Davies v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 696 of 2014)
Judgment date: 31 July 2015
Date published: 9 May 2017

Summary of decision:
Outlines the ATO's response to this case which concerns whether pursuant to relevant transitional provisions, the former Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) applies to shares & options granted to the taxpayer in the course of an employee share scheme.

Overview of facts:
The taxpayer is the sole director and sole employee of Dalara Investments Pty Limited (Dalara). At all relevant times, the taxpayer controlled Dalara. | The taxpayer was appointed as Executive Director - Operations of Whitehaven Coal Limited (Whitehaven) on 19 February 2009. Prior to his appointment, it was agreed between the taxpayer and Whitehaven that if the taxpayer were appointed, he would be remunerated by way of a share and option package in Whitehaven. Additionally, the taxpayer and Whitehaven were also aware that Whitehaven could not issue the shares or options to the taxpayer without first obtaining the approval of the company in general meeting. | On 27 April 2009, the taxpayer executed a Share Subscription and Option Deed (Deed) as a director of Dalara to formalise the earlier remuneration agreement. The Deed specified that the issue of the Shares and Options was subject to the obtainment of Share and Option Approvals at a general meeting. | On 17 November 2009, the share and options package for the taxpayer was approved at Whitehaven's annual general meeting. Subsequently, on or around 14 December 2009, Dalara subscribed for shares in Whitehaven. Dalara was also alloted options over ordinary shares in three tranches on 14 December 2009, 31 October 2010 and 31 October 2011. | The taxpayer lodged his 2009 income tax return including in his assessable income the discount received on the shares and options. The taxpayer held the view that discount received on the shares and options was included in his assessable income under former Division 13A of the ITAA 1936 at the time the Deed was entered into (in the 2009 income tax year). | The Commissioner issued amended assessments to the taxpayer for the 2009 to 2011 income years, including shortfall interest. The assessments were amended on the basis that the shares and options were instead to be assessed under Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997); in later years and in different amounts. The Commissioner also issued the taxpayer with a notice of assessment for the 2012 year consistent with this position. | The Commissioner disallowed the objections that the taxpayer lodged against the assessments and the taxpayer commenced proceedings in the Federal Court under Part IVC of the Taxation Administration Act 1953. | Issues decided by the court | The Court found that when the Deed was signed on 27 April 2009 Dalara had obtained a contingent right. This contingent right was a right to have the shares and options issued to it, once approval by general meeting was obtained. Approval by a general meeting was therefore a condition precedent to the performance of the contract. Once approved by the annual general meeting on 17 November 2009, the contingent right became a right to acquire shares. That being so, section 83A-15 of the Income Tax (Transitional Provisions) Act 1997 applied with the result that the right arising from the Deed was a right which became a right to acquire a beneficial interest in a share. Former Division 13A of the ITAA 1936, in this transitional situation, brought the discount received on the shares and options to tax when the Deed was executed in the 2009 income tax year. | The Court also found that the rights arising from the Deed which were subject to approval at the annual general meeting were not rights to acquire a share for the purposes of former Division 13A of the ITAA 1936 and were therefore only brought to tax under former Division 13A of the ITAA 1936 by application of the transitional provisions in section 83A-15 of the Income Tax (Transitional Provisions) Act 1997.

Issues decided:
The Court found that when the Deed was signed on 27 April 2009 Dalara had obtained a contingent right. This contingent right was a right to have the shares and options issued to it, once approval by general meeting was obtained. Approval by a general meeting was therefore a condition precedent to the performance of the contract. Once approved by the annual general meeting on 17 November 2009, the contingent right became a right to acquire shares. That being so, section 83A-15 of the Income Tax (Transitional Provisions) Act 1997 applied with the result that the right arising from the Deed was a right which became a right to acquire a beneficial interest in a share. Former Division 13A of the ITAA 1936, in this transitional situation, brought the discount received on the shares and options to tax when the Deed was executed in the 2009 income tax year. The Court also found that the rights arising from the Deed which were subject to approval at the annual general meeting were not rights to acquire a share for the purposes of former Division 13A of the ITAA 1936 and were therefore only brought to tax under former Division 13A of the ITAA 1936 by application of the transitional provisions in section 83A-15 of the Income Tax (Transitional Provisions) Act 1997.

ATO view of decision:
The ATO accepts that on the facts of the matter, it was open to the Court to find that the rights created by the existence of the Deed were rights which became a right to acquire a beneficial interest in a share and will not appeal the decision. A right created by the contract which is a contingent right to receive shares is a right which becomes a right to acquire a beneficial interest in a share. The ATO will adopt this reasoning of the Court, where applicable, when determining whether a right becomes a right to acquire a beneficial interest in a share for the purposes of section 83A-15 of the Income Tax (Transitional Provisions) Act 1997 and the similarly worded section 83A-340 of the ITAA 1997.

Administrative treatment:
Taxation Determination TD 2014/21 has been withdrawn, and replaced by Taxation Determination TD 2016/17. | There are two Class Rulings to which Davies is relevant: • Class Ruling CR 2012/12 does not require adjustment, as it is consistent with this decision. • Class Ruling CR 2011/19 does not require adjustment because the relevant scheme was entered into before the date of effect of TD 2016/17 (9 September 2015). As such, the class of entities to which CR 2011/19 applies may elect to apply this TD or their Class Ruling (provided they entered into the scheme during the term of the Class Ruling), whichever produces the more favourable outcome. | • Class Ruling CR 2012/12 does not require adjustment, as it is consistent with this decision. • Class Ruling CR 2011/19 does not require adjustment because the relevant scheme was entered into before the date of effect of TD 2016/17 (9 September 2015). As such, the class of entities to which CR 2011/19 applies may elect to apply this TD or their Class Ruling (provided they entered into the scheme during the term of the Class Ruling), whichever produces the more favourable outcome. | Date of amendment Part Comment 9 May 2017 Administrative treatment Updated to reflect the withdrawal of TD 2014/2 and that no amendments required to CR 2011/19 and CR 2012/12 Comments section Deleted

Legislative references: Income Tax Assessment Act 1936 Div 13A 139B 139D 139G Income Tax Assessment Act 1997 Div 83A 83A-25 83A-305 83A-340 Income Tax (Transitional Provisions) Act 1997 83A-15
Case references: Brown v Heffer (1967) 116 CLR 344 (1967) 41 ALJR 195 [1968] ALR 89 [1967] HCA 40 DHJPM Pty Ltd v Blackthorn Resources Ltd (2011) 83 NSWLR 728 [2011] NSWCA 348 (2011) 285 ALR 311 Federal Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 2000 ATC 4378 (2000) 44 ATR 370 [2000] HCA 35 (2000) 74 ALJR 1094 (2000) 172 ALR 346 Fowler v Federal Commissioner of Taxation [2013] FCAFC 69 (2013) 212 FCR 149 2013 ATC 20-398 (2013) 92 ATR 595 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 (1982) 56 ALJR 445 (1982) 41 ALR 441 [1982] HCA 29 Woodside Energy Ltd v Federal Commissioner of Taxation [2009] FCAFC 12 (2009) 174 FCR 91 (2009) 74 ATR 922