Richard Watsford and Commissioner of Taxation
[2012] AATA 815
•20 November 2012
[2012] AATA 815
Division TAXATION APPEALS DIVISION File Number
2011/2394
Re
Richard Watsford
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Egon Fice, Senior Member
Date 20 November 2012 Place
Melbourne
The Tribunal affirms the
objection decision of the Commissioner of Taxation dated
14 April 2011, in respect of the increased assessable income and the shortfall penalty.
......[sgd Egon Fice]..................................................................
Egon Fice, Senior Member
TAXATION - Assessable Income – Employee Share Scheme – fully paid ordinary shares – termination of employment – exercise of options – deed of release – audit in relation to discounts on shares or rights provided under an Employee Share Scheme – discount on a share or right – discount to be included in a taxpayers assessable income – qualifying share or right – onus of proof – shortfall penalty – remission of penalty
Corporations Act 2001 (Cth) ss 168, 170, 176
Income Tax Assessment Act 1936 (Cth) ss 139B, 139C, 139CB, 139CD, 139DD, 139E
Taxation Administration Act 1953 (Cth) ss 14ZZK, 284-75, 284-90
Aurora Developments v Federal Commissioner of Taxation (No 2) (2011) 196 FCR 457
Dixon v Federal Commissioner of Taxation (2008) 167 FCR 287
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
McCormack v The Commissioner of Taxation of The Commonwealth of Australia (1979) 143 CLR 284
Re Hobart Central Child Care Pty Ltd and Commissioner of Taxation (2005) 60 ATR 1314
The Commissioner of Taxation of The Commonwealth of Australia v Australia and New Zealand Savings Bank Ltd (1994) 181 CLR 466
REASONS FOR DECISION
Egon Fice, Senior Member
20 November 2012
On 1 May 2006 Mr Richard Watsford commenced employment with CBH Resources Ltd (CBH). CBH was a listed public company which was formerly known as Consolidated Broken Hill Ltd. It was a term of his employment contract that he be issued 3,000,000 five-year CBH options under the CBH Employee Option Plan (EOP), the exercise rights vesting in three tranches; 6 months, 12 months and 18 months following his commencement date. The exercise of the options entitled Mr Watsford to be issued fully paid ordinary shares in the capital of CBH at a discount. The EOP was an Employee Share Scheme (ESS) for the purposes of Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936).
Mr Watsford's employment with CBH was terminated on 27 April 2007. At the date of termination of his employment, the first tranche of options had vested but Mr Watsford had not exercised the rights granted by the options, and the options comprising the second and third tranches had not vested. In or about May 2007 Mr Watsford purported to exercise his rights under 1,000,000 of the options. His application was accompanied by a cheque for $330,000, being the $.33 per option exercise price.
Mr Watsford entered into a dispute with CBH regarding the termination of his employment. The dispute was eventually settled and the parties executed a Deed of Release on about 12 October 2007. It was a term of the Deed of Release that Mr Watsford's application for the exercise of 1,000,000 options would be granted upon payment being made for those options; and that a further 1,000,000 options could be exercised by Mr Watsford before 30 November 2007 on receipt of cleared funds.
Mr Watsford did not disclose the exercise of the 2,000,000 CBH options in his income tax return for the 2007 income year.
By letter dated 20 May 2008, the Commissioner of Taxation (the Commissioner) notified Mr Watsford that he was checking the accuracy of information given in his tax return prior to issuing a notice of assessment. The questions raised by that letter went to some deductions claimed by Mr Watsford. It appears Mr Watsford did not respond to the Commissioner's letter and on 11 July 2008 he was issued with a Notice of Assessment for the 2007 income year.
In a letter dated 17 September 2009 the Commissioner told Mr Watsford that his income tax return for the 2007 income year had been selected for audit in relation to discounts on shares or rights provided under an employee share scheme. After receiving submissions from Wong & Mayes, Chartered Accountants, acting on behalf of Mr Watsford, the Commissioner wrote to Mr Watsford enclosing a Position Paper which set out the findings from the audit.
In the Position Paper, the Commissioner stated that Mr Watsford was required to include in his assessable income for the 2007 income year the discount from market value he received in relation to the exercise of the 2,000,000 options in CBH. The Commissioner also stated that Mr Watsford was liable to an administrative penalty of 25% in relation to the shortfall amount resulting from a failure to take reasonable care to comply with a taxation law; that being a failure to disclose the discount he received on exercising CBH options.
Mr Watsford's accountants responded on 24 March 2010 stating that Mr Watsford had not exercised any options in the 2007 income year. Under the cover of a letter dated
27 April 2010, Mr Watsford's accountants provided a further detailed response to the Commissioner's claim.
In a letter dated 19 May 2010 the Commissioner notified Mr Watsford that he had completed his audit and that his position remained unchanged. The Commissioner issued a Notice of Amended Assessment on 27 May 2010 which increased Mr Watsford's taxable income by $525,600. The Commissioner also issued a Notice of Assessment of Shortfall Penalty on 28 May 2010, assessing Mr Watsford for a penalty of $61,101 on the basis that he or his agent had made a false or misleading statement and consequently he had a shortfall amount.
On 20 July 2010, Mr Watsford's solicitors lodged a Notice of Objection against the assessment and shortfall penalty with the Commissioner. In a letter dated 14 April 2011, the Commissioner notified Mr Watsford that his objection against the amended assessment for the 2007 income year had been disallowed. The Commissioner also concluded it was correct to impose a penalty of 25% of the tax shortfall and declined to exercise his discretion to remit all or part of the shortfall interest charge.
On 17 June 2011 Mr Watsford lodged with the Tribunal an application for review of the Commissioner's objection decision regarding the amended assessment for the 2007 income year and the administrative penalty decision.
The issues I am required to determine are whether:
(a)Mr Watsford has discharged his onus of proving that the $525,600 discount on the 2,000,000 CBH options which were exercised was incorrectly included in his assessable income for the 2007 income year;
(b)
all options granted to Mr Watsford on being employed by CBH lapsed on
27 April 2007 so that s 139DD of the ITAA 1936 applied to those options;
(c)the 2,000,000 options exercised by Mr Watsford were new options granted in the 2008 income year; and
(d)the administrative penalty was properly imposed or whether it should be remitted.
EVENTS LEADING TO SECTION 139B ASSESSMENT
On 24 March 2006 CBH wrote to Mr Watsford informing him that he was being offered a position with CBH as the Chief Operating Officer effective from 1 May 2006. That letter set out the terms on which Mr Watsford was to be engaged including:
3. Performance Incentive
As a member of the Company's management team you will be granted share options that provide an incentive for key professionals within the organisation to improve the performance of the Company and enhance shareholder value.
The following options will be issued as part of your package subject to your continued employment with respect to the vesting dates.
· 3 million 5 year CBH options; the option price to be the average price for CBH the three (3) months prior to your commencement date with the option vested as follows:
Ø 6 months from commencement – 1,000,000 CBH
Ø 12 months from commencement – 1,000,000 CBH
Ø 18 months from commencement – 1,000,000 CBH
In accordance with the letter of engagement, the first tranche of 1,000,000 CBH options vested on about 1 November 2006; the second tranche on or about 1 May 2007; and the third tranche on or about 1 November 2007.
Mr Stephen Lonergan, a company secretary, provided to the Tribunal a witness statement made on 23 May 2012 which was admitted into evidence. Mr Lonergan testified that in about February 2002 he began working at CBH, a public company listed on the Australian Stock Exchange (ASX). He became General Counsel of CBH at that time and between late 2004 and around late 2010 or early 2011, he assumed the role of Company Secretary in addition to his responsibilities as General Counsel.
Mr Lonergan testified that the options granted to Mr Watsford were granted under the CBH ESS which needed to be re-approved by shareholders every three years. This occurred in 2003 and the version of the ESS which was in existence at the time
Mr Watsford commenced employment with CBH was that version which Mr Lonergan was responsible for drafting updates. In fact the documents attached to Mr Lonergan's witness statement disclose that the document was referred to as the CBH EOP. An option under the plan is defined as an option issued to subscribe for ordinary shares in the capital of CBH. The rules set out in that document appear to be generic rules of the EOP. Mr Lonergan said in his witness statement that although Mr Watsford's letter of employment did not specifically refer to the 2003 ESS, CBH treated the options as having been issued to Mr Watsford under the 2003 ESS.
In fact, as Dr P Bender of counsel, who appeared on behalf of the Commissioner submitted, clause 5.1 of the EOP sets out the basis upon which an offer of options is made to employees of CBH. It provides:
5. OFFER OF OPTIONS
5.1 Subject to these Rules and the Listing Rules, the Company (acting through the Board) may offer Options to any Eligible Person at such times and on such terms as the Board considers appropriate. Each offer must state:
(a) that the Eligible Person to whom it is addressed may accept the whole or any lesser number of Options offered. The offer may stipulate a minimum number of Options and any multiple of such minimum or any other number which may be accepted;
(b) the period within which the offer may be accepted, and the period or periods during which the Options or any of them may be exercised and the Expiry Date;
(c) the method of calculation of the Exercise Price; and
(d) any other matters which the Board may determine.
Mr Watsford attached to his witness statement, which was made on 12 April 2012 and admitted into evidence, a document which sets out the Terms and Conditions on which his options were issued and which was entitled Terms and Conditions of Employee Options expiring 1 May 2011 (the Terms and Conditions). The significant Terms and Conditions were as follows:
A.The Options will expire on the earlier of the fifth anniversary of the option holder's date of commencement and the date the option holder ceases to be an employee of the Company ("Termination Date") or such date following the Termination Date as the Directors may determine ("Expiry Date").
B.Subject to conditions N, O and P below, each Option is a right in favour of the option holder to subscribe for, on payment of the Exercise Price, one fully paid, ordinary Share ranking equally in all respects with the then issued Shares in the Company.
C.The following numbers of Options shall become exercisable only after the following dates
(a) 1,000,000 Options after 1 November 2006
(b) 1,000,000 Options after 1 May 2007
(c) 1,000,000 options after 1 November 2007
Options not exercised before the Expiry Date will lapse on the Expiry Date.
D.Each Share allotted to an option holder on exercise of an Option shall be issued on payment of the Exercise Price.
E.The Exercise Price will be 33 cents.
F.The Exercise Price shall be payable in full on exercise of an Option.
…
J. Options shall not be listed for official quotation on ASX.
K. The Options shall not be transferable.…
M. The Company shall in accordance with the ASX Listing Rules make application to have Shares allotted pursuant to an exercise of Options listed for ASX Official Quotation.
Mr Watsford's employment with CBH was terminated on 27 April 2007. The letter notifying him of termination stated that his employment was at an end with effect on receipt of that letter. Mr Lonergan testified in his witness statement that he attended a meeting with Mr Watsford on 27 April 2007 when he was told that his employment with CBH was being terminated. Also present at that meeting was Mr Jim Wall, the Executive Chairman at that time. Mr Lonergan stated that he gave Mr Watsford the letter of termination on that date.
In his examination in chief, Mr Lonergan was asked whether he or Mr Wall considered that the options granted to Mr Watsford had not expired at the time of termination of his employment. Mr Lonergan responded that he and Mr Wall did not discount it as there was a high chance of litigation following the termination of Mr Watsford's employment. He said Mr Wall suggested extending the expiry on some of the options because it would be good for Mr Watsford and for the company in the course of negotiating a settlement.
There was no dispute between the parties that the right to exercise the first tranche of 1,000,000 options vested on 1 November 2006 at a time when Mr Watsford was employed by CBH. Nevertheless, in accordance with term A of the Terms and Conditions attached to the issue of those options, it is clear that the reference to the options expiring either on the date when the option holder ceases to be an employee of the Company or such a date following termination as the directors may determine, is intended to apply whether or not the right to exercise the options has vested. Although that is not expressly stated in the Terms and Conditions which refer to Mr Watsford's options expiring on 1 May 2011, use of the word expire strongly suggests that is the case and, in any event, rule 11.1 of the rules of the CBH EOP states:
Subject to these Rules and the terms of the Options, Options may be exercised at any time during the period commencing on the Issue Date and ending on the Expiry Date.
In his written statement Mr Lonergan testified that following Mr Watsford's termination of employment, he handled negotiations with Mr Watsford's legal representatives. He said that in about May 2007, he received an application from Mr Watsford in which he purported to exercise the rights attached to 1,000,000 of the options. The application was accompanied by cheque in the sum of $330,000 to pay for the exercise of those options. Mr Lonergan said that the company did not bank the cheque at that time, but retained it.
An exchange of e-mails between Mr Watsford and Mr Lonergan in late May and June 2007 discloses that Mr Watsford was of the view that he had exercised his rights under the share options in accordance with his employment contract. In an e-mail dated
31 May 2007 Mr Watsford referred to the exercising of my share options in accordance with my employment contract,…. Mr Lonergan made it clear that CBH wished to work towards settling the issues between the parties. He said in his written statement that he was aware that Mr Watsford was interested in exercising the options and he thought that CBH could use the options as a bargaining tool in resolution of the dispute. By allowing Mr Watsford to exercise his options, CBH would obtain additional cash without having to make a settlement payment to Mr Watsford. He said the power to resolve the dispute was delegated to him by the directors of CBH.
After protracted negotiations, on 12 October 2007 CBH entered into a Deed of Release with Mr Watsford to settle the dispute regarding the termination of his employment. As I have already stated above, in respect of the options, the Deed of Release provided that CBH would process Mr Watsford's application (which had been lodged by Mr Watsford with CBH on 14 May 2007) for the exercise of 1,000,000 options within five days of receiving a copy of the Deed executed by him for which a cheque had already been provided. CBH also agreed that a further 1,000,000 options could be exercised by Mr Watsford before 30 November 2007 and that any such application would be processed within five days of receiving an application.
In his written statement, Mr Watsford said that he transferred his right to the 1,000,000 options which were the subject of his 14 May 2007 application to an associated third party by way of a Standard Transfer Form completed by him on 12 October 2007. Also attached to Mr Watsford's written statement was a further Standard Transfer Form dated 14 November 2007 which also purported to transfer 1,000,000 options to a third party. Although Mr Watsford did not say that the second lot of 1,000,000 options were exercised by him, I understood that to be the case. However, in cross-examination when Mr Watsford was asked whether either or both of the Standard Transfer Forms were sent to CBH, he said they were not but that they were kept for his internal records.
LIABILITY TO TAXATION
Section 139B of ITAA 1936 provides:
(1)[Discount on share or right] If a taxpayer has acquired a share or right under an employee share scheme, the assessable income of the taxpayer includes the discount given in relation to the share or right.
…
(2)[When the discount is to be included] Unless subsection (2A) or (3) applies, the discount is included in the taxpayer's assessable income of the year of income in which the share or right is acquired.
As provided for in s 139C(1), a taxpayer acquires a share or right under an employee share scheme if the share or right is acquired by the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of the taxpayer or an associate of the taxpayer. There was no dispute between the parties that the rights acquired by Mr Watsford under the EOP were rights acquired directly in relation to his employment with CBH.
A taxpayer may make an election under s 139E(1) that subsection 139B(2) applies for a year of income. Mr Watsford had not made such an election. In that case, s 139B(3) may apply. It provides:
(3)[Qualifying share or right] If the share or right is a qualifying share or right and the taxpayer has not made an election under section 139E covering the share or right, the discount is included in the taxpayer's assessable income of the year of income in which the cessation time (see sections 139CA and 139CB) occurs.
The meaning of the expression qualifying right is set out in s 139CD of ITAA 1936. Section 139CD(1)(b) provides that the right to acquire a share in a company is a qualifying right if the first, second, third, fifth and sixth of the six conditions set out in that subsection are satisfied. Those conditions are:
(a)First Condition – the share or right is acquired by a taxpayer under an employee share scheme;
(b)Second Condition – the company is the employer of the taxpayer or a holding company of the employer of the taxpayer;
(c)Third Condition – all the shares available for acquisition under the scheme are ordinary shares and all the rights available for acquisition under the scheme are rights to acquire ordinary shares;
(d)Fifth Condition – immediately after the acquisition of the share or right, the taxpayer does not hold a legal or beneficial interest in more than 5% of the shares in the company; and
(e)Sixth Condition – immediately after the acquisition of the share or right, the taxpayer is not in a position to cast, or control the casting of, more than 5% of the maximum number of votes that might be cast at a general meeting of the company.
There appeared to be no dispute between the parties about the fact that the rights acquired by Mr Watsford satisfied all five of the conditions referred to in the preceding paragraph. Although Ms M Baker of counsel, who appeared on behalf of Mr Watsford, pointed out that Mr Lonergan said in his witness statement that Mr Watsford was granted the options pursuant to an ESS when in fact it was called an EOP, in my opinion, nothing turns on that. The CBH EOP is clearly an ESS for the purposes of Division 13A of ITAA 1936. There can be no doubt the grant of the options was for the purpose of enabling an employee to acquire ordinary shares in CBH. An option is defined in the CBH EOP as an option issued under the Plan to subscribe for a Share, a Share being defined as a fully paid ordinary share in the capital of CBH. Therefore, given that the options issued to Mr Watsford when he commenced employment with CBH in May 2006 are properly defined as qualifying rights pursuant to s 139CD(1), it follows that the discount from market value of the shares acquired by Mr Watsford on the exercise of those options must be included in his assessable income in the year of income in which the cessation time occurred.
The cessation time dealing with rights is found in s 139CB of ITAA 1936. It provides:
(1)[Cessation time for share rights] The cessation time for a right is the earliest of the following:
(a)the time when the taxpayer disposes of the right (other than by exercising it);
(b)the time when the employment in respect of which the right was acquired ceases;
(c)subject to subsection (3), if the right is exercised and there is a restriction preventing the taxpayer from disposing of the share acquired as a result of the exercise of the right or a condition that could result in the taxpayer forfeiting ownership of the share – the time when the last such restriction or condition ceases to have effect;
(d)subject to subsection (3), if the right is exercised and is no such restriction or condition – the time when the right is exercised;
(da) if subsection (3) applies – the time when the taxpayer disposes of the share referred to in paragraph (3)(b);
(e) the end of the 10 year period starting when the taxpayer acquired the right.
As Dr Bender submitted, the earliest of the events referred to above which apply to Mr Watsford is the time when his employment with CBH ceased, that being on 27 April 2007. Therefore, according to Dr Bender, Mr Watsford was required to include the discount amount on the exercise of his CBH options in his assessable income in the 2007 income year.
The essential issue in dispute between the parties in this matter is whether the options exercised by Mr Watsford on 12 October 2007 and 19 November 2007 were those options which he acquired while he was an employee of CBH or, as Mr Watsford claims, those options had lapsed due to the termination of his employment and the subsequent options which he acquired were new options issued by CBH in the course of settling his employment dispute.
Section 139DD of ITAA 1936 deals with the event where rights are lost. Insofar as it is relevant to Mr Watsford's case, it provides:
(1)[Requirements where rights never acquired] For the purposes of this Division, a right to acquire a share in a company is never acquired by a taxpayer if the following two requirements are satisfied.
(2)[Rights lost without exercised by taxpayer] The first requirement is that the taxpayer loses the right without having exercised it.
(2A)…
(3)[Company employer of taxpayer] The second requirement is that the company was, at the time the right was acquired, the employer of the taxpayer or a holding company of the employer of the taxpayer.
…
ONUS OF PROOF
As Dr Bender submitted, Mr Watsford bears the onus of proving that the assessment set out in the Amended Notice of Assessment is excessive. Section 14ZZK of the Taxation Administration Act 1953 (TAA) provides:
14ZZK On an application for review of reviewable objection decision:
(a)the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the objection decision to which the decision relates; and
(b)the applicant has the burden of proving that:
(i) if the taxation decision concerned is an assessment (other than a franking assessment) – the assessment is excessive; or
(ii) if the taxation decision concerned is a franking assessment – the assessment is incorrect; or
(iii) in any other case – the taxation decision concerned should not have been made or should have been made differently.
Furthermore, as Brennan J said in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 621, when dealing with s 190 of ITAA 1936 which was then in identical terms to s 14ZZK:
Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgement as to the amount of the assessment.
That statement was cited with the approval by the High Court of Australia (Brennan, Deane, Dawson and Toohey JJ) in The Commissioner of Taxation of The Commonwealth of Australia v Australia and New Zealand Savings Bank Ltd (1994) 181 CLR 466 at 479.
As Dr Bender submitted, evidence on behalf of an applicant is essential. In the absence of that evidence, a court (or the Tribunal in this case) is not able to infer facts in favour of taxpayers. As Gibbs J said in McCormack v The Commissioner of Taxation of The Commonwealth of Australia (1979) 143 CLR 284, at 303:
In some cases in which all the relevant facts are known, and there is no material upon which it might properly be concluded that the property was acquired for the relevant purpose, the inference may properly be drawn that the property was not acquired for the relevant purpose. But it is not enough, even when all the facts are known, that there is no material upon which it may be concluded that the property was acquired for the purpose mentioned in s. 26 (a).
Dr Bender submitted that the evidence set out in Mr Watsford's statement is inconsistent with the documentary evidence and the evidence of Mr Lonergan. In those circumstances, according to Dr Bender, Mr Watsford has not discharged his onus of proof.
Prior to dealing in detail with the submissions made by both parties regarding the nature of the options which Mr Watsford exercised in October and November 2007, I should say something about a company's legal requirement to maintain Registers and the fact that CBH shares are listed on the ASX.
COMPANY REGISTER AND ASX LISTING RULES
Section 168 of the Corporations Act 2001 (the Corporations Act) provides:
168 Registers to be maintained
A company or registered scheme must set up and maintain:
(a) a register of members (see section 169); and
(b) if the company or scheme grants options over unissued shares or interests – a register of option holders and copies of options documents (see section 170); and
(c) if the company issues debentures – a register of debenture holders (see section 171).
…
170 Register of option holders and copies of options documents
(1) The register of option holders must contain the following information about each holder of options over unissued shares in the company or unissued interests in the scheme:
(a) the option holder's name and address;
(b)the date on which the entry of the option holder's name in the register is made;
(c) the date of grant of the options;
(d) the number and description of the shares or interests over which the options were granted;
(e) either:
(i) the period during which the options may be exercised; or
(ii) the time at which the options may be exercised;
(f) any event that must happen before the options can be exercised;
(g) any consideration for the grant of the options;
(h) any consideration for the exercise of the options or the method by which that consideration is to be determined.
Because it is a register of the holders of options that are still exercisable, the register must be updated whenever options are exercised or expire.
(2) Information about the grant of an option must be entered in the register within 14 days after the grant of the option.
The evidentiary value of registers is dealt with in s 176 of the Corporations Act. It provides:
In the absence of evidence to the contrary, a register kept under this Chapter is proof of the matters shown in the register under this Chapter.
Mr Lonergan attached to his witness statement a document entitled Completed Transactions relating to Mr Watsford. According to Mr Lonergan, this is the only CBH record of options held by Mr Watsford in respect of CBH shares. He also said in his witness statement that CBH share register records were maintained by a company known as Boardroom Pty Ltd. The document entitled Completed Transactions was provided by Boardroom Pty Ltd as is evident from the document itself. According to Mr Lonergan, it is an extract from the CBH options register. It records 3,000,000 options being granted to Mr Watsford on 17 May 2006. It also records 1,000,000 options being converted on 12 October 2007 and a further 1,000,000 options being cancelled on 15 October 2007. It then discloses a further 1,000,000 options being converted on 19 November 2007.
Also attached to Mr Lonergan’s statement is an extract from the CBH share register disclosing the acquisition and disposition of CBH fully paid ordinary shares relating to Mr Watsford. It accords with the options register, disclosing the acquisition of 1,000,000 shares on 12 October 2007 by option conversion; and a further 1,000,000 shares on
19 November 2007, also by option conversion.
Dr Bender submitted that the CBH registers of members and option holders are proof of the matters shown in those registers in accordance with what is set out in s 176 of the Corporations Act. He submitted that Mr Watsford had not provided any evidence to the contrary which would displace the proof established by that section.
Mr Lonergan's evidence was that in his capacity as Company Secretary, he was largely responsible for reporting to the ASX on behalf of CBH. That included reporting matters which would become publicised ASX new issue announcements.
There can be no doubt that options issued under the EOP are subject to the ASX Listing Rules. Clause 5.1 of the Rules of the EOP provides:
5.1 Subject to these Rules and the Listing Rules, the Company (acting through the Board) may offer Options to any Eligible person at such times and on such terms as the Board considers appropriate.…
According to Mr Lonergan, under the ASX Listing Rules, all new issues of listed and unlisted shares and options by CBH had to be reported to the ASX under Listing Rule 3.10.3 which requires a listed entity to immediately notify the ASX of a proposed issue of shares or options on a form referred to as Appendix 3B. Also, the expiry or lapse of listed and unlisted options also needed to be reported to the ASX under that Listing Rule.
In an attachment to his witness statement, Mr Lonergan disclosed a completed form referred to as an Appendix 3B in which is recorded the issue of 3,000,000 Employee Options, being unlisted options with an exercise price of $.33 each with an expiry date of 1 May 2011. Mr Lonergan signed that document and dated it 17 May 2006.
Following the execution of the Deed of Release, Mr Lonergan signed another Appendix 3B with the ASX on 12 October 2007 in which is recorded the issue of 1,000,000 ordinary shares on the exercise of unlisted employee options in CBH. That document also records the lapse of 1,000,000 unlisted options in CBH following their conversion to fully paid ordinary shares. The issue price is stated to be $.33 per share. Similarly, on
21 November 2007 Mr Lonergan apparently lodged with the ASX a further Appendix 3B document indicating the issue of a further 1,000,000 ordinary shares on the exercise of unlisted employee options. Again, the issue price of those ordinary shares was $.33 per share.
These documents accord with the submissions made by Dr Bender that on their face, the documents purport to evidence the conversion of 2,000,000 existing employee options to ordinary shares in CBH and the lapse of a further 1,000,000 such options.
However, Ms Baker submitted that to the extent that those documents support the Commissioner's assertion that the options did not lapse when Mr Watsford's employment was terminated, the documents are irrelevant. In any event, Ms Baker submitted that the documents should not be given any weight as evidence. That is because some of the documents attached to Mr Lonergan's witness statement, while on their face appearing to be covered by the evidentiary rules stated in the Corporations Act, closer inspection discloses that this is unlikely to be the case.
By way of example, Ms Baker referred to the purported extract from CBH records recording Mr Watsford's option holding in CBH. She submitted that document failed to comply with the requirements of s 170 of the Corporations Act. She noted that the purported extract from CBH's option register did not distinguish between the date of entry on that document and the date of grant of the options; the exercise period of the options was not identified; there was no description of the type of shares to which the options entitled the option holder; and no description of the events which must occur before the option is exercised.
With respect to Ms Baker, while I find she may be partially correct that not all of the particulars she has mentioned are recorded on the extract, the essential items appear to be present. The date on the document appears to be the date which coincides with giving notice to the ASX. That may well coincide with the date on which the entry in the register was made. It does not, as Ms Baker submitted, record the date of grant of the options. As to her second point, that the period during which the options may be exercised is not recorded, it should be noted that s 170 requires either that information or the time at which the options may be exercised. The extract does indicate both the expiry date of the options and their exercise price stated in the following way: EMP OPTS EX 01/05/11@33C. As to whether the document fails to disclose an event that must happen before the options can be exercised, there is no such event under the EOP. In fact each of the items listed in s 170(1)(f) – (h) commences with the word any indicating an entry is only required if those subsections are applicable. For example, it requires any consideration for the exercise of the options… and in this case, that is $.33 which is recorded.
According to Dr Bender, the register of option holders proves that the 2,000,000 options which Mr Watsford exercised in October and November 2007 were the same options that he was granted in 2006 rather than being new options. However, as Ms Baker submitted, the evidentiary status of the register of option holders may be rebutted where there is evidence to the contrary. That submission is clearly correct. In this case, there was evidence given by Mr Watsford that the options he exercised in October and November 2007 were new options and not those which he acquired under his contract of employment with CBH. Nevertheless, that does not mean that I should disregard the evidence which is provided by the register of option holders. What is recorded in that register should be taken into account in considering the consistency of the whole of the evidence before me. After all, the EOP rules make it plain that the offer of options is subject to the ASX listing rules.
DID THE CBH OPTIONS GRANTED TO MR WATSFORD ON COMMENCEMENT OF HIS EMPLOYMENT LAPSE PRIOR TO BEING EXERCISED
As I have indicated above, CBH operated an ESS for the benefit of employees of the company. It published rules dealing with the EOP. In addition to that document, CBH provided Mr Watsford with a document setting out the Terms and Conditions of the Employee Options granted to him on the commencement of his employment. Those Terms and Conditions were specific and related to Mr Watsford's terms and conditions of employment set out in the letter of offer dated 24 March 2006. Both documents need to be considered when determining this issue.
The Rules of the CBH EOP which are relevant to Mr Watsford's claim are as follows:
1.DEFINITIONS AND INTERPRETATION
1.1In these Rules, unless the context otherwise requires, the following words and expressions shall have the following meanings:
"Company" means Consolidated Broken Hill Ltd ACN 009 423 858;
"Eligible Person" means at any time a person who then is a director or an employee (whether full-time or part-time) of a Group Company;
"Expiry Date" means, in relation to an Option, the date determined by the Board prior to the offer of the relevant Options, subject to any restriction in the Australian Corporations Legislation from time to time but in any event no longer than 5 years from the date of grant of the Option;
"Listing Rules" means the Official Listing Rules of ASX as they apply to the Company;
…
11.EXERCISE OF OPTIONS
11.1 Subject to these Rules and the terms of the Options, Options may be exercised at any time during the period commencing on the Issue Date and ending on the Expiry Date.
…
11.3 Options not exercised on or before the Expiry Date will automatically lapse.
11.4 Options may only be exercised by notice in writing to the Board delivered to the registered office of the Company. The notice must specify the number of Options being exercised and must be accompanied by:
(a) payment of the Exercise Price for the number of Options specified in the notice; and
(b) the Certificate for those Options, for cancellation by the Company.
The notice is only effective (and only becomes effective) when the Company has received value for the full amount of the Exercise Price (for example, if the Exercise Price is paid by cheque, by clearance of that cheque).
11.5 Subject to paragraph 11.3, within 10 Business Days after the notice referred to in clause 11.4 becoming effective, the Board must:
(a) allot and issue the number of Shares specified in the notice to the Holder;
(b) cancel the Certificate for the Options being exercised; and
(c) if applicable, issue a new Certificate for any remaining Options covered by the Certificate accompanying the notice.
…
I have set out the relevant Terms and Conditions on which the Employee Options were issued to Mr Watsford in paragraph 18 above.
Consistent with the rules of the CBH EOP, Mr Watsford became an Eligible Person on
1 May 2006 and he ceased to be an Eligible Person on 27 April 2007. There appears to be no dispute about the fact that the three tranches of options granted to Mr Watsford on the commencement of his employment on 1 May 2006 were options granted under CBH's ESS, known as the EOP. Their expiry date was 1 May 2011.
Despite the expiry date of 1 May 2011, the Terms and Conditions on which Mr Watsford's options were issued made it clear that those options would expire either on the fifth anniversary of Mr Watsford's date of commencement, or on the date he ceased to be an employee of the company. If his employment terminated prior to the five year expiry period, Term A of the Terms and Conditions of the issue of the options to Mr Watsford provided that his options could remain open until such date as the directors of CBH determined. Term A does not restrict the directors of CBH to making a determination about the expiry date following the termination of employment to the period of time prior to the termination of employment. In other words, Term A provides that the expiry date of the options can be extended beyond the termination of employment of the employee concerned even after the termination has occurred. Had it been intended otherwise, I have no doubt that Term A would have expressly stated such a restriction.
It will be recalled that at the time of Mr Watsford's termination of employment, he had not exercised any of the options allotted to him even though the first tranche of 1,000,000 options had vested. Some two weeks after the termination of his employment
Mr Watsford attempted to exercise the first tranche of 1,000,000 CBH options which vested on 1 November 2006. He testified that CBH did not issue him any shares on receiving an application dated 14 May 2007. He said he had several discussions with
Mr Lonergan from which he understood that CBH considered the options had expired and that he no longer had any rights to shares as a consequence of the purported exercise of those options. Mr Lonergan's evidence was that after receiving the application in about May 2007, he told Mr Watsford in an e-mail that he did not have the right to exercise the options. Subject of course to a determination by the directors extending the date for exercise of the options, the information given to Mr Watsford appears to be correct.
There was no dispute that following Mr Watsford's termination of employment with CBH, the parties entered into negotiations regarding, amongst other things, the exercise of the options granted to Mr Watsford in 2006. Mr Lonergan put into evidence as an attachment to his written statement a number of e-mails, one of which, dated 30 May 2007, stated:
I refer to your recent e-mails. With respect to your purported exercise of employee options, I am awaiting your advice on the question put to you in my e-mail to you dated 14 May.
Mr Lonergan also said that although Mr Watsford's employment terminated in April 2007, the management of CBH, including himself as Company Secretary and General Counsel, considered the options not to have expired until notified to the ASX. As will become clear presently, it matters not whether that statement by Mr Lonergan is correct. While Term A of the Terms and Conditions clearly provides that the options expire on the date the option holder ceases to be an employee of the company, it leaves open the possibility of an extension by the directors of the expiry date. Therefore, until such time as the directors made a determination, or indicated expressly and clearly that all of the options had expired on the termination of Mr Watsford's employment, the possibility remained open that the time for termination of those options would be extended. Therefore, Mr Lonergan's e-mail in May 2007 that Mr Watsford did not have the right to exercise those options at that time was plainly correct and was subject to the directors making a determination about extending the expiry time.
CBH was entitled to refuse to allot shares when Mr Watsford purported to exercise the first tranche of the options on 14 May 2007. That refusal was not necessarily an indication that CBH treated the options as having expired. This is particularly so as the parties had entered into negotiations which involved the exercise of the options after the termination of Mr Watsford's employment. The fact that Mr Lonergan did not notify the ASX that those options were cancelled within 14 days after termination of Mr Watsford's employment, while not necessarily indicative of the fact that the options remained on foot, nevertheless is consistent with Mr Lonergan's evidence that CBH was considering whether to extend the time for termination of the options.
Although Ms Baker submitted that if it were true that the options had not expired on
27 April 2007, then CBH breached both the Terms and Conditions governing the options as well as rule 11.5 of the rules of the EOP, respectfully, I disagree. As I have already said, it remained open to CBH to determine an expiry date beyond Mr Watsford's termination date under the Terms and Conditions on which the options were granted. Secondly, the operation of rule 11.5 of the EOP must be read in the context of rule 11.1. Rule 5.1 provides that CBH may offer options to any Eligible Person on such terms as the Board considers appropriate. In accordance with that rule, CBH provided Mr Watsford with options subject to the Terms and Conditions. Rule 11.1, which deals with when options may be exercised, expressly provides that such exercise is subject to the EOP rules and the terms of the options. Therefore, while rule 11.3 states that options not exercised on or before the Expiry Date automatically lapse, that rule is clearly subject to the Terms and Conditions on which Mr Watsford's options were granted. It must follow that there has been no breach of rule 11.5 dealing with the allotment and issue of shares within 10 business days of notice being given of exercise of an option.
In his written statement Mr Lonergan testified that the directors of CBH delegated the power to resolve the dispute with Mr Watsford to him as Company Secretary and General Counsel, in conjunction with other members of the company's management team. On 12 October 2007 CBH entered into a Deed of Release with Mr Watsford to settle the dispute. Mr Lonergan said he was responsible for negotiating the terms of that Deed. The most significant statement in the Deed of Release is the definition of Options at clause 1.2 (e) which sets out the following:
Options means options each over a share in the Company with an exercise price of 33 cents granted to the Employee in 2006
As I have already set out above, the Deed then provided that CBH would process
Mr Watsford's application for the exercise of the first tranche of 1,000,000 options following receipt of cleared funds and that the right to exercise a second 1,000,000 tranche of options could be exercised before 30 November 2007. Having regard to the definition of Options in the Deed of Release, it is not possible to conclude otherwise than the parties agreed to the extension of time for the exercise of 2,000,000 of the 3,000,000 options granted to Mr Watsford on commencement of employment with CBH in 2006. They did not agree to the extension of time for the third tranche of 1,000,000 options and that tranche was cancelled. The Deed of Release also has a term stating that the Deed constitutes the entire agreement of the parties relating to its subject matter and supersedes all prior understandings, negotiations, agreements, written or oral, express or implied, in relation thereto. The options register was subsequently amended in accordance with the Deed of Release and notices given to the ASX. CBH did not lodge with the ASX a notice indicating the issue of new options.
Ms Baker submitted that the Deed of Release was new agreement which created 2,000,000 new options. She said the Deed of Release did not purport to give lapsed options any continued existence nor could it have done so as a matter of law. With respect to Ms Baker, not only had the options issued in 2006 not lapsed, that submission is contrary to the definition of Options set out in the Deed. As is set out in the Deed of Release, that document is evidence of the parties' intention at the time of its execution and it constitutes the entire agreement between them. Furthermore, it accords with the evidence given by Mr Lonergan and the notices given to the ASX.
Although Ms Baker submitted that the options referred to in the Deed of Release were not the same options as those initially granted in May 2006 because they had different terms, I cannot agree. While it is correct to say, as does Ms Baker, that the date for the exercise of two tranches of the options were extended and one tranche was cancelled, that is in accordance with the statement in the Deed which refers to all prior understandings being superseded by that document. It also applies to Ms Baker's submission regarding the transfer of options. The Deed of Release does not deal with the transfer of options whereas the Terms and Conditions under which the options were granted in 2006 provide, at Term K, that the options shall not be transferable. Again, there is no obvious reason why the parties could not agree to amend the Terms and Conditions in accordance with their agreement on the resolution of the employment dispute.
Finally, Ms Baker submitted that no formal determination was made by the directors of CBH regarding the extension of time for the exercise of the options. The first thing to be said about this submission is that the Terms and Conditions of the Employee Options say nothing about a formal determination. In any event, the Deed of Release is signed by
Mr R E Besley, Managing Director. Furthermore, the parties acted in accordance with what is set out in that Deed. There was no suggestion that its terms were not enforceable.
In those circumstances, I find that the date on which the employee options issued to Mr Watsford expired was extended in accordance with the terms of the Deed of Release executed on 12 October 2007. The 2,000,000 options which Mr Watsford exercised in October and November 2007 were options which he acquired under the CBH ESS. They were not new options as was claimed by Mr Watsford. There is nothing in the Deed of Release to suggest they were new options and in fact, the very definition of Options in the Deed makes it clear they were not.
Although Dr Bender also submitted that the financial statements of CBH are consistent with the 2,000,000 options exercised by Mr Watsford being those options which were issued to him in May 2006, while entirely consistent with the Deed of Release and the evidence of Mr Lonergan, and it certainly records the understanding of CBH, it does not, in my opinion, necessarily follow that those statements are evidence that the options acquired by Mr Watsford were those acquired in May 2006. While it is true to say that the directors of a company are required to make a declaration that the financial statements comply with the Corporations Act, and therefore give a true and fair view of the company's financial position, those statements state the prima facie position which of course can be displaced by other evidence. This is not a case where there was not any contradictory evidence.
Given the findings of fact which I have made above, s 139DD of ITAA 1936 cannot have any bearing on Mr Watsford's case. He did not lose the right in the form of the options without having exercised it. He subsequently exercised the right provided by the options in relation to the first two tranches of options which he acquired at the commencement of his employment in 2006. He did lose the right to exercise the third tranche of options.
There was no dispute between the parties that the rights acquired by Mr Watsford in 2006 satisfied the definition in s 139B(3) as qualifying rights. Because Mr Watsford did not make an election under s 139E(1), the discount from market value of the shares subsequently acquired by Mr Watsford on the exercise of the two tranches of options acquired in 2006 had to be included in his assessable income in the year of income in which the cessation time occurred. In this case, the cessation time as defined in
s 139CB(1)(b) was the time when Mr Watsford's employment ceased, that is 27 April 2007. It follows that the discount sum of $525,600, which was not disputed, had to be included in Mr Watsford's assessable income in the 2007 income year as claimed by the Commissioner.
PENALTIES
The Commissioner imposed an administrative penalty on Mr Watsford for his failure to include $525,600 in his 2007 income tax return which resulted in a shortfall amount of $244,404. The penalty was imposed pursuant to s 284 – 75 of the TAA which, insofar as it is relevant, provides:
(1)You are liable to an administrative penalty if:
(a)you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law; and
(b)the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and
(c)you have a *shortfall amount as a result of the statement.
The Base Penalty Amount is set out in s 284 – 90 of the TAA. The Commissioner used Item 3 which refers to a shortfall amount or part of it resulting from a failure by the taxpayer or his or her agent to take reasonable care to comply with a taxation law for which the base penalty amount is 25% of the shortfall amount or part.
The Commissioner contended that Mr Watsford had made a false or misleading statement in the tax return he lodged for the 2007 income year. That was because the CBH options were not new options and that was clear to Mr Watsford from the terms of the Deed of Release which defined the options referred to in that document as the 2006 options. Although I did not have a copy of the Deed of Release executed by
Mr Watsford in evidence, there was no dispute that he had agreed to the terms of release set out in that document. That much is evident from the fact that he exercised the options in October and November 2007.
What conduct constitutes reasonable care was discussed in some detail by Greenwood J in Aurora Developments v Federal Commissioner of Taxation (No 2) (2011) 196 FCR 457. His Honour said, after referring to the Revised Explanatory Memorandum to the 2000 Bill, at 465 – 466:
It follows as a matter of principle that the reasonable care test calls upon a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer in fulfilling the taxpayer's tax obligations. The test looks to whether such a person would have foreseen, has a reasonable probability or reasonable likelihood, the prospect that the action or step or the failure to act or take an affirmative step would result in a shortfall amount and in determining that question, a relevant factual enquiry is whether the taxpayer made the reasonable attempts a person in the position of the taxpayer ought to have taken so as to comply with the provisions of a taxation law. At para 1.75 of the Explanatory Memorandum, the observation is made that a taxpayer who prepares his or her own Business Activity Statement would usually be taken to have exercised reasonable care if the taxpayer relies upon the advice of an accountant or lawyer (or both) whom the taxpayer could reasonably expect to provide competent advice on the relevant matter in issue.
At para 1.76, the observation is made that a taxpayer would be at risk of a penalty if the taxpayer was careless (that is to say, did not act reasonably) in presenting all of the relevant facts to an adviser and such a failure materially affected the advice upon which the taxpayer sought to rely.
Ms Baker submitted that Mr Watsford testified he instructed Wong & Mayes, Chartered Accountants, to prepare his income tax return for the 2007 income year and that he provided full details of the options and the Deed of Release as part of his instructions. The problem with that testimony is that there was no evidence before me which supported the statement by Mr Watsford. Furthermore, although he referred to full details of the options, Mr Watsford did not explain just what those details were.
Ms Baker submitted that this would have included details of the terms and conditions of the options, as well as the following facts and circumstances which had occurred by
30 June 2007:
(a)CBH's refusal to accept Mr Watsford's exercise application of 14 May 2007 in respect of the first tranche of options;
(b)Mr Lonergan's description of his exercise of those options as the "purported exercise"; and
(c)Mr Lonergan apparently having told Mr Watsford that "he did not have the right to exercise the Options".
The problem I see with that submission is that what Mr Watsford in fact said to his accountants may not be the same as what Ms Baker assumed he would have told them. There was no evidence before me either from the accountants or in any correspondence between Mr Watsford and the accountants regarding his instructions. Mr Watsford was asked in cross-examination what information he provided to Wong & Mayes. He said that he maintained a software package known as Quicken where he recorded his income details and share option holdings. He said he submitted those to his accountants asking them to telephone him if they required an explanation for any of that material. Mr Watsford did not provide the information from his Quicken program to the Tribunal.
As to Mr Watsford claiming that CBH refused to accept the exercise of his options made by application on 14 May 2007, the evidence of Mr Lonergan and the subsequent negotiations conducted by the parties regarding the exercise of the existing options; and Mr Lonergan's description, when he referred to the purported exercise of those options, is not indicative of a flat refusal to allow Mr Watsford to exercise the first tranche of options. In fact, the conduct of the parties and the statements made by Mr Lonergan are consistent with the fact that although the 2006 options expired on the termination of
Mr Watsford's employment thereby preventing the exercise of those options at that time, the ongoing discussions included extending the expiry date of those options to allow
Mr Watsford to exercise those rights.
Although Mr Watsford said that he had the Deed of Release at the time he instructed his accountants to prepare his 2007 income tax return, he did not say that he provided a copy of that document to his accountants. Furthermore, if Mr Lonergan's evidence is correct, and I have no reason to doubt that, then Mr Watsford was legally represented in the settlement discussions which took place after the termination of his employment and resulted in an agreement being reached and expressed in the Deed of Release. I cannot accept that those legal representatives overlooked the fact that the Deed of Release defined the options referred to in that document as the options with an exercise price of $.33 granted to Mr Watsford in 2006. I also do not accept that his legal representatives would not have made Mr Watsford aware of that fact if he was under the impression that the 2006 options had expired.
Had he provided that document to his accountants, I have no reason to doubt that they would have come back to him with some questions about that. It follows I cannot accept Ms Baker's submission that to the extent that Mr Watsford had formed a belief concerning the options which was reasonable and arguable on the facts, it must follow that he took reasonable care in lodging his income tax return for the 2007 income year.
If in fact Mr Watsford formed that view, given the circumstances which resulted in the parties executing the Deed of Release, such a view could not be regarded as reasonable. There was no evidence from Mr Watsford that he consulted either the lawyers who acted for him in the course of settlement negotiations following the termination of his employment or that he discussed the reference to the 2006 options in the Deed of Release with his accountants. The absence of that evidence leads me to infer that either it does not exist or it would not have assisted Mr Watsford's case.
Ms Baker also submitted that because the proper legal characterisation of options was far from clear, I should take the view that the position taken by Mr Watsford was about as likely as not correct. I cannot accept that submission. No question arose in this case about the nature or legal characterisation of the options. The only matter in dispute was the characterisation of the terms of the contract between Mr Watsford and CBH regarding the options. Whether those options had lapsed or expired was simply a matter of carefully interpreting the terms of the agreement between the parties. As I have indicated above, a careful reading of the rules of the ESS and the Terms and Conditions under which the options were issued to Mr Watsford makes the situation abundantly clear. If that were not enough, there can be no disputing what is set out in the Deed of Release.
I find that the Commissioner's assessment of Mr Watsford to an administrative penalty of $61,101 in the 2007 income year was the correct decision.
REMISSION OF PENALTY
In the alternative, Ms Baker submitted that if Mr Watsford was correctly assessed in respect of an administrative penalty, it should nevertheless be remitted either in full or in part. She did not explain why that should be the case.
Dr Bender submitted that there were no grounds for the remission of penalty. He said that remission for a taxpayer who had not taken the requisite care depended on whether the penalty imposed was harsh in the particular circumstances of the taxpayer. He referred to the Federal Court decision in Dixon v Federal Commissioner of Taxation (2008) 167 FCR 287. Dr Bender also submitted that there need to be circumstances which could be regarded as mitigating the taxpayer's behaviour while at the same time recognising the purpose and role the penalties play in the self-assessment system. He referred to the AAT decision in Re Hobart Central Child Care Pty Ltd and Commissioner of Taxation (2005) 60 ATR 1314 at 1357 [205], a decision of Deputy President S A Forgie.
There was no evidence before me that the penalty imposed was harsh in Mr Watsford's circumstances. There was also no evidence before me about mitigating circumstances involving Mr Watsford's behaviour in this matter. Accordingly, I find there are no grounds for remitting the assessed penalty.
CONCLUSION
On commencing employment with CBH, Mr Watsford was granted 3,000,000 options in three tranches. The first tranche was exercisable in November 2006, the second after
1 May 2007 and the third after 1 November 2007. His employment with CBH was terminated on 27 April 2007. Although the first tranche of options had become exercisable by that date, Mr Watsford had not applied to exercise 1,000,000 options at $.33.Under the Terms and Conditions of the issue of those options to Mr Watsford, the agreement between CBH and Mr Watsford was that they would expire on the date he ceased to be an employee of CBH. However, the term dealing with the expiry date of the options also provided that the directors of CBH could determine an expiry date which was after the date on which his employment was terminated.
After extensive negotiations following Mr Watsford's dispute with CBH regarding the termination of his employment, during which the exercise of the existing options was discussed, the parties entered into a Deed of Release on 12 October 2007 the terms of which permitted Mr Watsford to exercise 1,000,000 of the options within five days of CBH receiving full payment for those options and a further 1,000,000 options before
30 November 2007. I have found that the Deed clearly extended the expiry date of the existing 2006 options. CBH did not issue new options outside the ESS to Mr Watsford.Despite that, Mr Watsford did not disclose in his 2007 income tax return as assessable income the discount from market value of the shares he acquired on the exercise of those options. I have found that he was required to do so as the cessation time in respect of those options occurred when Mr Watsford's employment with CBH terminated. That occurred in the 2007 income year. Therefore, I have found that the Commissioner correctly amended Mr Watsford's assessment for that income year to include additional taxable income of $525,600.
The Commissioner also assessed Mr Watsford for an administrative penalty for failure to take reasonable care which resulted in a tax shortfall. I have found that Mr Watsford failed to take reasonable care and therefore he was correctly assessed for an administrative penalty. I have found that there are no grounds for remitting that penalty.
I find the Commissioner's objection decision made on 14 April 2011 in respect of the increased assessable income and the shortfall penalty was correct. I affirm that decision.
I certify that the preceding 95 (ninety -five) paragraphs are a true copy of the reasons for the decision herein of
Egon Fice, Senior Member...[sgd].....................................................................
Associate
Dated 20 November 2012
Date of hearing 24 September 2012 Counsel for the Applicant Ms M Baker Solicitors for the Applicant Ernst & Young Law Pty Limited Counsel for the Respondent Dr P Bender Solicitors for the Respondent Australian Taxation Office
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