WILLIS Applicant And COMMISSIONER OF TAXATION

[2010] AATA 420

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 420

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2009/0851

TAXATION        APPEALS         DIVISION		)
Re		WILLIAM WILLIS

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr B H Pascoe, Senior Member

Date8 June 2010

PlaceMelbourne

Decision The Tribunal affirms the decision under review

(sgd) B H Pascoe

Senior Member

INCOME TAX -  employee share scheme - issue of options - date of acquisition of options - whether acquired on date of shareholder approval or date of allotment

Income Tax Assessment Act 1936 Division 13A

REASONS FOR DECISION

8 June 2010 Mr B H Pascoe, Senior Member  

1.      This is an application to review a decision of the respondent to disallow an objection against an amended assessment of income tax in respect of the year ended 30 June 2005.  The objection was against the inclusion of $427,000 as assessable income being the alleged value of options to acquire shares in the applicant’s employer company.

2. Pursuant to s 34J of the Administrative Appeals Tribunal Act 1975 (AAT Act) the Tribunal being satisfied that the issues for determination can be adequately determined in the absence of the parties and both parties having consented to the review being determined without a hearing, the decision has been reviewed by consideration of the documents lodged with the Tribunal and without holding a hearing.  The documents considered by the Tribunal were the documents provided by the respondent pursuant to s 37 of the AAT Act (T1-T30) and submissions from the parties.

3.      The applicant Mr W Willis, was a director and chairman of the board of directors of Mt Gibson Iron Ltd (Mt Gibson) during the year ended 30 June 2005.  The issue in dispute concerns the allotment of 1,000,000 options to acquire shares in Mt Gibson at an exercise price of 25 cents.  The sole issue between the parties is the date on which the options were acquired by Mr Willis.  The respondent determined in the amended assessment that the date of acquisition was 8 April 2005, the recorded date of allotment of the options.  For Mr Willis, it was contended that the date of acquisition was 3 May 2004, the date of the General Meeting of Mt Gibson where shareholder approval was given to the allotment of the options.  The date of acquisition is significant as a result of the increase in market value of Mt Gibson shares between the two dates.

4.      At a General Meeting of Mt Gibson on 3 May 2004 a total of 15 resolutions were passed by shareholders.  All of the resolutions put to shareholders related to the proposed issue of shares and options.  Of specific relevance to this matter was Resolution 7 which was in the following words:

That subject to Resolution 6 being passed and pursuant to section 208 of the Corporations Act and ASX Listing Rule 10.14 and for all other purposes approval be and is hereby given, to the allotment of 1,000,000 Options over Shares in the Company under the terms of the Mount Gibson Iron Limited Directors, Officers, Employees and Other Permitted Persons Option Plan to William B. Willis or his nominees, the Options to be exercisable at 25 cents each, on or before 31 December 2006.  The issue of Options in the Company will occur no later than 12 months, or such later date to the extent permitted by an ASX waiver of the Listing Rules, from the date of the General Meeting.

Resolution 6 at that meeting was in the following terms:

That pursuant to ASX Listing Rule 7.2 (exception 9) and for all other purposes, approval be, and is hereby given, to the establishment of the Mount Gibson Iron Limited Directors, Officers, Employees and Other Permitted Persons Option Plan in accordance with the Rules in the form set out in Annexure “C” to this Notice of Meeting and signed by the Managing Director by way of identification, and that the Directors be, and are hereby, authorised to administer the Mount Gibson Iron Limited Directors, Officers, Employees and Other Permitted Persons Option Plan in accordance with those rules.

Of possible relevance to the issue before the Tribunal, the Rules of the plan contain the following clauses:

2.Subject to the passing of an ordinary resolution by the shareholders of the Company authorising the establishment of the Plan at a General Meeting of the Company to be held on 3 May 2004 and to due compliance with Chapter 6D of the Corporations Act, the Plan shall take effect from such date subsequent to that meeting as resolved by the Board.

3.1“Issue Date” means in relation to an Option, the date on which the Company grants that Option;

4.2The Board may terminate the Plan, or suspend its operation for any period it considers desirable, at any time that it considers appropriate.

5.1The Company shall not offer or issue options … if the total number of shares the subject of the options … would exceed 5% of the total number of issued shares in the Company …

7.1Subject to these Rules and to the Listing Rules, the Company (acting through the Board) may offer Options to any Eligible Persons at such times and on such terms as the Board considers appropriate.  Each offer must state or include:-

(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 Exercise Price of the Options;

(c)the period within which the offer may be accepted;

(d)a copy of the Plan;

(e)an undertaking to provide the Eligible Person with verbal advice of the current market price of the Shares within two Business Days of request made by the Eligible Person at any time prior to the Expiry Date;

(f)confirmation that the offer document has been or will be provided to ASIC with seven days after the provision of this material to the Eligible Person; and

(g)any other matter which the Board may determine.

7.2Upon receipt of an offer of Options, an Eligible Person may, within the period specified in the offer:-

(a)accept the whole or any lesser number of Options offered by notice in writing to the Board; or

(b)nominate a nominee in whose favour the Eligible Person wishes to renounce the offer by notice in writing to the Board.  The Board may, in its absolute discretion, resolve not to allow such renunciation of an offer in favour of a nominee without giving any reason for such decision.

7.3      Upon:-

(a)receipt of the acceptance referred to in clause 7.2(a); or

(b)the Board resolving to allow a renunciation of an offer in favour of a nominee (“Permitted Nominee”) and the Permitted Nominee accepting the whole or any lesser number of Options offered by notice in writing to the Board,

then the Eligible Person or the Permitted Nominee, as the case may be, will be taken to have agreed to be bound by these Rules and will be issued Options subject to these Rules.

7.4Certificates for Options will be dispatched within 10 Business Days after their Issue Date.

5. By letter of 15 April 2005 Mr Willis was provided with an Issuer Sponsored Holding Statement for the 1,000,000 options issued under the Option Plan as approved by shareholders on 3 May 2004. The Holding Statement showed the date of allotment as 8 April 2005. The Australian Stock Exchange was advised of the issue of the options showing the date of issue as 8 April 2005. The registered owner of the options was shown as W Willis and R Willis as trustees of the Willis Superannuation Fund. There is no document evidencing the nomination of the superannuation fund but there is no dispute that such nomination was made. Neither was there any dispute that s 139D of the Income Tax Assessment Act 1936 (the Act) included any amount of discount in the assessable income of Mr Willis.

6. Division 13A of Part III of the Act deals with employee share schemes. Section 139B includes in the assessable income of a taxpayer the discount given in relation to a share or right if the taxpayer has acquired the share or right under an employee share scheme. Section 139CC provides that the discount is the market value of the share or right at the time when it was acquired by the taxpayer less any consideration paid.  Section 139G provides that:

A person acquires a share or right if:

…

(c)       in the case of a right – another person creates the right in that person.

Unfortunately, the Act does not assist in defining the time of acquisition.

7.      It was submitted for the respondent that s 139G implies that the time of acquisition is the occurrence of the event listed in that section being the date when the right was created in a person.  It was said that, while the General Meeting of 3 May 2004 approved the grant of the options, they were not created until the Board took the further steps required under the Plan rules.  It was said that the date of acquisition was the date on which the options were allotted and not repudiated by Mr Willis.  The respondent submitted that the date of acquisition was 8 April 2005, there being no evidence that the Board took any steps under the rules of the Plan to create the options at any earlier date.

8.      For Mr Willis, it was submitted by his legal representative, Mr J Young, that the date of acquisition was 3 May 2004 in that, on the passing of the resolution, there was nothing further required of Mr Willis to have the options registered in the name of his nominee, the superannuation fund.  It was said that, as chairman of the Board, Mr Willis had been involved in the discussions and processes which ultimately led to the shareholders’ meeting and the passing of the resolution for the grant of options.  It was said that, as part of those discussions, he had already decided that the options would be issued to the superannuation fund and nothing further needed to be done.

9.      While the Act does not define a time of acquisition, it is difficult to see it being prior to a time when the right is created.  Again, the Act does not define right but it is clear from a reading of Division 13A that the right which is in issue here is a right to take up shares in a company. The resolution of 3 May 2004 did nothing more than approve in advance the allotment by the Board of 1,000,000 options pursuant to the Option Plan. The resolution required such allotment to occur no later than 12 months from the date of the meeting. At its best it may be said that, on 3 May 2004, Mr Willis had a right to have the Board issue the options under the Plan within the next 12 months. I am unable to see that it can be said that Mr Willis acquired the right, being the options, at any time prior to the date when those options were created. The rules of the Plan required the options to be offered to the person and that person to accept part or all of the options or nominate a recipient. Whether these steps were taken is not clear from the evidence.

10.     There is no evidence that the options were created prior to 8 April 2005.  Irrespective of any prior offer or authorisation to allot the options, it seems clear that a person cannot acquire an option that did not exist prior to that date.

11.     There is no dispute as to the calculation of the discount included in the assessable income.  Unfortunately for Mr Willis the market value of the Mt Gibson shares increased significantly between 3 May 2004 and 8 April 2005.

12.     It follows from the foregoing that the decision under review should be affirmed.

I certify that the twelve [12] preceding paragraphs are a true copy of the reasons for the decision herein of
Mr B H Pascoe, Senior Member

(sgd): Leah Berardi
  Clerk

Date of Hearing  29 April 2010 (Hearing on the Papers)
Date of Decision  8 June 2010
Solicitor for the Applicant             Mr J Young, Consulting Tax Lawyer 

Solicitor for the Respondent        Ms A Moutafis, Australian Tax Office,

Legal Service Branch