Fowler v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 795 of 2012)
Judgment date: 3 July 2013
Date published: 27 August 2013

Summary of decision:
Outlines the ATO's response to this case which concerns the date on which a director of a public company acquired rights under an employee share scheme (ESS) within the meaning of Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936).

Overview of facts:
The taxpayer was appointed a non-executive director of Nexus Energy Ltd (Nexus), a public company, on 11 April 2000, and continued in that position until 16 November 2007, when he was appointed non-executive chairman of the board of Nexus. | Nexus had an employee share option plan (ESOP) which it had established in November 2003. The ESOP was governed by rules. At a meeting of the Nexus board of directors on 14 September 2006, it was resolved that, as part of their remuneration, options would be issued to the directors on the same terms and conditions as the ESOP, and that shareholder approval would be obtained prior to issue. | On 29 September 2006, Nexus announced to the Australian Securities Exchange (ASX) that 4,770,000 options were to be issued to directors, subject to shareholder approval at the next Annual General Meeting (AGM). On 30 November 2006, the AGM approved the issue of options to the directors, including the issue of 742,500 options to the taxpayer. On 8 December 2006, in accordance with the ASX Listing rules, Nexus notified the ASX that the taxpayer had acquired 742,500 options on 30 November 2006 through his nominee, Tess Aust P/L. In its annual report for the 2007 income year, Nexus stated that it had granted options to the taxpayer on 30 November 2006. | The taxpayer did not include in his return for the 2007 income year any assessable income arising under Division 13A of the ITAA 1936 in relation to the acquisition of rights under an ESS. The Commissioner issued an amended assessment to the taxpayer, including in his assessable income an amount arising under Division 13A, based on the market value of rights to acquire shares that were acquired by the taxpayer on 30 November 2006. The taxpayer was also assessed as liable to pay an administrative penalty of 25% for a failure to take reasonable care. | Before the Federal Court at first instance [2012] FCA 1040, the taxpayer accepted that he had acquired rights under an ESS for the purposes of Division 13A during the 2007 income year. However, the taxpayer argued that he acquired the rights on 14 September 2006 (when their market value was less than their value on 30 November 2006). Kenny J found that the taxpayer acquired rights for the purposes of Division 13A on 30 November 2006. Her Honour also found that there was no cogent evidence that the taxpayer had taken reasonable care to consider the income tax consequences of acquiring the Division13A rights when lodging his tax return. | Issues decided by the court | The taxpayer argued that a contract was made between him and Nexus which could lead to an acquisition of shares, and that this contract gave rise to a right to acquire shares under Division 13A which was acquired by him on 14 September 2006 when the right was 'created' in him for the purposes of paragraph 139G(c) of the ITAA 1936. The taxpayer also argued that his primary argument was consistent with the interaction between Division 13A and the capital gains tax (CGT) provisions, the latter recognising that a right is acquired under the contract which gave rise to the right. | While the Court recognised the obiter dicta in an earlier Full Court decision in FC of T v McWilliam [2012] FCAFC 105, that an unconditional right to acquire options can be a right to acquire shares under Division 13A, the Court agreed with Kenny J that the taxpayer did not obtain an unconditional right to acquire shares on 14 September 2006. On 14 September 2006, the taxpayer acquired a right to require Nexus to put the issue of options to him to its shareholders for approval. Such a conditional right is not a right to acquire shares under Division 13A. The acquisition of a right to acquire shares was conditional on shareholder approval. On the giving of shareholder approval on 30 November 2006, the taxpayer acquired unconditional rights to acquire shares under Division 13A. Besanko J, at [87], [90]-[94], [102], and Gordon J, at [152]-[161]. | The Court did not find it necessary to determine the taxpayer's arguments based on the interaction between Division 13A and the CGT provisions, as any view about how the CGT provisions operate in this case cannot prevail over the clear view that the Court came to on the operation of Division 13A. Besanko J, at [122], and Gordon J, at [155]. | The Court also found, at [127]-[130] and [162], that there was no error in the reasoning of Kenny J that the taxpayer had not discharged the onus of showing that he was not liable for an administrative penalty for a failure to take reasonable care.

Issues decided:
The taxpayer argued that a contract was made between him and Nexus which could lead to an acquisition of shares, and that this contract gave rise to a right to acquire shares under Division 13A which was acquired by him on 14 September 2006 when the right was 'created' in him for the purposes of paragraph 139G(c) of the ITAA 1936. The taxpayer also argued that his primary argument was consistent with the interaction between Division 13A and the capital gains tax (CGT) provisions, the latter recognising that a right is acquired under the contract which gave rise to the right. While the Court recognised the obiter dicta in an earlier Full Court decision in FC of T v McWilliam [2012] FCAFC 105, that an unconditional right to acquire options can be a right to acquire shares under Division 13A, the Court agreed with Kenny J that the taxpayer did not obtain an unconditional right to acquire shares on 14 September 2006. On 14 September 2006, the taxpayer acquired a right to require Nexus to put the issue of options to him to its shareholders for approval. Such a conditional right is not a right to acquire shares under Division 13A. The acquisition of a right to acquire shares was conditional on shareholder approval. On the giving of shareholder approval on 30 November 2006, the taxpayer acquired unconditional rights to acquire shares under Division 13A. Besanko J, at [87], [90]-[94], [102], and Gordon J, at [152]-[161]. The Court did not find it necessary to determine the taxpayer's arguments based on the interaction between Division 13A and the CGT provisions, as any view about how the CGT provisions operate in this case cannot prevail over the clear view that the Court came to on the operation of Division 13A. Besanko J, at [122], and Gordon J, at [155]. The Court also found, at [127]-[130] and [162], that there was no error in the reasoning of Kenny J that the taxpayer had not discharged the onus of showing that he was not liable for an administrative penalty for a failure to take reasonable care.

ATO view of decision:
The taxpayer has not sought special leave to appeal to the High Court from the decision of the Full Court. | The ATO respectfully agrees with the earlier decision of the Full Court in McWilliam that an unconditional contractual right to acquire share options could be a right to acquire shares under Division 13A. However, the ATO notes the views of the Full Court in this case that the contractual right created in the taxpayer on 14 September 2006 was not an unconditional right to acquire shares. The Court found that the clear agreement between the taxpayer and Nexus was that the taxpayer would not acquire an unconditional right to acquire shares until shareholder approval for the issue of the share options was obtained on 30 November 2006. Once shareholder approval was obtained, the taxpayer could compel Nexus to issue the share options to him. | The ATO notes that whether a contractual right created before 1 July 2009 in relation to the acquisition of shares, amounted to the acquisition of an unconditional right to acquire shares under Division 13A, is likely to depend on the construction of the terms of the relevant contract and of any legislation that may have governed the formation and operation of the contract.

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | None

Legislative references: Corporations Act 2001 s 9 s 170 s 176 s 208 s 209 s 251A Income Tax Assessment Act 1936 Division 13A s 26(e) s 26AAC s 139 s 139B s 139C s 139CC s 139CD s 139D s 139DD s 139DE s 139E s 139F s 139FC s 139FD s 139FE s 139FF s 139G s 139GE s 160U s 160ZYJB s 160ZYJC Income Tax Assessment Act 1936-1971 s 26 Income Tax Assessment Act 1997 s 15-2 s 109-5 s 109-10 s 130-80 s 130-85 s 974-75 s 974-130 s 995-1 Taxation Administration Act 1953 (Cth) Schedule 1 s 284-15 Schedule 1 s 284-75 Schedule 1 s 284-90 Taxation Laws Amendment Act (No 2) 1995 The Act
Case references: Abbott v Philbin (1959) 39 TC 82 [1959] 1 WLR 667 [1961] AC 352 (1960) 39 ATC 221 ASIC v Hellicar [2012] HCA 17 (2012) 286 ALR 501 Brown v Heffer (1967) 116 CLR 344 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 C of T (Queensland) v Camphin (1937) 57 CLR 127 Donaldson v Federal Commissioner of Taxation [1974] 1 NSWLR 627 (1974) 4 ATR 530 74 ATC 4192 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55 (2004) 218 CLR 471 (2004) 57 ATR 556 Federal Commissioner of Taxation v McWilliam [2012] FCAFC 105 (2012) 204 FCR 478 Federal Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd [2000] HCA 35 (2000) 201 CLR 520 (2000) 44 ATR 370 2000 ATC 4378 Fraunschiel v Federal Commissioner of Taxation (1989) 20 ATR 955 (1989) 89 ATC 4616 Hill End Gold Ltd v First Tiffany Resource Corporation [2010] NSWSC 375 Laybutt v Amoco Australia Pty Limited [1974] HCA 49 (1974) 132 CLR 57 McWilliam v McWilliams Wines Pty Limited and Others (1964) 114 CLR 656 Mott and Another v Mt Edon Goldmines (Aust) Ltd and Others (1994) 12 ACSR 658 Perri v Coolangatta Investments Pty Ltd [1982] HCA 29 (1982) 149 CLR 537 Roach v Bickle [1915] HCA 80 (1915) 20 CLR 663 Tagget v Federal Commissioner of Taxation [2010] FCA 25 2010 ATC 20-162 (2010) 78 ATR 126 Tagget v Federal Commissioner of Taxation [2010] FCAFC 109 (2010) 188 FCR 128 2010 ATC 20-210 (2010) 80 ATR 399 Trade Practices Commission v Arnotts Ltd (1990) 93 ALR 657
Subject references: Employee share scheme Rights to acquire shares Director of public company Administrative penalty Failure to take reasonable care