The AAT has found that a taxpayer’s assessable income, for the year ended 30 June 2011, includes the amount of $3,610,467 million, being the value of 16 shares, in a new holding company: Glencore International PLC. This was so, because the taxpayer exchanged his ‘Profit Participation Units’, in a subsidiary, as part of the float of the group (offering the public about 15% to 20% of the group).

Keen readers will notice the ‘Glencore’ name, which featured in a recent High Court case: Blank v Commissioner of Taxation [2016] HCA 42; (2016) 258 CLR 439. In that case, the Court unpheld an an assessment, of the quarterly payments of the enormous aggregate amount of USD 160,033,328 (USD 160m), as income according to ordinary concepts, under exactly this ‘Incentive Profit Participation Scheme’. The amounts became payable on a ‘triggering event’ happening – in that case, the taxpayer ceasing to be an an employee of any company within the Glencore Group. The Court held that the scheme was essentially deferred remuneration (delayed for the time the benefits accrue in the scheme and delayed a further 5 years, being the period over which the 20 quarterly instalments were paid). As a reward for labour, or a ‘recognised incident’ of employment, the amounts were income, according to ordinary concepts, and assessable as such. (A more lenient capital gains tax result, was trumped, by the ‘ordinary income’ finding.) [See related Tax Month article]

The taxpayer was not represented, before the Tribunal, whereas the Commissioner was. The Tribunal relied on the Commissioner’s summary of the facts (which were broadly not in contention). The Tribunal largely adopted the Commissioner’s reasons (which is not to say that they were wrong). I thought it worth making these observations, though.

The taxpayer was an engineer employed by one or more subsidiaries in the Glencore Group. The Glencore Group operates one of the world’s largest international commodity trading businesses. Mr De Figueiredo had been issued with certain shares and units under an employee profit participation plan, in 2006 and 2008, when he worked for the Glencore Group in Zambia, before becoming a resident of Australia. These entitlements were exchanged for the issue of 16 new shares to Mr De Figueiredo, in May 2011, as part of the IPO and related restructuring transactions involving the Glencore Group. At that point in time, Mr De Figueiredo was working for a subsidiary in the Glencore Group in Australia and he was a resident of Australia.

The Taxpayer sought to distinguish his tax dispute from Blank’s case on two grounds, both of which sprang from the fact that he had not ceased being an employee of the Glencore group (unlike: Mr Blank) so that he had not received cash from the ordinary operation of the incentive scheme (but only the shares in the new head company). This, he argued, had two effects.

  1. The first was that his receipt of the shares, no longer carried the character of deferred remuneration, and so his receipt of those shares no longer had the character of income.
  2. The second was, that he had not ‘derived’ any ‘income’ in Australia, as the issue of shares (which did happen whilst he was in Australia) was just swapping one set of rights for another set of rights (with no cash being paid) whilst he was a resident of Australia. He said that the alleged ‘income’ was not, in any event, relevantly ‘derived’ whilst he was an Australian resident.

Australian income tax works in an unhappy way for employees receiving deferred remuneration. Had this taxpayer, for instance, have been paid the deferred amounts, that related to his service in Zambia, whilst he was working in Zambia, he would not have been taxable in Australia. This is because he would have not been ‘resident’, in Australia, and his employment income would not have had an Australian source (employment income being generally sourced where his services were rendered). But a taxpayer, who realises a deferred remuneration benefit, whilst in Australia, the taxpayer subjects the whole of the deferred remuneration to Australian tax (even if part of it has a non-australia source, earned whilst the taxpayer was not a resident).

The taxpayer faced two hurdles in making out his characterisation and derivation arguments.

  • The first is that a substitute for income is, itself, income as the High Court found in Commissioner of Taxation v Myer Emporium Ltd [1987] HCA 18; and
  • The second is that the case law establishes that ‘income’ has sufficiently ‘come in’ (and thus been relevantly ‘derived’) when a taxpayer has received money or money’s worth.

The Tribunal did find against the taxpayer. Senior Member Lazanas made the following comments.

  1. I agree with counsel for the Commissioner that Blank’s case is the starting point for the analysis because Mr De Figueiredo’s rights under the IPPA were relevantly identical to those considered by the High Court. It follows that, if amounts had been paid to Mr De Figueiredo pursuant to the IPPA, they would have been ordinary income assessable to him under s 6-5 of the ITAA 1997, on all fours with Blank’s case. The following extracts from the judgment of the High Court are binding authority for that proposition:

[63] As the majority of the Full Court correctly concluded, what the IPPA 2005 conferred on Mr Blank was an executory and conditional promise to pay an amount at a future date determined by reference to the PPU allocated to Mr Blank. The fact that the Amount was paid after the termination of the contract of service, by a person other than the employer (here, GI) and separately to ordinary wages, salary or bonuses, does not detract from its characterization as income if the payment is, as here, a recognized incident of the employment.

31. However, Mr De Figueiredo did not receive payment of his IPP under the IPPA and so his case requires some further analysis.

 

32.  Instead of an outright payment, and instead of satisfying his entitlement under the IPPA, Mr De Figueiredo was issued 16 new GH shares [intermediate shares in the old holding company which were later transferred to the new PLC Head Company, in return for shares in the PLC company],  to the value of $3,610,467, as part of the Reorganisation, in substitution for his PPUs under the IPPA. While Mr De Figueiredo held the PPUs, he had a conditional executory promise to be paid deferred compensation that was “entirely a matter for the future”: see Tagget v Federal Commissioner of Taxation [2010] FCAFC 109; (2010) 188 FCR 128 at [30]. Mr Blank’s position was the same except that Mr Blank’s position changed when the “triggering event” happened, namely, the termination of his employment with the Glencore Group. Mr De Figueiredo’s position also changed when, as part of the Reorganisation, he agreed to transfer his entitlements to GHAG in return for 16 new GH shares. That is, he (through the Agent) received the 16 new GH shares [that became PLC shares] in substitution for his rights under the IPPA.

33.  At that point in time, Mr De Figueiredo derived as income an amount equal to the market value of the 16 new GH shares as he became the beneficial owner of the 16 new GH shares, free and clear of any contingencies. Critically, at that time, it could no longer be said that Mr De Figueiredo had merely a contingent right to receive the entitlement nor that the entitlement was “a matter for the future”. In Tagget’s case, it was accepted that the taxpayer had not derived the income when he was not in a position to call for the transfer of land to him, as consideration for services he had rendered many years earlier, as the rights in question were conditional executory promises. It was held in Tagget’s case that the taxpayer only derived the income when there was no longer any contingency about the transfer. Similarly, in Sent v Federal Commissioner of Taxation [2012] FCAFC 187; (2012) 208 FCR 462, the Full Federal Court held that the taxpayer in that case derived income when he, or his nominee, was issued shares in substitution for his bonus entitlements. In Sent’s case, the taxpayer had both accrued and contingent bonus entitlements under an employment agreement that were replaced by an absolute entitlement to be issued with shares and the shares issued were free and clear of any contingency as to services provided or to be provided. The Full Court held at [29] that “[t]here would be nothing to deny derivation, in the sense of the shares ‘coming home’, at the time they were issued”. The same analysis applies to Mr De Figueiredo’s tax position.

 

 

(De Figueiredo and FCT [2018] AATA 62, AAT, Lazanas SM, AAT File No: 2017/0317, 23 January 2018.)

27 January 2018

[FJM: LTN 17, 25/1/18]; Tax Month January 2018]

Study questions (answers below*)

  1. Was the taxpayer assessable, on the $3.6m value, of the shares he received, when the profit participation scheme was dismantled for the float?
  2. Was the Glencore profit participation scheme, in the USD 160m Blank case, different to this Glencore scheme?
  3. Did the taxpayer get some of the profit rights whilst working in Zimbabwe?
  4. Was the taxpayer’s central argument that he got shares, not cash (like Mr Blank did)?
  5. Does it matter that you get a substitute, for another benefit, that is income?
  6. Can income be derived before it has relevantly ‘come in’?
  7. Could receipt of a right that was contingent defer ‘derivation’ for tax purposes?

 

*[answers:1.yes;2.no(16Shares);3.no(Zambia);4.yes(para30);5.no(MyerEmporium);6.no(MoneyOrMoney’sWorth);7.yes(Tagget’s&Sent’sCases)]

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