 150,000 shares, which subsequently changed to options because Dr Mangat did not qualify as a sophisticated investor.
Counsel further submitted that it is immaterial that the ESS interest offered to Dr Mangat altered from a beneficial interest in a share in the Company to a beneficial interest in “a right to acquire a beneficial interest in a share in the company” because both are ESS interests, as defined in s 83A-10(1)(b).
Furthermore, it was submitted on behalf of Dr Mangat that the offer of the ESS interest was not discretionary and did not depend on her making an application or election to receive the ESS interest or meeting certain performance hurdles. That is, Dr Mangat argued she had acquired a beneficial interest in 150,000 shares in the Company upon signing the Engagement Letter. It was submitted that Dr Mangat’s subsequent completion of the Share Purchase Application Form in August 2012 and the Company’s subsequent issuing of certificates merely formalised the right Dr Mangat had acquired on executing the Engagement Letter on 30 December 2011. In other words, it was argued that the ESS interest that formed a component of Dr Mangat’s remuneration was also not conditional on future events.
Counsel for Dr Mangat also argued that the Commissioner’s approach incorrectly conflated the date of acquiring an ESS interest, namely, a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company with the date of acquiring the legal title.
The problem with Dr Mangat’s contentions is that she did not persuade me she acquired a beneficial right in a right which later became a right to acquire a beneficial interest in shares in the Company when she says she did. Specifically, Dr Mangat did not acquire an ESS interest, as defined in s 83A-10(1), or a beneficial interest in a right covered by ss 83A-340(1) and (2) when she executed her Engagement Letter or started employment with VH. Nor did she persuade me that she acquired any such right at any other time that was more than 12 months before the options were cancelled in June 2013. The evidence strongly points to Dr Mangat only acquiring an ESS interest in or about August 2012, that is, when she applied for the issue of options in the Company. This is because she did not acquire a legally enforceable right to require the Company to issue her with shares or options when she executed the Engagement Letter or started employment. It follows that where the options in VH were granted to Dr Mangat and cancelled within the same year, namely, the year ended 30 June 2013, Dr Mangat is not eligible to utilise the discount method to calculate her net capital gain: s 115-25(1). Nor did Dr Mangat persuade me that s 130-95 gives rise to an earlier acquisition time.
Counsel for both parties canvassed numerous cases which address the circumstances where a taxpayer has acquired a beneficial interest in a right to acquire a beneficial interest in a share in the company. Although the cases mostly discuss different legislative provisions, it is helpful to refer to them briefly, as well as to the arguments that were raised regarding the legal nature of an option. This is in a context where, as previously noted, there is no definition of ‘acquire’ for the purposes of Div 83A. Additionally, the Explanatory Memorandum to the Bill which inserted Div 83A into the ITAA 1997 does not explain the meaning of ‘acquire’ within Div 83A.
In Fraunschiel v Federal Commissioner of Taxation (1989) 20 ATR 955, a case dealing with whether the rights in question were a ‘right to acquire a share in a company’ in the context of the interpretation of former s 26AAC of the ITAA 1936, Lee J held at 975 that a right to accept an offer of an option must be distinguished from a right to acquire the shares. His Honour stated that a right to acquire shares would be a right such as that contained in an option to purchase shares while a right to accept an offer has no enforceable quality as it may be withdrawn or revoked.
In Federal Commissioner of Taxation v McWilliam (2012) 204 FCR 478 the Full Federal Court held at [84]-[85] that an employee under an employee share scheme acquires a “right” within the meaning of former Div 13A of the ITAA 1936 upon acquiring a right to require the employer to issue options to purchase shares, and does not acquire that right only upon the issue of the options themselves. The Commissioner had argued that the relevant right was a right to acquire shares and not just any right, legal or equitable, that might arise prior at the grant of a right to acquire shares. The Commissioner accepted that an acquisition of options to acquire shares was an acquisition of rights for the purposes of former Div 13A but had argued that Mr McWilliam’s right to acquire shares only arose on the grant of the options as opposed to any anterior right requiring the company to issue the options to Mr McWillliam. As the Tribunal had earlier found that Mr McWilliam had acquired the options (rather than the right to acquire options) and that finding was not challenged, there was no competent appeal on a question of law. The Full Court considered at [84] that there was “no distinction between an interest in the relevant right (the right to acquire the shares) and an interest in an anterior right (the right to require the employer to provide the shares).”
In Fowler v Federal Commissioner of Taxation (2013) 212 FCR 149 the Full Federal Court again addressed the former Div 13A of the ITAA 1936 and decided that the right acquired by Mr Fowler was not an unconditional right to acquire options. Mr Fowler had acquired a conditional right to insist that the company put the issue of options to him to the shareholders for approval. The Full Federal Court held that a conditional right to acquire options is not properly characterised as a right to acquires shares in the company for the purposes of former Div 13A, although it is a right that may lead to the acquisition of a right to acquires shares (see [92]-[94] per Besanko J; [154], [156], [160] per Gordon J; [163] per Dodds-Streeton J). Unlike the taxpayer in Fowler’s case, Dr Mangat did not acquire any enforceable right in her Engagement Letter to acquire options.
In Davies v Deputy Commissioner of Taxation (2015) 234 FCR 93, Perram J considered when certain shares and options were brought to tax in circumstances where the taxpayer acquired the right to have shares and options issued to him on a date under the terms of a deed entitled ‘Share Subscription and Offer Deed’, but that right was contingent on shareholder approval being obtained in respect of the shares and in the case of the options, their exercise. The Commissioner argued that the taxpayer’s rights were merely contingent and a new right would come into existence upon the happening of the contingency. His Honour held at [72], [84] and [90] that the obligation to issue shares and options, although contingent, came into existence on the execution of the deed, such that the taxpayer acquired on the date of execution a beneficial interest in a right with that right later becoming a right to acquire a beneficial interest in a share. Further, the satisfaction of a contingency does not create a new right but rather completes a right that already exists. Davies is distinguishable from the present case because VH did not grant any options to Dr Mangat in her Engagement Letter.
In Re Van and Federal Commissioner of Taxation [2002] 51 ATR 1153 the issue was whether certain employee shares acquired pursuant to the exercise of an option were acquired when the option agreement was entered into or when the option was exercised so as to determine whether the taxpayer was entitled to a 50% CGT discount under Div 115 of the ITAA 1997. In relation to the legal nature of an option, the Tribunal applied the “two contract” approach to options, that is, an option agreement is an offer together with a contract that the offer will not be revoked in the option period: Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57. The Tribunal decided that the taxpayer only acquired the shares at the time of exercise of the options with the result that the option period could not be included and the taxpayer was therefore not entitled to the 50% CGT discount as the shares were not held for more than 12 months prior to their sale. The Commissioner submitted that the two contract approach with respect to options is to be preferred in the context of the ITAA 1997. The Commissioner contended that when Re Van is applied along with other cases on the time of acquisition of ESS interests, it is clear that Dr Mangat could not have acquired her options any earlier than 17 August 2012.
I was not satisfied that any of the cases supported Dr Mangat in relation to her acquiring a beneficial interest in a right to acquire a beneficial interest in shares in the Company any earlier than when she executed the application form in relation to the options on or about 17 August 2012. The resolution in this case turns on the factual matrix and not on any of the cases which were raised because Dr Mangat did not provide evidence to support her claim that she had an enforceable right to acquire the options at any earlier stage.
IS DR MANGAT LIABLE TO AN ADMINISTRATIVE PENALTY? IF SO, SHOULD IT BE FURTHER REMITTED?
The Commissioner in his objection decision dated 18 August 2016 determined that Dr Mangat is liable for an administrative penalty of 75% on the tax shortfall based on
s 284-75(3) of Schedule 1 to the TAA. This is because Dr Mangat failed to lodge a required document, namely, her tax return and that document was necessary for the Commissioner to assess her tax liability accurately. As noted above, the Commissioner also determined to partially remit the penalty to the rate of 50% of the tax shortfall.Dr Mangat submitted that the statutory criteria for the 75% penalty were not satisfied and, further or in the alternative, the partially remitted penalty of 50% was excessive and should be further remitted to nil. Dr Mangat argued her 2013 income tax return was unnecessary for the Commissioner to determine “a tax-related liability accurately,” according to the terms of s 284-75(3)(b).
Dr Mangat argued that prior to the Commissioner issuing the default assessment to her on 15 February 2016, the Commissioner already had the relevant information, as evident from a printout of the “Tax Agent Portal” as at 10 November 2015 as this recorded as an entry under “2012-2013 Employee Share Schemes” an amount of $494,195.00 as a “Discount from deferral schemes”. Dr Mangat submitted that the Commissioner was clearly already in possession of “a document necessary to determine a tax-related liability”. Dr Mangat also argued any tax return which she could have lodged by the due date (31 October 2013) for her 2013 tax return would have been inaccurate.
As also noted above at [48], Dr Mangat pointed out that her evidence and, in addition, the evidence of Mr Santoro, was that the latter was in discussions with the Commissioner in late 2015 about the preparation of Dr Mangat’s 2013 tax return and the Commissioner was aware that Dr Mangat was having difficulty obtaining the relevant information from VH about the calculation of the discount to be included in her return. Indeed, the evidence was that the Commissioner had requested VH to issue Dr Mangat with a revised ESS statement for the financial year ended 30 June 2013, which VH did on 25 January 2016 and forwarded by email to Dr Mangat on 27 January 2016. According to Dr Mangat, the Commissioner was also aware of the revised lower amount of discount to be included in her return before the default assessment for the year ended 30 June 2013 issued on 15 February 2016.
I agree with the Commissioner’s position that Dr Mangat’s income tax return was necessary for him to assess her tax-related liability accurately. The arguments put on behalf of Dr Mangat on this issue are misplaced. The provision of information by an employer to the Commissioner as to a payment for an ESS interest is not sufficient information to permit the Commissioner to accurately determine a taxpayer’s income tax position as substantial other information about a taxpayer’s fiscal affairs in the year is required. Furthermore, the self-assessment regime for income tax is premised on taxpayers taking responsibility for completing their returns since they are most knowledgeable about their fiscal affairs. Similarly, the argument that any return lodged by Dr Mangat at that time would have been inaccurate is without foundation because, if adopted, taxpayers would be permitted to avoid administrative penalties on the basis that furnishing an inaccurate tax return would not have assisted the Commissioner and, consequently, excuse taxpayers from lodging tax returns. That cannot be correct. It is incumbent on taxpayers to obtain the relevant information to comply with their annual tax compliance obligations and/or make arrangements with the Commissioner, for example, by asking for an extension of time for lodgment. Dr Mangat did neither of these things. It follows that the administrative penalty of 75% on the tax shortfall was correctly imposed although, as noted above, the Commissioner determined to remit this penalty to the rate of 50% at the objection stage.
The Commissioner argued at the hearing that there are no circumstances that would warrant further remission of the administrative penalty below 50% of the tax shortfall. I disagree. Section 298-20 of Schedule 1 to the TAA provides the Commissioner (and the Tribunal standing in the shoes of the Commissioner) with a general and unconstrained discretionary power to remit all or part of the penalty. The question for the Tribunal is whether it is satisfied, having regard to Dr Mangat’s particular circumstances, it is appropriate to remit the penalty in whole or in part: Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 212 FCR 483 at [249] per Griffiths J.
The Commissioner pointed to Dr Mangat’s history of non-compliance with her taxation obligations over a period exceeding a decade as an important consideration as well as the fact that, with respect to the 2013 income year, Dr Mangat had been sent a lodgment reminder letter and a default assessment warning letter by the Commissioner in mid-2015. The Commissioner also relevantly stated in his Notice of Objection Decision “if your circumstances prevented you from lodging on time contact should have been made with the Tax Office before the due date for lodgement to explain your situation at the time”.[36]
[36] T2-16.
On the other hand, Dr Mangat submitted that there was no loss to the revenue due to her failure to lodge her earlier income tax returns as her employer had remitted tax for her over the years and she received a tax refund overall after she lodged several years of tax returns at once,[37] even though certain individual years required minor tax payments. In relation to the 2013 income year, being the relevant year, Dr Mangat’s evidence was that it was in late September 2014 she began discussing “the need to bring [her] tax affairs up to date”.[38] She then instructed accountants to attend to the lodgement of her outstanding tax returns and, by late 2015, her new accountants had lodged virtually all outstanding tax returns and were in discussions with tax officers regarding certain information required from the Company about the calculation of the discount amount. This information was made available to the Commissioner by VH in late January 2016 shortly before the Commissioner proceeded to issue the default assessment to Dr Mangat in mid-February 2016 which, as noted above at [48], took Mr Santoro by surprise. Undoubtedly, this was because at the time of issue of the default assessment Dr Mangat was co-operating with the Commissioner and attempting to finalise her tax return for the 2013 year. Moreover, Dr Mangat’s accountant, Mr Santoro, advised her that she was entitled to the CGT discount in relation to the disposal of her ESS interest which was the only outstanding issue in relation to the tax audit that ensued. Dr Mangat also promptly entered into a tax payment arrangement after the default assessment was issued to her in early 2016.
[37] Exhibit A1, paragraph 46.
[38] Exhibit A1, paragraph.
Having regard to all the circumstances set out above, especially the fact that by late 2014, Dr Mangat had embarked on a course of attempting to comply with her taxation obligations which included bringing her tax returns up to date and seeking tax advice, I consider it is appropriate to further remit the penalty below 50% of the tax shortfall. This is because Dr Mangat was not completely indifferent to her taxation obligations as she was engaging, through her tax agent, with the Commissioner in relation to the lodgment of her return for the year ended 30 June 2013. Remission decisions need to consider the fact that a major objective of the penalty regime is to promote consistent treatment of taxpayers by reference to specified rates of penalty and, furthermore, the power to remit penalties must be exercised for a proper purpose in accordance with the objects of the TAA. Relevantly, the base penalty rate of 50% administrative penalty generally applies to taxpayers who act recklessly regarding the operation of the taxation laws while the base rate of 25% generally applies to taxpayers who fail to take reasonable care: see the table at s 284-90(1) of Schedule 1 to the TAA. Dr Mangat’s position with respect to her tax return for the year ended 30 June 2013 fell in between the range of 25% to 50% penalty, towards the higher end. Her situation was not one of a mere failure to take reasonable care. There was an inordinate delay by Dr Mangat in the lodgment of her tax returns which ultimately impacted the relevant year and this was inexcusable, even taking into account Dr Mangat’s periods of intensive study, work commitments, and travel due to relocations between different teaching hospitals. Dr Mangat impressed me as a highly intelligent and resourceful professional who should have known about her annual taxation compliance obligations and sought advice well before the due dates. It is appropriate, in all the circumstances, that the penalty for the tax shortfall in respect of the 2013 year should be further remitted from 50% to 40% of the tax shortfall.
CONCLUSION
For the reasons set out above, I have decided that the Commissioner’s objection decision in relation to the amended assessment for the year ended 30 June 2013 is affirmed. The objection decision regarding the administrative penalty is set aside and remitted to the Commissioner with a direction to issue an assessment of administrative penalty at the rate of 40% of the tax shortfall in respect of the year ended 30 June 2013.
I certify that the preceding 101 (one hundred and one) paragraphs are a true copy of the reasons for the decision herein of Ms G Lazanas, Senior Member
........................[sgd]............................................
Associate
Dated: 21 August 2018
Date(s) of hearing: 25 August 2017 Date final submissions received: 11 September 2017 Counsel for the Applicant: Ms L McBride Solicitors for the Applicant: Delta Law Counsel for the Respondent: Ms C Ensor Solicitors for the Respondent: ATO Review & Dispute Resolution
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