Blank v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: High Court (S144 of 2016)
Judgment date: 9 November 2016
Date published: 13 January 2017

Summary of decision:
Outlines the ATO's response to this case which concerns whether an amount paid to a taxpayer was ordinary income as a reward for services and therefore assessable pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Overview of facts:
Between November 1991 and 31 December 2006, the taxpayer was employed by Glencore International AG (GI) or one of its subsidiaries within the Glencore Group and worked variously in South Africa, Switzerland, Hong Kong and, from early 2002, in Australia. | The taxpayer became a tax resident of Australia on 2 January 2002 and retained that status at all relevant times thereafter. | Over the course of his employment with the Glencore Group, the taxpayer participated in a number of employee profit participation arrangements operated by the Group. Participation was governed by two 'stapled' agreements: • a 'Shareholders' Agreement' with Glencore Holding AG ('GH', one of the two ultimate holding companies in the Glencore group); and • a 'Profit Participation Agreement' with GI. | • a 'Shareholders' Agreement' with Glencore Holding AG ('GH', one of the two ultimate holding companies in the Glencore group); and • a 'Profit Participation Agreement' with GI. | The agreements underwent a number of amendments and revisions during the period the taxpayer participated in the profit participation arrangements. Relevantly, the governing documents at the time the taxpayer terminated his employment were the Shareholders' Agreement 2005 (SA 2005) and the Incentive Profit Participation Agreement 2005 (IPPA 2005). | Over the period 1993 to 2003, the taxpayer subscribed to 1,600 shares in GH. Under the IPPA 2005 this entitled him to an equal number of profit participation units (PPUs). The PPUs were used to allocate a portion of GI's adjusted balance sheet profits to the taxpayer each year. The annual profit allocations were aggregated over the period during which the taxpayer was taken to have held the PPUs, up to and including the last day of the month in which he gave notice of the termination of his employment. | The taxpayer terminated his employment with the Glencore Group on 31 December 2006. Pursuant to a declaration of assignment and general release which the taxpayer executed on 15 March 2007, and in accordance with the IPPA 2005, the taxpayer became entitled to receive from GI an amount of USD 160,033,328.25 (the Amount) payable in 20 quarterly instalments. The taxpayer did not return the Amount as ordinary income; instead he returned it as the proceeds from the disposal of a capital asset. | The Commissioner successfully argued both at first instance and on appeal to the Full Federal Court that the Amount was deferred compensation for the taxpayer's employment and assessable as ordinary income upon receipt. | The taxpayer sought, and obtained, special leave to appeal to the High Court. | Issues decided by the court | The primary issue decided by the Court was the proper characterisation of the Amount in the hands of the taxpayer. This, in turn, depended on the proper construction of the IPPA 2005. (a) The Commissioner contended that the Amount to which the taxpayer became entitled upon the termination of his employment was payable to the taxpayer as deferred compensation for his employment and that the PPUs and associated rights were issued solely for the purposes of calculating the amount of deferred compensation. (b) The taxpayer, on the other hand, contended that the Amount was paid as consideration for the disposal of the PPUs and associated rights being anterior proprietary rights that had been conferred upon the taxpayer as a reward for his employment and which were assessable when issued to the taxpayer, either as ordinary income or under paragraph 26(e) of the Income Tax Assessment Act 1936 (ITAA 1936), and which thereafter were held by the taxpayer on capital account. | (a) The Commissioner contended that the Amount to which the taxpayer became entitled upon the termination of his employment was payable to the taxpayer as deferred compensation for his employment and that the PPUs and associated rights were issued solely for the purposes of calculating the amount of deferred compensation. (b) The taxpayer, on the other hand, contended that the Amount was paid as consideration for the disposal of the PPUs and associated rights being anterior proprietary rights that had been conferred upon the taxpayer as a reward for his employment and which were assessable when issued to the taxpayer, either as ordinary income or under paragraph 26(e) of the Income Tax Assessment Act 1936 (ITAA 1936), and which thereafter were held by the taxpayer on capital account. | By joint judgment, the High Court unanimously agreed with the approach taken by Edmonds J at first instance and the majority of the Full Federal Court. The High Court held that the Amount to which the taxpayer became entitled upon the termination of his employment was deferred compensation for services rendered as an employee and therefore assessable as income according to ordinary concepts. The fact that the Amount was paid after termination of the contract of service, by a person other than the taxpayer's employer, and separately to ordinary wages, salary or bonuses, did not detract from this characterisation. | The Court disagreed with the taxpayer's contention that his associated rights under the agreements were assets of a proprietary nature, analogous to options. The Court characterised the Amount, not as proceeds from the exploitation of any anterior set of rights, but as the performance of the promise to pay money under the IPPA 2005 on satisfaction of the conditions on which that performance depended. The Court distinguished the taxpayer's rights from the options considered in Abbott v Philbin [1961] AC 352 on the basis that, in that case, the employee's rights were unconditional and could be exercised at any time. By contrast, any rights or claims the taxpayer had acquired were 'merely executory' and neither vested nor accrued. Nor could they be turned to pecuniary account - the taxpayer's ability to assign his rights and claims to an entity under his complete control did not 'bring home' the value of those rights prior to them having vested. | The Court observed that if the taxpayer's contention was correct, and the value of executory and conditional promises to pay money in relation to employment or services rendered were assessable under paragraph 26(e) of the ITAA 1936, then every employee would be rendered an accruals-based taxpayer taxable on their wages and salary before they received it. Their Honours noted that such a conclusion could not be correct. | Alternative contentions | By notice of cross contention, the Commissioner argued, in the alternative, that: • the Amount was assessable income under the second limb of the Federal Commissioner of Taxation v Myer Emporium (1987) HCA 18; or • each instalment of the Amount was assessable as either an eligible termination payment under subsection 27A(1) of the ITAA 1936, or an employment termination payment under subparagraph 82-130(1)(a)(i) of the ITAA 1997. | • the Amount was assessable income under the second limb of the Federal Commissioner of Taxation v Myer Emporium (1987) HCA 18; or • each instalment of the Amount was assessable as either an eligible termination payment under subsection 27A(1) of the ITAA 1936, or an employment termination payment under subparagraph 82-130(1)(a)(i) of the ITAA 1997. | As the Court held in favour of the Commissioner on the primary issue, these alternative contentions did not arise. | Application to cross appeal: CGT cost base | Given the Court determined that the Amount was not in the nature of a capital gain it was unnecessary for the Court to consider the Commissioner's application for special leave to cross-appeal from the Full Court in relation to the cost base of the PPUs and associated rights. | Application to cross appeal: timing question | The taxpayer was a receipts based taxpayer and therefore the Amount was assessable upon actual or constructive receipt. | The Commissioner sought special leave to cross-appeal from the Full Federal Court's decision on the basis that if the Amount was assessable income under section 6-5 of the ITAA 1997, then the taxpayer derived two instalments of the Amount in the 2007 income year because those instalments were 'applied or dealt with' on his behalf, or as he directed, in that year, within the meaning of subsection 6-5(4) of the ITAA 1997. | The Commissioner's contention was that an agreement had been reached prior to 17 March 2007 to vary the payment terms for the first two instalments. | The High Court refused special leave on the basis that the question was one of fact not involving a principle of general application.

Issues decided:
The primary issue decided by the Court was the proper characterisation of the Amount in the hands of the taxpayer. This, in turn, depended on the proper construction of the IPPA 2005. (a) The Commissioner contended that the Amount to which the taxpayer became entitled upon the termination of his employment was payable to the taxpayer as deferred compensation for his employment and that the PPUs and associated rights were issued solely for the purposes of calculating the amount of deferred compensation. (b) The taxpayer, on the other hand, contended that the Amount was paid as consideration for the disposal of the PPUs and associated rights being anterior proprietary rights that had been conferred upon the taxpayer as a reward for his employment and which were assessable when issued to the taxpayer, either as ordinary income or under paragraph 26(e) of the Income Tax Assessment Act 1936 (ITAA 1936), and which thereafter were held by the taxpayer on capital account. (a) The Commissioner contended that the Amount to which the taxpayer became entitled upon the termination of his employment was payable to the taxpayer as deferred compensation for his employment and that the PPUs and associated rights were issued solely for the purposes of calculating the amount of deferred compensation. (b) The taxpayer, on the other hand, contended that the Amount was paid as consideration for the disposal of the PPUs and associated rights being anterior proprietary rights that had been conferred upon the taxpayer as a reward for his employment and which were assessable when issued to the taxpayer, either as ordinary income or under paragraph 26(e) of the Income Tax Assessment Act 1936 (ITAA 1936), and which thereafter were held by the taxpayer on capital account. By joint judgment, the High Court unanimously agreed with the approach taken by Edmonds J at first instance and the majority of the Full Federal Court. The High Court held that the Amount to which the taxpayer became entitled upon the termination of his employment was deferred compensation for services rendered as an employee and therefore assessable as income according to ordinary concepts. The fact that the Amount was paid after termination of the contract of service, by a person other than the taxpayer's employer, and separately to ordinary wages, salary or bonuses, did not detract from this characterisation. The Court disagreed with the taxpayer's contention that his associated rights under the agreements were assets of a proprietary nature, analogous to options. The Court characterised the Amount, not as proceeds from the exploitation of any anterior set of rights, but as the performance of the promise to pay money under the IPPA 2005 on satisfaction of the conditions on which that performance depended. The Court distinguished the taxpayer's rights from the options considered in Abbott v Philbin [1961] AC 352 on the basis that, in that case, the employee's rights were unconditional and could be exercised at any time. By contrast, any rights or claims the taxpayer had acquired were 'merely executory' and neither vested nor accrued. Nor could they be turned to pecuniary account - the taxpayer's ability to assign his rights and claims to an entity under his complete control did not 'bring home' the value of those rights prior to them having vested. The Court observed that if the taxpayer's contention was correct, and the value of executory and conditional promises to pay money in relation to employment or services rendered were assessable under paragraph 26(e) of the ITAA 1936, then every employee would be rendered an accruals-based taxpayer taxable on their wages and salary before they received it. Their Honours noted that such a conclusion could not be correct. | Alternative contentions: By notice of cross contention, the Commissioner argued, in the alternative, that: • the Amount was assessable income under the second limb of the Federal Commissioner of Taxation v Myer Emporium (1987) HCA 18; or • each instalment of the Amount was assessable as either an eligible termination payment under subsection 27A(1) of the ITAA 1936, or an employment termination payment under subparagraph 82-130(1)(a)(i) of the ITAA 1997. • the Amount was assessable income under the second limb of the Federal Commissioner of Taxation v Myer Emporium (1987) HCA 18; or • each instalment of the Amount was assessable as either an eligible termination payment under subsection 27A(1) of the ITAA 1936, or an employment termination payment under subparagraph 82-130(1)(a)(i) of the ITAA 1997. As the Court held in favour of the Commissioner on the primary issue, these alternative contentions did not arise. | Application to cross appeal: CGT cost base: Given the Court determined that the Amount was not in the nature of a capital gain it was unnecessary for the Court to consider the Commissioner's application for special leave to cross-appeal from the Full Court in relation to the cost base of the PPUs and associated rights. | Application to cross appeal: timing question: The taxpayer was a receipts based taxpayer and therefore the Amount was assessable upon actual or constructive receipt. The Commissioner sought special leave to cross-appeal from the Full Federal Court's decision on the basis that if the Amount was assessable income under section 6-5 of the ITAA 1997, then the taxpayer derived two instalments of the Amount in the 2007 income year because those instalments were 'applied or dealt with' on his behalf, or as he directed, in that year, within the meaning of subsection 6-5(4) of the ITAA 1997. The Commissioner's contention was that an agreement had been reached prior to 17 March 2007 to vary the payment terms for the first two instalments. The High Court refused special leave on the basis that the question was one of fact not involving a principle of general application.

ATO view of decision:
The Commissioner notes that the decision of the Court is consistent with the submissions made to the Court by the Commonwealth Solicitor-General on the Commissioner's behalf.

Administrative treatment:
Implications for impacted ATO precedential documents (Public Rulings, Determinations, ATO IDs) | None. | Implications for impacted Law Administration Practice Statements | None.

Legislative references: Income Tax Assessment Act 1936 26(e) 27A(1) Income Tax Assessment Act 1997 6-5(1) 6-5(4) 82-130(1)(a)(i)
Case references: Olsson v Dyson (1969) 120 CLR 365 Blank v Federal Commissioner of Taxation [2014] FCA 87 2014 ATC 20-442 (2014) 95 ATR 1 Blank v Federal Commissioner of Taxation [2015] FCAFC 154 2015 ATC 20-536 Neilson v Overseas Projects Corporation of Victoria Ltd (2005) 223 CLR 331 Mutual Acceptance Co Ltd v Federal Commissioner of Taxation [1944] HCA 34 (1944) 69 CLR 389 (1944) 7 ATD 506 Donaldson v Federal Commissioner of Taxation (Cth) [1974] 1 NSWLR 627 (1974) 4 ATR 530 (1974) 74 ATC 4192 Federal Commissioner of Taxation v McArdle (1988) 19 ATR 1901 (1988) 89 ATC 4051 Abbott v Philbin [1961] AC 352 Commissioner of Taxation v McNeil [2007] HCA 5 (2007) 229 CLR 656 (2007) 64 ATR 431 2007 ATC 4223 Tagget v Federal Commissioner of Taxation [2010] FCAFC 109 (2010) 188 FCR 128 2010 ATC 20-210 (2010) 80 ATR 399 Permanent Trustee Company of New South Wales Ltd v Federal Commissioner of Taxation (1940) 64 CLR 663 (1940) 6 ATD 5 (1940) 2 AITR 109 Scott v Federal Commissioner of Taxation [1966] HCA 48 (1966) 117 CLR 514 (1966) 14 ATD 286 Brent v Federal Commissioner of Taxation [1971] HCA 48 (1971) 125 CLR 418 (1971) 2 ATR 563 71 ATC 4195 Blank v Federal Commissioner of Taxation (No 2) [2014] FCA 517 2014 ATC 20-455 (2014) 98 ATR 379 Neilson v Overseas Projects Corporation of Victoria Ltd (2005) 223 CLR 331 Federal Commissioner of Taxation v Dixon [1952] HCA 65 (1952) 86 CLR 540 (1952) 10 ATD 82 Henry v Foster (1931) 16 TC 605 Dewhurst v Hunter (1932) 16 TC 637 Reseck v Federal Commissioner of Taxation [1975] HCA 38 (1975) 133 CLR 45 (1975) 5 ATR 538 75 ATC 4213