Sent and Commissioner of Taxation
[2011] AATA 198
•25 March 2011
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2011] AATA 198
ADMINISTRATIVE APPEALS TRIBUNAL )
) Nos 2007/1843, 2009/2579
TAXATION APPEALS DIVISION ) Re EDUARD SENT Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr Frank O’Loughlin, Senior Member Date25 March 2011
PlaceMelbourne
Decision
The Tribunal sets aside the objection decisions and directs that assessments be amended in accordance with these reasons.
………[signed]…………
Senior Member
TAXATION – Amounts paid to executive benefit trust to acquire shares in Employer organisation in substitution for accrued and potential future bonuses – whether income derived – whether Part IVA applies – whether penalty remitted by Commissioner – appropriate penalties to be imposed
Income Tax Assessment Act 1936 (Cth) ss 21, 23L, 26, 177A, 177C, 177D, Part IVA
Income Tax Assessment Act 1997 (Cth) ss 6-5, 6-10
ABB Australia Pty Ltd v Commissioner of Taxation [2007] FCA 1063
Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314
Blankfield v Federal Commisioner of Taxation (1972) 127 CLR 610
Brent v Federal Commissioner of Taxation (1971) 125 CLR 418
BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164
Burrill v Commissioner of Taxation (1996) 96 ATC 4629
Calder v Federal Commissioner of Taxation 2005 ATC 4760
Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235
Commissioner of Taxation v Hart (2004) 217 CLR 216
Commissioner of Taxation v Lenzo (2008) 167 FCR 255
Commissioner of Taxation v McNeil (2007) 229 CLR 656
Commissioner of Taxation v Sleight (2004) 136 FCR 211
Commissioner of Taxation v Sydney Refractive Surgery Centre Pty Ltd (2008)
Commissioner of Taxation v White [2010] FCA 730
Commissioner of Taxes v Phillips (1936) 55 CLR 144
Deputy Commissioner of Taxes v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108
Eastern Nitrogen Ltd v Federal Commissioner of Taxation (2001) 108 FCR 27
Ede(Inspector of Taxes) v Wilson (1945) 26 TC 381
Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 34 FLR 375
Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540
Federal Commissioner of Taxation v Energy Resources of Australia Limited (1994) 94 ATC 4923
Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359
Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404
Gair v Federal Commissioner of Taxation (1944) 71 CLR 388
GP International Pipecoaters PtyLtd v Federal Commissioner of Taxation (1990) 170 CLR 124
Imperial Bottleshops Pty Ltd v Commissioner of Taxation [1991] FCA 276
London and Thames Haven Oil Wharfs Ltd v Attwool (Inspector of Taxes) [1967] 2 All ER 124
M I M Holdings Ltd v Commissioner of Taxation (1997) 36 ATR 108
McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381
Pascoe v Federal Commissioner of Taxation (1956) 30 ALJR 402
Permanent Trustee Company of NSW v Commissioner of Taxation (1940) ATD 5
R v Deputy Federal Commissioner of Taxation (SA); Ex parte Hooper (1926) 37 CLR 368
Re Allman v Federal Commissioner of Taxation (1998) 98 ATC
Reuter v Federal Commissioner of Taxation (1993) 24 ATR 527
Ronamin v Commissioner of Taxation [2008] FCA 1532
Scott v Federal Commissioner of Taxation (1966) 117 CLR 514
Tinkler v Federal Commissioner of Taxation (1979) 29 ALR 663
Vincent v Commissioner of Taxation of the Commonwealth of Australia (2002) 124 FCR 350
Walstern v Commissioner of Taxation [2003] FCA 1428
Weight (Inspector of Taxes) v Salmon (1935) 19 TC 174
REASONS FOR DECISION
25 March 2011 Mr Frank O’Loughlin, Senior Member 1.This application concerns disputed:
(a)assessability of a payment of $11,600,000 to the Trust[1], of which the Applicant was a beneficiary, or the value of Primelife[2] shares acquired by the Trust with that money, as part of changes to the Applicant’s employment arrangements with Primelife, when his accrued and accruing bonus entitlements were extinguished; and
[1]Appendix 1 sets out a list of defined terms (and persons) which are footnoted when first used in these reasons.
[2]See Appendix 1.
(b) penalties.
2.The Applicant was the Managing Director and Chief Executive Officer of Primelife.
3.Until November 2001 the Applicant had an employment contract that provided for cash bonuses. The bonuses relevant to the present matters fell into three categories:
(a) those that had accrued and were payable;
(b)those for which some, but not all, eligibility conditions had been satisfied and which were not payable until further conditions were satisfied; and
(c) those that had not yet accrued in any sense.
4.In November 2001 the Applicant’s employment arrangements with Primelife were changed. His accrued, emerging and future bonus entitlements were extinguished and Primelife paid $11,600,000 to the Trust in December 2001. Those funds were ultimately used to buy 5 million Primelife shares.
5.In two, alternate, assessments the Commissioner[3] assessed the $11,600,000 as taxable income. The primary assessment assessed the $11,600,000 as either income derived or assessable statutory income. The secondary assessment gave effect to a determination made pursuant to Part IVA of the 1936 Assessment Act[4] and cancelled a tax benefit of the same amount.
[3]See Appendix 1.
[4]See Appendix 1.
6.The Commissioner also assessed penalty at the 50% rate in each of the primary and secondary assessments; and he has indicated that he has exercised his powers of remission reducing one of the penalties to nil – somewhat curiously without identifying which one. What the Commissioner has said is that he:
... exercised his discretion under s.298-20 of Schedule 1 of the TAA 1953 to remit the amount of the overall penalty to 50% of … [the] … shortfall amount under a previous assessment and the scheme shortfall amount under the Penalty Assessment the subject of this objection. …
However, the cumulative basis for penalty imposition are maintained.”
and in the ATO itemised account for the Applicant there appear the following entries:
Process Date Effective Date Transaction description Debit amount Credit amount 16 Nov 2006 15 Dec 2006 Shortfall penalty relating to recklessness for Income Tax $2,813,000 20 Mar 2009 20 Apr 2009 Shortfall penalty relating to a scheme shortfall for Income Tax $2,813,000 20 Mar 2009 20 Mar 2009 Remission of shortfall penalty relating to a scheme shortfall for Income Tax $2,813,000
which suggest that, if there has been a remission, the penalty assessed consequent upon the amended assessment giving effect to the Part IVA determination was the remitted penalty.
7.The Commissioner’s submission is that
... he has not remitted the section 6-5 penalty at all. He has not remitted the Part IVA penalty at all …
... what the Commissioner was conveying in that paragraph was to recognise that because of the way legislation works and the penalty assessment provisions work, you’ve got to have two separate penalties. All he was saying is that he’s only going to be able to recover under one, that is, he will recover 50 per cent – he will seek to recover 50 per cent under the 6-5 penalty, or he will seek to recover 50 per cent under the Part IVA penalty, but even though there are two before him, he recognises that he is going to lose on one of them.
and that the form of expression used to convey the message that two amounts of penalty will not be enforced was neither careless nor reckless but could have been better, with … the intention of the [author] … manifest from the whole context.
8.The Applicant disputes both assessments.
THE ISSUES
9.The issues that need to be resolved are:
(a)whether the $11,600,000 payment, or the market value of the Primelife shares, are assessable in the 2002 Year[5] as either:
[5]See Appendix 1.
(i)ordinary income, pursuant to s 6-5 of the 1997 Assessment Act;[6] or
[6]See Appendix 1.
(ii)statutory income, pursuant to s 6-10 of the 1997 Assessment Act and s 26(e) of the 1936 Assessment Act;
(b)whether the whole or any part of the $11,600,000 was a fringe benefit within the FBT Assessment Act[7] and hence was not assessable to the Applicant by reason of s 23L or s 26(e) of the 1936 Assessment Act;
(c)whether Part IVA of the 1936 Assessment Act applies to include any part of the $11,600,000 in the Applicant’s assessable income in the 2002 Year;
(d)whether any administrative penalty remains a liability; and if so, which penalty and whether 50% is the appropriate level; and
(e) whether any remaining administrative penalty ought be remitted.
[7]See Appendix 1.
THE COMPETING CONTENTIONS
10.The Commissioner contends that:
(a)the $11,600,000 payment is assessable pursuant to either ss 6-5(1) or 6-5(4) of the 1997 Assessment Act;
(b)alternatively, the $11,600,000 payment is assessable pursuant to s 26(e) of the 1936 Assessment Act and s 6-10(3) of the 1997 Assessment Act;
(c)alternatively, the market value of 5 million Primelife ordinary shares is assessable on the same footing as (a) and (b) above;
(d)s 23L does not apply to render any income derived by the Applicant exempt income;
(e)alternatively, Part IVA of the 1936 Assessment Act applies so as to include $11,600,000 or the market value of 5 million Primelife ordinary shares in the Applicant’s assessable income;
(f)each of the penalties assessed remains an outstanding imposition and each of the penalties was correctly assessed at the 50% level; and
(g) there ought not be any remission.
11.The Applicant contends to the contrary.
IS THE $11,600,000 PAYMENT, OR ANY PART OF IT, ASSESSABLE AS INCOME IN THE HANDS OF THE APPLICANT?
12.The competing contentions require consideration of the circumstances in which the $11,600,000 payment was made to the Trust and the 5 million Primelife shares were acquired by the Trust.
13.Throughout the relevant period (from July 1998 until 30 June 2002), Primelife was a public company whose ordinary shares were listed and traded on the Australian Stock Exchange.
14.Shortly before 1 July 1998 the Applicant and Primelife entered into the Employment Agreement,[8] pursuant to which the Applicant was:
[8]See Appendix 1.
(a)engaged as the Managing Director and Chief Executive Officer of Primelife for a five-year term commencing on 1 July 1998; and
(b) entitled to:
(i) a base salary of $300,000;
(ii) an annual bonus of up to $300,000; and
(iii)three additional bonuses, calculated by reference to Primelife’s accounting profit for each financial year ending 30 June from 1999 to 2003, less any losses in those years.
(A)The first additional bonus was to be calculated by reference to Primelife’s financial performance for the three financial years to 30 June 2001.
(B)The second additional bonus was to be calculated by reference to Primelife’s financial performance for the four years to 30 June 2002, with the amount calculated reduced by the first additional bonus.
(C)The third additional bonus was to be calculated by reference to Primelife’s financial performance for the five years to 30 June 2003, with the amount calculated reduced by the first and second additional bonuses.
15.The structure of the additional bonus arrangements provided a claw back of entitlements to bonuses that had not fallen due for payment and of bonuses that had been paid.
16.On 1 October 2000 the Applicant and Primelife recorded an earlier agreement made in July 1999 to vary the Employment Agreement. Upon the variation becoming effective, the Applicant's:
(a) base salary was increased to $600,000 per annum; and
(b) entitlement to payment of the annual bonuses was terminated.
17.For the three years to 30 June 2001 the Applicant had accrued and accruing bonuses of $7,246,572.
18.One third of these bonuses ($2,415,524) was said to be due and payable and the remaining two thirds ($4,831,048) were subject to final calculation after the close of the 2002 and 2003 Years and were subject to reduction if Primelife sustained losses in those Years.
19.The Primelife Board of Directors perceived a lack of understanding and criticism of the Applicant’s bonus arrangements and transactions between Primelife and parties connected to the Applicant by financial and investment markets.
20.In 2001 Primelife had liquidity difficulties and paying the Applicant’s bonus entitlements in cash would have exacerbated those difficulties.
21.Discharging the Applicant’s bonus entitlements by way of a share issue would have been problematic for the Applicant and Primelife. Whether it had any basis for the assumption, Primelife assumed that the Applicant would have been forced to sell a significant proportion of the shares to fund his income tax liability. Primelife did not want to have a large parcel of shares coming on to the market, with the inevitable effect on the share price. Nor did it want its managing director and CEO being seen to be selling shares for similar reasons.
22.While the Applicant claimed to have been unable to meet any tax liability without selling a substantial part of the proposed share issue, he did not lead any evidence in support of that claim. Self-serving statements of this kind are to be tested closely, and received with the greatest caution.[9] In circumstances where supporting evidence of personal financial capacity would be expected to be within the knowledge and/or possession of the Applicant, and that evidence is not led, the conclusion to be reached is that there is insufficient evidence to find that there was such an inability.
[9]See Pascoe v Federal Commissioner of Taxation (1956) 30 ALJR 402 at 403 per Fullagar J and Imperial Bottleshops Pty Ltd v Commissioner of Taxation [1991] FCA 276 at [31] per Hill J.
23.A solution to these difficulties needed to be found, if possible.
24.In or about January and/or February 2001, Trinity[10] was asked to advise as to the optimal bonus delivery mechanism for existing bonus amounts for the Applicant. It is clear that Primelife paid for the advice but who asked Trinity for the advice is not clear. The evidence is contradictory; the Applicant asserting that it was Primelife and correspondence from Trinity suggesting it was the Applicant. No finding can be made one way or the other in these circumstances.
[10]See Appendix 1.
25.Trinity advised (among other things) that:
(a)bonuses could be delivered to the Applicant in the form of Primelife shares through an executive share trust, under which participants would have … a minimum “vesting period” of twelve months before participating executives would be allowed to encash their Units …; and
(b)the tax impost for executives would be deferred until final disposal of the underlying shares
26.Following a series of meetings leading up to June 2001, Primelife and the Applicant agreed that bonuses accrued to date and all future bonus entitlements would be replaced with an issue of 5 million fully paid ordinary Primelife shares.
27.Issuing these shares required shareholder approval.
28.In July 2001 Primelife advised shareholders of the proposed changes to the Applicant’s remuneration arrangements.
29.On or about 2 October 2001 the Applicant and Primelife executed the Share Issue Deed[11] which, subject to Primelife shareholder approval, operated to:
(a)stop all existing contractual arrangements relating to remuneration and bonuses payable to the Applicant for his role as the chief executive officer and managing director of Primelife;
(b) effect a waiver of all accrued bonuses; and
(c)create an entitlement to be issued 5 million Primelife fully paid ordinary shares.
[11]See Appendix 1.
30.The entitlement to the shares could be taken up by the Applicant or his nominee and was expressed to be in consideration for waiving the bonus entitlements.
31.For corporate law purposes, Primelife commissioned an independent expert’s report from PKF.[12] In October 2001 PKF opined that:
(a)for the 1999-2001 Years, the Applicant's entitlement to Additional Bonus Payments was $7,246,572 of which one-third, $2,415,524, was presently due for payment;
(b)for the 2002-2003 Years, the Applicant could be expected to become entitled to further Additional Bonus Payments ranging between $5,122,462 and $5,532,500;
(c)the fair value of 5 million fully paid Primelife ordinary shares was between $10,300,000 and $12,500,000; and
(d)the proposed changes to bonus arrangements and share issue were fair and reasonable to the shareholders of Primelife.
[12]See Appendix 1.
32.The materials sent to Primelife shareholders to consider before voting on the proposed resolution did not mention any proposed terms which might have the effect of deferring the Applicant’s enjoyment of the 5 million shares to be issued. Similarly, the PKF report opined as to whether it would be fair and reasonable to all shareholders if 5 million shares were issued to the Applicant, without any suggestion of the Applicant’s enjoyment of the proposed share issue being deferred or being subject to continuing employment for at least one year. None of the statements made by Primelife about the 5 million shares, in the lead up to their issue and after their issue, mentioned that the Applicant was obliged to continue in employment for at least one year and that his full enjoyment of the shares would be deferred until that time.
33.The resolution proposed to Primelife shareholders, to authorise the issue of shares to the Applicant, was part of a package of three interdependent resolutions. The resolution to issue the shares was resolution 4. Resolution 5 proposed an increase in the Applicant’s salary package to $850,000 per annum. Resolution 6 proposed a purchase of a property at Point Cook from Mainpoint[13] (a company related to the Applicant) for $6,000,000. The $6,000,000 was less than the then value of the property. The consideration for the issue of shares to the Applicant was the discharge and abandonment of entitlements to bonuses.
[13]See Appendix 1.
34.The Trust was established by the Trust Deed[14]. The Trustee of the Trust was Primelife Share Plans[15] and Trinity was the Advisor.
[14]See Appendix 1.
[15]See Appendix 1.
35.The terms of the Trust Deed provided:
(a)for three classes of units – Class A Share Units, Class B Share Units and Class C Share Units;
(b)that Employers (namely any employer accepted by the Trustee as an employer for the purposes of the Trust Deed) would settle money on the Trustee;
(c)that moneys settled by Employers were to be used to make loans to eligible employees (as defined) for the purpose of applying to the Trustee for units in the trust;
(d)that moneys received by the Trustee for units in the trust were to be used exclusively to acquire shares in the Employer (or the Employer’s holding company);
(e)for shares acquired through this process to be allocated to particular share units;
(f)for applications for share units being accompanied by applications for loans to acquire those units;
(g)that issue of units in accordance with the application constituted an acceptance of the loan application;
(h)that allocated shares could not be sold by the Trustee. They could be disposed of by the Trustee by distribution of cancellation entitlements;
(i)for cancellation entitlements equal to either an in specie distribution of such of the allocated shares referrable to the units of a market value equal to the issue price of the units, or all of the allocated shares. Whether the whole or only part of the allocated shares were to be distributed to unit holders in specie depended on the circumstances of the cancellation with the principal discriminator being whether the cancellation occurred after a date stipulated by the Trustee at the time of issue of the units;
(j)that the Trustee was able to set off the amount of any unpaid loan before paying a cancellation entitlement to a unit holder;
(k)that units could not be cancelled at the instigation of a unit holder within 12 months of their issue; and
(l)that upon termination of the Trust, any surplus trust property was able to be distributed at the discretion of the Trustee to or for the benefit of any eligible employee or any employee share scheme operated for the benefit of Primelife employees.
36.The terms of the Trust did not include any provision by which the Applicant could compel a change in trustee to an entity of his choice or under his control.
37.The Applicant did not control either the Advisor or the Trustee through any shareholding interest in either of them.
38.After the creation of the Trust, there was a confusing sequence of events by which the Trust was funded, units were issued and Primelife shares acquired.
39.It is clear that on 21 December 2001:
(a)Primelife deposited a cheque for $11,600,000 in the Trust's bank account in respect of the Applicant; and
(b)that a cheque for $11,600,000 was drawn on the Trust’s bank account and paid to Primelife as the issue price for 5 million ordinary Primelife shares. The weighted average trading price of Primelife shares in the week leading up to 21 December 2001 was $2.32. This gave the value of the 5 million share parcel, assuming the value of such a parcel is appropriately measured by reference to that value of one share, of $11,600, 000.
40.At some time on or after 21 December 2001, the Trust is said to have lent $11,600,000 to the Applicant, who used those funds to purchase 5 million A class units at $2.32 per unit. The Applicant’s evidence was that the loan was made at some time subsequent to the December 2001 transactions concerning the Primelife shares. Mr Fitton’s[16] evidence was to the same effect.
[16]See Appendix 1.
41.On 23 January 2002 the Trust issued 5 million Class A units to the Applicant for a price of $2.32 per unit or $11,600,000 in total. The units were said to vest one year from the commencement of participation in the Trust and to represent an entitlement to Primelife shares under the Trust.
42.That sequence of events was not possible. After 21 December 2001 the only assets of the Trust were the Primelife shares. The money it had received from Primelife had been spent.
43.Accordingly, the only conclusions able to be drawn are that if a loan was made by the Trust to the Applicant, it was made on 21 December 2001, as part of a circular flow of funds that began and ended with Primelife; or that there was no loan in the sense of an advance and the issue price of the units was simply an unpaid debt. The preferable conclusion is that the Applicant was issued the 5 million Class A units and owed the Trust $11,600,000.
44.The Trust’s financial statements reflect that it had two assets: the 5 million Primelife shares and a debt of $11,600,000 due to it by the Applicant.
45.The lack of formality and precision in giving effect to the arrangements devised for the 5 million shares to be issued is explained by either:
(a)the fact that the Applicant was the only holder of units in the Trust and after one year would have been entitled to the entire trust fund; thus making it immaterial as to whether he owed the Trust $11,600,000 or not; if the debt was repaid he would receive the money back; or
(b)that the administrators of the Trust, who were also the advisers to the players in these arrangements, did not attend to the steps that needed to be taken with the precision contemplated by the Trust documents. Having had the benefit of the evidence first hand, the latter explanation is the preferable conclusion to reach.
46.While the terms of the Trust appear to accommodate multiple participants, the Applicant was the only participant in it and this was consistent with Trinity’s advice to Primelife.
47.Contemporaneous statements, made by Primelife and signed by the Applicant, indicated that the 5 million Primelife shares had been issued to the Applicant or his nominee.[17]
[17]For example Primelife’s March 2002 half-year ASX filing
48.At the request of the Applicant, on 1 December 2003, Eskaton,[18] a company controlled by the Applicant, replaced Primelife Share Plans as trustee of the Trust.
[18]See Appendix 1.
49.What, if anything happened to the loan said to have been made by the Trust to the Applicant is not clear.
50.In the absence of the Applicant taking control of the Trust, the value of any benefit he would obtain from the Trust would have been limited by the Trustee’s power to set off the outstanding loan or debt in respect of the units in the Trust against cancellation entitlements under the Trust Deed.
51.For the purposes of the present matter the Applicant engaged an expert, (Mr Lom[19]) to give his opinion as to the value of the promise to issue shares in Primelife to the Applicant as at 4 October 2001 and the value of 5,000,000 shares in Primelife as at 21 December 2001. Given the conclusions that follow, these questions are not relevant to the outcome in the proceedings. If they were relevant, Mr Lom’s valuations would be accepted by the Tribunal.
[19]See Appendix 1.
52.From these facts, the conclusions are that:
(a)before December 2001 the Applicant had an accrued entitlement to some bonus money, partly accrued entitlements to other bonus money (with payment of these entitlements subject to contingencies) and an employment contract that provided for further bonuses to accrue and then become payable on further contingencies being met;
(b)from December 2001 the Applicant had a interest in a trust that had assets worth $11,600,000, ignoring the loan alleged to have been made to the Applicant, enjoyment of which was subject to a contingency; and
(c)that the arrangement in (b) was the consideration for waiving all of the entitlements in (a) above; and
(d)while it was not documented under the Trust Deed, or in any other evidence led in the proceeding, it is apparent that, at the outset, there was a plan to transfer control of the Trust to the Applicant at the end of the deferral period; and Eskaton becoming the trustee after 2 years was the execution of that plan.
53.From these facts the Commissioner says that $11,600,000 was derived as income. In support of this contention, the Commissioner relies on some relatively uncontroversial propositions:
(a)the character of a receipt needs to be determined in the taxpayer’s hands;[20]
[20]Relying on GP International Pipecoaters PtyLtd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 136 (per Brennan C.J., Dawson, Toohey, Gaudron and McHugh JJ); Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 34 FLR 375, at 388 (per Bowen CJ); Scott v Federal Commissioner of Taxation (1966) 117 CLR 514, at 526.
(b)consideration for the performance of services is almost always income.[21] In support of this proposition, the Commissioner dwelt on some remarks of Hill J:
[21]Relying on M I M Holdings Ltd v Commissioner of Taxation (1997) 36 ATR 108 and Reuter v Federal Commissioner of Taxation (1993) 24 ATR 527 at 540 (per Hill J).
Perhaps the most usual usage of the word "income" in ordinary speech is to describe that which comes in as a reward for services. Amounts such as salary, wages, commission, tips and the like, are universally regarded as income and it is immaterial whether they are paid under or pursuant to a contract of service or services on the one hand, or gratuitously on the other. So, too, for income tax purposes, it would be immaterial whether an amount which is a reward for services is paid to the taxpayer in advance of the services being performed (eg, a signing-on fee) or after the services have been performed, or whether the payment is made by the person for whom the services are performed or by some other person. It will also be generally immaterial whether the amount paid is paid periodically or in a lump sum. What will matter is the character of the payment as a reward for services or, as it was put by Fullager J in Hayes v FCT (1956) 96 CLR 47 at 57-8; 6 AITR 248, whether the receipt is a "product" of the taxpayer's services.[22]
These remarks were directed to characterisation of an amount paid in particular circumstances. To the extent that the Commissioner’s submission takes these remarks made by His Honour in one context (characterisation of an amount) and seeks to extend them to another context (derivation) any such extension is inappropriate. For an amount to be assessable as income it must be income derived. The decision in Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation[23] concerned payment for services yet to be rendered;
(c)a payment made in substitution for another payment entitlement takes the character of the original entitlement;[24]
(d)the money value of a non-cash receipt is the relevant taxable amount;[25]
(e)an amount can be derived as income even if not paid to or received by the taxpayer. Common law concepts of constructive receipt and the statutory formulations of those concepts have a role to play in such cases.[26]
[22]Reuter v Federal Commissioner of Taxation (1993) 24 ATR 527 at 540.
[23](1965) 114 CLR 314 (per Barwick C.J, Kitto and Taylor JJ).
[24]Relying on Commissioner of Taxes v Phillips (1936) 55 CLR 144, at 153 (per Starke J) and 157 (per Dixon and Evatt JJ); Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540, at 568 (per Fullagar J); London and Thames Haven Oil Wharfs Ltd v Attwool (Inspector of Taxes) [1967] 2 All ER 124, at 134 (per Diplock LJ); Tinkler v Federal Commissioner of Taxation (1979) 29 ALR 663, at 665 (per Brennan J) and 668-669 (per Deane and Fisher JJ); Re Allman v Federal Commissioner of Taxation (1998) 98 ATC 2142, at [7]; Ronamin v Commissioner of Taxation [2008] FCA 1532, at [56]; Commissioner of Taxation v Sydney Refractive Surgery Centre Pty Ltd (2008) 172 FCR 557, at [14].
[25]The Commissioner refers to and relies on the decisions in Burrill v Commissioner of Taxation (1996) 96 ATC 4629, at 4631-2 (per Jenkinson, Olney and Sundberg JJ); Federal Commissioner of Taxation v Energy Resources of Australia Limited (1994) 94 ATC 4923, Hill J at 4950; Weight(Inspector of Taxes) v Salmon (1935) 19 TC 174; and Ede(Inspector of Taxes) v Wilson (1945) 26 TC 381. Section 21(1) of the 1936 Assessment Act.
[26]The Commissioner refers to and relies on ss 6-5(4) and 6-10(3) and the decisions in Permanent Trustee Company of NSW v Commissioner of Taxation (1940) ATD 5 at 12 (per Rich J); Brent v Federal Commissioner of Taxation (1971) 125 CLR 418 at 430; Gair v Federal Commissioner of Taxation (1944) 71 CLR 388 at 393-394 (per Latham CJ); Commissioner of Taxation v McNeil (2007) 229 CLR 656; ABB Australia Pty Ltd v Commissioner of Taxation [2007] FCA 1063 at [164] (per Lindgren J); Blankfield v Federal Commissioner of Taxation (1972) 127 CLR 610; Commissioner of Taxation v White [2010] FCA 730 (per Gordon J); Federal Coke Co. Pty Ltd v Federal Commissioner of Taxation (1977) 77 ATC 4255.
54.The Commissioner’s case does not address either the fact that there were contractual rights to be paid bonuses in the future, for services to be provided in the future, which were cancelled; or that there were the contingencies associated with the Applicant’s entitlements to his former bonus entitlements and to his replacement interests in the Trust.
55.The following propositions, also uncontroversial, need consideration in the present circumstances.
(a)An undissected lump sum payment received in consideration of cancellation or discharge of unliquidated damages entitlements on capital account and on revenue account is not on revenue account and is not assessable as income.[27]
(b)It is appropriate to apportion a single amount in some circumstances, including when the payment or receipt is in settlement or discharge of distinct claims, of which some at least are liquidated.[28]
(c)For an amount to be income derived it must be a gain that has come home to a taxpayer in realised or realisable form.[29]
(d)For an amount to have come home it needs to have been received or earned free of restriction.[30]
(e)Assessable income, gross income, net profits and gains are not synonymous with receipts.[31]
(f)For a payment to be income derived, the situation in relation to the payment must have been reached such that it might properly be counted as a gain completely made.[32]
(g)An amount received that is liable to be repaid, if the agreed quid pro quo is not provided by the recipient, is not income derived.
[27]McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381 at 391 (per Dixon C.J., Fullagar and Kitto JJ).
[28]As above, at 391 (per Dixon C.J., Fullagar and Kitto JJ).
[29]Deputy Commissioner of Taxes v Executor Trustee and Agency Co of South Australia Ltd (Carden's Case) (1938) 63 CLR 108 at 155 (per Dixon J).
[30]Arthur Murray (NSW) Pty Ltd Federal Commissioner of Taxation (1965) 114 CLR 314 at 318.
[31]As above, at 318.
[32]As above, at 318.
56.Issues concerning undivided lump sums, and the inability to go behind them to determine the character of amounts received or enjoyed, are not presently relevant. First, while the resolution put to Primelife shareholders to authorise the issue of shares to the Applicant was one of three interdependent resolutions, the issue of shares was not in part consideration for the Applicant procuring that the Mainpoint property would be sold to Primelife. The evidence links the $11,600,000 payment to the cancellation of the bonus entitlements. If there is a linkage between the $11,600,000 payment and the Mainpoint divestment procured by the Applicant, such a linkage would not assist the Applicant. Any such linkage would suggest the appropriate part of the $11,600,000 would be a reward for the Applicant doing something for the benefit of Primelife, which would be a reward on revenue account.[33] Second, the $11,600,000 payment and/or the Primelife shares were not consideration for cancellation and discharge of unliquidated claims on both capital and revenue account. The amount, or the value, can be apportioned and seen in part discharge of bonus entitlements for services provided and in part as discharge of bonus entitlements that might arise in respect of services to be provided in the future.
[33]GP International Pipecoaters PtyLtd v Federal Commissioner of Taxation (1990) 170 CLR 124 is an illustration.
57.The decision in Commissioner of Taxation v White is of particular relevance to that part of the $11,600,000 referable to services that have already been provided. There, Her Honour observed that income does not have to be received as money;[34] an amount does not need to be paid over to the taxpayer to be income and can be derived if it has been dealt with on the taxpayer’s behalf or at the taxpayer’s direction;[35] and if an amount paid to an executive employment trust would otherwise have been income if paid directly to the executive, then the amount paid to the trust will be the executive’s income and contingencies in relation to enjoyment of the benefits of the trust are not to the point.[36]
[34]Commissioner of Taxation v White [2010] FCA 730, at [25].
[35]See above, at [25].
[36]See above, at [28] and [29].
58.To the extent of the bonus entitlements cancelled which were referrable to services already provided by the Applicant in the present circumstances, the decision in Commissioner of Taxation v White[37] governs the outcome.The amount of $7,246,572 is assessable as income derived. Accordingly questions of ss 23L and 26(e) do not arise.
[37]See above.
59.To the extent that the $11,600,000 was not referrable to services that had been provided and was referrable to cancellation of bonus entitlements that might accrue in the future (if services are provided and if conditions precedent to any bonus entitlement are satisfied), the decision in White does not govern the matter.
60.In these circumstances, there is no swapping one monetary amount, which would be assessable, for some other advantage which would be equally assessable. Payment of some millions of dollars in advance of the services being provided would raise a presumption that if the services were not provided the amount would be repayable. Accordingly, Arthur Murray principles would apply and the amount would not be assessable. Therefore, the substitute arrangement would not be tainted with the income character of the original arrangement.
61.In the present circumstances, the Applicant was provided with an opportunity to purchase a parcel of units in a trust he did not control and in respect of which he might not enjoy any benefit for at least one year. This was in substitution for bonus entitlements, in respect of work yet to be performed, which were contingent on the financial performance of a company in the future.
62.In these circumstances, and subject to Part IVA applying, $4,353,428 of the $11,600,000 was not an amount of income derived or an amount otherwise assessable.
PART IVA
63.The Commissioner contends that if all or any part of the $11,600,000 was not part of the Applicant’s taxable income for the 2002 year, then Part IVA applies to cancel a tax benefit to the extent that the $11,600,000 is not so included.
64.The Scheme to which the Commissioner says Part IVA applies is stated in alternate ways.
65.The first Scheme identified by the Commissioner is said to consist of the following steps and events:
(a) establishing the Trust;
(b)Primelife paying $11,600,000 to the Trust on 21 December 2001 at the direction of or on behalf of the Applicant;
(c)the Trust paying $11,600,000 to Primelife on 21 December 2001, in exchange for the issue to it of 5 million ordinary Primelife shares;
(d)Primelife issuing 5 million ordinary Primelife shares to the Trust on or about 21 December 2001;
(e)if it occurred, the Trust lending the Applicant $11,600,000 on interest-free terms in or about January 2002; which sum was used by the Applicant to subscribe for units in the Trust;
(f)the Trust issuing 5 million class A units, in respect of the 5 million ordinary Primelife shares, to the Applicant on or about 23 January 2002.
66.The first alternative Scheme is said to consist of steps (a) and (b) above and the second alternative Scheme is said to consist of steps (a), (b), (c) and (d) above.
67.The additional factual matters that need to be set out to analyse whether Part IVA can apply are that:
(a)the Applicant’s asserts that upon cancellation of the units in the Trust and sale of the Primelife shares a taxable capital gain arose because there was no cost base. That may well have been the calculation of the capital gain that arose made by the Applicant but the foundation for it appears inconsistent with the assertion that there was a loan made by the Trustee to the Applicant and a purchase of units by the Applicant. Unless the debt forgiveness rules have been applied, the foundation for this calculation by the Applicant is questionable;
(b)Primelife did not claim a deduction for the $11,600,000 payment. Whether Primelife was entitled to claim a deduction, contrary to the position it has taken, is open to question.
68.The consequence of the conclusion that, as to the amount of $7,246,572, the Applicant had derived income assessable under s 6-5 means that there cannot be a tax benefit that has been obtained. Thus Part IVA cannot apply in respect of that amount.[38]
[38]See Vincent v Commissioner of Taxation of the Commonwealth of Australia (2002) 124 FCR 350, at [88]-[95].
69.The consequence of the conclusion that $4,353,428 of the $11,600,000 was not derived as assessable income means that there can be a tax benefit that has been obtained. Thus Part IVA can apply in respect of that amount.
70.In the present circumstances it becomes necessary to address whether Part IVA can apply to cancel a tax benefit obtained as a consequence of an arrangement where an employee and an employer restructure the remuneration entitlements for prospective services in a particular way that does not attract immediate taxation.
71.For Part IVA to operate it is necessary that there be a scheme, that the Applicant obtain a tax benefit in connection with the scheme and that the sole or dominant purpose of the person (or at least one of the persons) who entered into or carried out the scheme was to enable the Applicant to obtain the tax benefit.
72.The critical concepts of scheme, obtaining a tax benefit and dominant purpose are addressed, in turn, below.
Scheme
73.The term scheme is widely defined in s 177A of the 1936 Assessment Act. It includes any agreement, arrangement, understanding, promise or undertaking, (whether express or implied and whether enforceable, or intended to be enforceable, by legal proceedings), plan, proposal, action, course of action or course of conduct.
74.Part of a scheme is not a scheme,[39] although a course of conduct might be a scheme, even if it occurs as part of a larger series of transactions.[40]
[39]Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 383, 384.
[40]Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 at [42], [52] and [96].
75.The scheme identified must be related to the tax benefit said to be obtained[41] and it must be something which is the object of a particular, dominant purpose. To this end it must be something to which the matters posited in paragraphs (i) to (viii) of s 177D(b) can or may be relevant.[42]
[41]Commissioner of Taxation v Hart (2004) 217 CLR 216 at [9].
[42]As above, at 259 and 260.
76.In the present circumstances, any of the Schemes identified by the Commissioner meet this definition.
Obtaining a tax benefit
77.In this matter, the relevant test for whether the Applicant obtained a tax benefit is s 177C(1)(a) of the 1936 Assessment Act. That section looks to whether an amount was not included in the Applicant’s assessable income for the (2002) Year, where that amount would have been included, or might reasonably be expected to have been included, in his assessable income for that Year if the Scheme had not been entered into or carried out.
78.To determine whether the Applicant obtained a tax benefit it is necessary to consider, in the absence of the Scheme, what activity the Applicant would have undertaken or might reasonably be expected to have undertaken in lieu of the Scheme; and whether that activity would have, or might reasonably be expected to have, resulted in the subject amount not being included in the Applicant’s assessable income.[43]
[43]Commissioner of Taxation v Lenzo (2008) 167 FCR 255 at [128] per Sackville J, Heerey & Siopis JJ agreeing.
79.In the present circumstances, it is not possible to assert that the Applicant would have been paid $4,353,428 in cash in the first half of the 2002 Year by way of bonuses for the 2002 and 2003 Years. The Applicant's employment may have terminated, Primelife may have returned an economic performance result that did not attract any bonus entitlement or Primelife may not have had surplus cash available to make such a payment. Each of these factors makes the likelihood of such a payment, on terms that it would not have been subject to disgorgement, improbable. Accordingly, such an assumption cannot be relied upon to demonstrate that the Applicant obtained a tax benefit in the requisite sense.
80.It is possible, however, to assert that an issue of shares directly to the Applicant without restriction would have been made. This was the arrangement which was the subject of discussion and agreement between Primelife and the Applicant; an arrangement subsequently authorised by shareholders. The arrangement was altered because of the tax impact that the Applicant would face if that arrangement was implemented.
81.Accordingly, it is possible to show that a tax benefit arose. That benefit was the value of the proportion of the 5 million Primelife shares attributable to the future bonuses: $11,600,000 less $7,246,572 or $4,353,428.
Dominant purpose
82.Whether the Applicant or Primelife (being the parties who entered into or carried out the Scheme/s) did so for the dominant purpose of enabling the Applicant to obtain a tax benefit requires consideration of the eight s 177D(b) factors. These factors:
(a)are objective tests. Had the dominant purpose test been subjective, the requisite conclusion would necessarily be drawn. Primelife and the Applicant assert that the immediate tax benefit associated with an unrestricted issue of shares to the Applicant was to be avoided. Subjective purposes, however, are to be ignored;
(b)are all required to be considered in assessing the relevant purpose; and
(c)can be considered holistically or globally,[44] in assessing the relevant purpose. By extension, sub groupings of these factors can be considered together.
[44]Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 at [94] per Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ.
83.In this matter, some of the factors can be addressed in groups.
Manner in which the scheme was entered into or carried out and the form and substance of the scheme
84.Much of the Commissioner’s case is expressed to depend on the manner in which the Scheme/s was/were entered into or carried out and the form and substance of the Scheme/s, with a heavy emphasis on:
(a) complexity;
(b) round robin funding flows;
(c) significant tax planning;
(d) a significant amount being excluded from assessable income;
(e) lack of formality in documentation; and
(f)the alleged substance of the transactions entered not being the same as the form of those transactions.
85.Complexity of itself is not an uncommon feature of commercial transactions. In circumstances where it is clear that there was to be a structured deferral of full entitlement to any economic benefit associated with the proposed share issue it could be expected that arrangements would be complex. While complexity in the transaction entered into compared with simplicity of an alternate transaction may suggest a tax avoidance purpose, the extent of the suggestion becomes marginal if the complexity produces a legal or equitable state of affairs or relationships sought or intended to be created. In the present circumstances, the alleged complexity is somewhat marginalised.
86.Circular flows of money do not add weight to the Commissioner’s case. So-called round robin transactions may be an effective means by which transactions are undertaken or implemented. Whether they point to a tax avoidance purpose depends upon the surrounding circumstances and the significance they play in the commercial objectives that are sought to be achieved. It has been said that, as a feature of transactions entered into or carried out for tax avoidance purposes, they do not point strongly to that conclusion.[45] In the present case, the circular flows of money are explicable by reference to the commercial objectives that were being pursued.
[45]See Commissioner of Taxation v Sleight (2004) 136 FCR 211 at [77] per Hill J and Calder v Federal Commissioner of Taxation 2005 ATC 4760 at [91] per Nicholson J.
87.As to the Commissioner’s reliance upon tax planning, that matter does not point significantly to a tax avoidance purpose either. Tax planning is a legitimate endeavour to pursue and can be expected.[46]
[46]Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 416 per Brennan C.J., Dawson, Toohey, Gaudron, Gummow and Kirby JJ.
88.The size of the benefit does not add great weight to a conclusion as to tax avoidance purpose.
89.Recognising that participants in transactions attended by a lack of formality in transaction documentation do so at their peril, such a lack of itself does not add great weight to a tax avoidance purpose conclusion where there is an explanation for it. In the present circumstances absence of, or irregularities in, documentation is probably explained as noted above.
90.The substance of the transactions entered into was that the value of the Primelife shares was delivered to the Applicant at least one year after their issue. That is not the same as delivering that value immediately. The potential value might not ever have been enjoyed. The legal form of the transaction was the same as the substance. Accordingly no weight can be attached to this factor.
91.In arriving at a conclusion as to dominant purpose, it is clear that a tax liability was at least deferred; and to achieve that deferral assets of a much larger value were left at risk for 12 months. This exposure of assets worth approximately double the tax benefit enjoyed under a set of arrangements, where form and substance and the manner of execution were directed to that end, displaces a conclusion that obtaining the tax benefit was the dominant purpose of the Scheme/s. Unless the arrangement to expose the Applicant to loss of any entitlement to value represented by the Primelife shares, with the corresponding enhancement of Primelife’s position, is regarded as a sham, it must be recognised.
The time at which the scheme was entered into and the length of the period during which the scheme was carried out
92.For the broadest Scheme identified, the time at which the Scheme was entered into and the length of the period during which the Scheme was carried out commenced with creating the Trust and continued through to the Applicant acquiring units in the Trust. For the narrowest Scheme identified that period commenced with creating the Trust and continued for less than three weeks until $11,600,000 was paid to the Trust. In each case the relevant timing occurred shortly after the Primelife shareholders approved an issue of shares to the Applicant – an approval that would have been required for the alternate possibility of a direct issue of shares to the Applicant. Accordingly the time at which the Scheme was entered into and the length of the period during which the Scheme was carried out does not suggest a tax avoidance purpose.
Results under the Assessment Acts and changes in financial position
93.The comparison of factors (iv), (v) and (vi) in s 177D(b) are pivotal in the conclusion to be reached. Different benefits were actually enjoyed by the Applicant at different times as a consequence of the Scheme/s. Under each Scheme, the Applicant did not enjoy the benefit of the shares for a period of the deferral. His financial position changed dramatically as a consequence of the Scheme/s, by an amount significantly higher than the tax benefit he enjoyed. For the first 12 months of each of the Schemes identified Primelife had the potential to benefit from the existence of a trust with substantial assets that may have been available to provide benefits to its other employees with the attendant benefits that would have been enjoyed as a consequence.
94.If the focus of attention is the broadest Scheme identified, the issue of units in the Trust on the terms on which they were issued become features of the Scheme. On the Applicant’s assertions, and as returned by the Applicant, these features suggest aggregate taxation liabilities for the Applicant over a two year period that would be substantially the same as had the alternate possibility been pursued. If it be permissible to approach the analysis of these factors in this way, the conclusion becomes more compelling.
Remaining factors
95.The remaining factors do not add anything material to the analysis required.
Conclusion as to purpose
96.The Applicant’s circumstances are very different to those which existed in Federal Commissioner of Taxation v Spotless Services Ltd where the means adopted to procure non-assessable foreign source income involved steps through which in legal form there was foreign source income without the usual risks attendant upon or associated with investing offshore.[47] The Applicant sustained the legal risks embodied in the terms of the Trust and the terms on which the units in it were issued to him. It was those terms connected with the Schemes identified by the Commissioner that produced the tax benefit asserted. The Applicant’s circumstances are parallel to those of a person who decides to sell and lease back plant and equipment and as a consequence becomes entitled to deductions for the lease payments and sustains the legal risks of not being an owner of that plant and equipment.[48]
[47]See “Tax Avoidance in Australia”, GT Pagone, The Federation Press, 2010 at page 79.
[48]See Eastern Nitrogen Ltd v Federal Commissioner of Taxation (2001) 108 FCR 27, Lee, Carr and Sundberg JJ.
97.While some factors may point marginally in one direction or point in neither direction, the comparison of the exposure to loss of value of double the tax benefit and the corresponding enhanced position of Primelife (factors (iv), (v) and (vi)) determine the outcome. This comparison points significantly to a dominant purpose of the Scheme being other than to enjoy a tax benefit.
98.If this were not the approach to be adopted when considering if Part IVA could apply to any arrangement under which an employee and an employer change remuneration conditions for prospective services, from taxable salary to another form of benefit which is either not taxed under the income tax system or is taxed under the income tax system in a different way or at a different time under what are colloquially described as salary sacrifice arrangements, then such arrangements would be liable to be defeated by Part IVA.
PENALTY
99.The only additional fact relevant to the question of penalty is that it is apparent that the Applicant did not take separate advice in relation to the preparation of his tax return for the 2002 year. The Applicant was intimately involved in obtaining advice from a firm who had a long history in arranging employee and executive remuneration packages, and in giving advice and obtaining ATO rulings and opinions in relation to such arrangements. It is apparent that the Applicant relied on the advice that was given during the structuring phase of the arrangements he entered; to the effect that there would not be any taxable amount in the 2002 year.
100.The first question in relation to penalty concerns whether any, and if so which, penalties remain in existence.
101.The Commissioner’s records show that the Part IVA or Scheme penalty has been remitted. The Commissioner asserts that, notwithstanding the use of formal words and references to the statutory powers enabling remission, he has not, in fact, remitted either penalty.
102.The conclusion to be reached is that neither the accounting entries posted nor the communication sent by the Commissioner constitutes a remission of any penalty.
103.What the Commissioner has done is attempt to ensure that only one penalty is recovered and that only one penalty remains posted to the ATO computer systems for the Applicant.
104.While the communication of what the Commissioner has done might have been clumsy, there is sufficient information to suggest that the Commissioner has not turned his mind to the process of remission and has not made any decision to do so.
105.The process of remission is, in presently relevant respects, similar to that of assessment. Just as an assessment is a decision-making process of the Commissioner,[49] a remission requires a decision-making process and the steps to give effect to it. Here the decision- making process has not been undertaken.
[49]In the context of an assessment see R v Deputy Federal Commissioner of Taxation (SA); Ex parte Hooper (1926) 37 CLR 368 at 373 per Isaacs J.
106.It might be observed that if the communication of the treatment of the duplicated penalty was as submitted on behalf of the Commissioner, the approach to what constitutes a failure to take reasonable care might need review.
107.The conclusions concerning the derivation of the $4,353,428 part of the $11,600,000 and the operation of Part IVA in respect of this amount resolves any penalty issues – no penalty is payable.
108.The conclusion concerning the derivation of the $7,246,572 part of the $11,600,000 payment means that penalty is in issue.
109.It is sufficiently clear that the Applicant acted in accordance with the advice of an external firm which had a long history in arranging and advising on employee and executive remuneration arrangements.
110.That removes the position of the Applicant from one of recklessness within the meaning of that term as explained by Cooper J in BRK (Bris) Pty Ltd v Commissioner of Taxation.[50]
[50][2001] FCA 164.
111.Whether the Applicant has failed to take reasonable care is a separate question; and whether the Applicant has adopted a reasonably arguable position is another. Given the magnitude of the tax shortfall in issue, the Applicant is required to satisfy both tests.
112.Given the conclusions regarding whether the Applicant adopted a reasonably arguable position, it is not immediately necessary to conclude whether he took reasonable care. Nevertheless it may be necessary for future purposes. Recognising that the Applicant is a senior businessman who could be expected to be more knowledgeable than the average taxpayer and that the amounts were large, the fact that the Applicant acted on advice from a firm who might be expected to have some expertise in the area, who devised the structure, and who could be presumed to be acutely aware of the relevant facts, cannot be ignored. In these circumstances, the Applicant can be regarded as having taken reasonable care.
113.To have taken reasonable care is not the end of the matter. Adopting a reasonably arguable position is a more rigorous standard;[51] and it is possible that a person can take reasonable care and yet fail to adopt a reasonably arguable position.
[51]Walstern v Commissioner of Taxation [2003] FCA 1428 at [106] per Hill J.
114.To satisfy the reasonably arguable position test, it is necessary to demonstrate that the position adopted, while wrong, was as likely as not to be correct. This requires a taxpayer to have adopted a position that is supported by a reasoned case that could be put with some prospect that it might be accepted:
The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer's view is ultimately seen to be wrong it is nevertheless `about' as likely to be correct as the correct view. A question of judgment is involved.[52]
[52]As above at [108(7)] per Hill J.
115.In this matter the preferable conclusion is that the Applicant did not have a reasonably arguable position.
116.The transactions entered into, to deliver the Applicant’s bonus entitlement for services already provided, were not such that an argument could be advanced that the $7,246,572 part of the $11,600,000 was not derived as income, with expectations that it could succeed.
117.Finally, should the penalty that stands be remitted? The principal criterion is that the penalty be harsh. The Applicant has not advanced material that would provide a foundation for such a conclusion to be reached.
CONCLUSIONS
118.For the foregoing reasons:
(a)$7,246,572 of the $11,600,000 payment was properly assessable in the 2002 Year as either:
(i)ordinary income, pursuant to s 6-5 of the 1997 Assessment Act; or
(ii)statutory income, pursuant to s 6-10 of the 1997 Assessment Act and s 26(e) of the 1936 Assessment Act;
and questions of the exemptions in ss 23L and 26(e) do not arise;
(b)the remaining $4,353,428 of the $11,600,000 payment was not assessable;
(c)Part IVA of the 1936 Assessment Act does not apply to include any part of the $11,600,000 in the Applicant’s assessable income in the 2002 Year;
(d)neither imposition of administrative penalty has been remitted by the Commissioner and penalty is properly assessed at the 25% level for failure to adopt a reasonably arguable position by reference to the reduced tax shortfall amount in respect of the $7,246,572 part of the $11,600,000 payment; and
(e) no further remission is appropriate in the circumstances.
DECISION
119.The Tribunal sets aside the objection decisions and directs that assessments be amended in accordance with these reasons.
I certify that the one hundred and nineteen [119] preceding paragraphs are a true copy of the reasons for the decision herein of:
Mr Frank O’Loughlin, Senior MemberSigned:...........................[signed]..............................................
Associate Grace HorzitskiDates of Hearing 17, 18, 20 May 2010
Date of Decision 25 March 2011
Counsel for the Applicant Dr N. Orow
Solicitor for the Applicant Schetzer Brott & Appel
Counsel for the Respondent Mr T. Murphy S.C. and Mr S. Sharpley
Solicitor for the Respondent Australian Government Solicitor
Appendix 1
1936 Assessment Act
Income Tax Assessment Act 1936 (Cth)
1997 Assessment Act
Income Tax Assessment Act 1997 (Cth)
ATO
Australian Taxation Office
Commissioner
The Respondent Commissioner of Taxation of the Commonwealth of Australia
Employment Agreement
the five year term employment contract between the Applicant and Primelife entered shortly before 1 July 1998
Eskaton
Eskaton Pty Ltd
FBT Assessment Act
Fringe Benefits Tax Assessment Act 1986 (Cth)
Fitton
Mr Gary Fitton, a director and principal of Trinity and its related entities
Lom
Mr Paul Lom
Mainpoint
Mainpoint Developments Pty Ltd
PKF
PKF Corporate Advisory Services (Vic) Pty Ltd
Primelife
Primelife Corporation Limited
Primelife Share Plans
Primelife Share Plans Pty Ltd
Share Issue Deed
Deed between the Applicant and Primelife dated 2 October 2001
Trinity
Trinity Management Group Pty Ltd
Trust
The Primelife Executive Share Trust created by the Trust Deed
Trust Deed
The deed dated 4 December 2010 by which the Trust was created
Year
A financial year ending on 30 June
0
36
1