The AAT has confirmed that the taxpayer was assessable on the discount on rights to shares acquired under the ‘NewSat’ Employee Share Scheme (ESS) after it dismissed the taxpayer’s argument that she was coerced into accepting the ESS offer.

  1. NewSat was an Australian specialist satellite communications company that delivered internet, voice, data and video to customers via third party satellites using its ground-based teleports. NewSat, however, had ambitions to build and own its own satellite.
  2. NewSat entered into a contract, with Lockheed Martin, for the design, manufacture and delivery of a satellite to NewSat called Jabiru-1. It also entered into an agreement with Arianespace (a commercial launch service provider based in France) to prepare and launch Jabiru-1 on its Ariane 5 launch vehicle.
  3. Unfortunately, in the second half of 2014, NewSat made a loss and was left with significant outstanding loan repayments, which it could not afford. By April 2015 it was faltering and was put into administration. At the end of 2015, NewSat was wound up.
  4. Prior to that, in May 2015, the administrators made various employees of the company redundant, including the CEO and the Applicant taxpayer (who was his executive assistant).
  5. Prior to that again, In September 2011, the taxpayer accepted an offer to participate in NewSat’s Employee Share Scheme (ESS) as part of the planned financing and launch of Jabiru-1. In October 2011, the Taxpayer: Ms Fox, received 200,000 ‘Performance Rights’ and in June 2012, she received a further 500,000 Performance Rights (a total of 750,000 in the 2011/12 financial year). The  Performance Rights entitled holders to convert the Rights into NewSat ordinary shares, subject to some ‘vesting events’ occurring. In respect of half of these rights (350,000), the main vesting ‘events’ was financial close on the financing of the Jabiru-1 satellite, which occurred on 17 February 2014. (The other half of the Rights vested when the satellite was launched, but that never happened). On 20 February 2014, the Taxpayer received an email saying she could convert her rights to shares and nearly 4 months later (on 13 June 2014), she elected to convert those Rights, and was issued 350,000 NewSat shares. The Taxpayer was also issued, it seems, another 100,000 shares, with a taxing point of 7 October 2013 (8 months prior to the 350,000 shares issued, but still in the same tax year). The total market value of these shares (on the relevant taxing point dates) was $106,058, and this was the relevant ‘discount’ that is assessable under Div 83A of the ITAA97, as the Taxpayer paid nothing for the shares.
  6. On 1 July 2014, NewSat sent the the Taxpayer a notice alerting her that she needed to include the $106,058 amount in her income tax return for the year ended 1 day earlier (30 June 2014).
  7. In a horror stretch for this mere ‘executive assistant’, her employer went into administration on 17 April 2015. On 27 May 2015, she lodged her 2014 tax return (with the $106,058 assessable discount included); on 29 May 2015, she was made redundant without any employee benefits, whilst on maternity leave; and on 4 June 2015, the Commissioner issued her 2014 assessment, with $231,219 assessable income (other assessable income, plus the $106,058) and an additional amount to pay (on top of PAYGw credits) of $42,959.80.
  8. On 7 August 2015, NewSat was placed into liquidation and on 12 October 2015, the Liquidators made a s104-145 declaration that ‘there was no likelihood that the shareholders would receive any distribution, triggering CGT event G3, and thus a capital loss equal to her reduced cost base (which is probably the $106,058 assessable discount, that was assessable under Div 83A).

It is not hard to see why this was such a bad result for the unemployed, new Mum, with no termination benefits. She had a $40k tax liability on receiving shares, that less than 12 months later had become worthless (falling from $106k, in that time). The capital loss, for the same $106k was effectively useless, as it was a capital loss (which is not deductible); it arose in the next tax year (with no carry back of losses) and in her circumstances, she was unlikely to have any capital gain, against which to offset the capital loss.

Further, she was not a senior executive or board member, able to monitor the financial trajectory of the company, she was given no opportunity to get independent advice, and she did not know that the taxing point arose on getting the shares (rather than on selling them).

Despite this sad story, the Taxpayer had few options to object, and did so on the somewhat flimsy ground that her boss rushed her to sign the application and was given no time to get advice. She alleged that this was coercion (or undue influence) that disengaged the ESS taxing provisions.

The AAT later articulated the consequences of this argument, if successfully mad out [para 171].

If the Applicant is correct, that the agreements were vitiated, then the consequence is not that the shares were not in her hands as at 13 June 2014 and ought not be taxed, it is, rather, that the shares she held at that date were not hers to dispose of or deal with.

This would preclude the ‘taxing point’ arising (even though the shares had been issued to her).

Sadly, however, the AAT then decided that, on the evidence, the taxpayer was not coerced into accepting the ESS offer and it upheld the assessment – all in all, a sad but probably correct result.

(Fox v CofT [2018] AATA 2791, AAT, File No 2017/0644, Pintos-Lopez SM, 10 August 2018).

 

Comprehension questions (answers available)

  1. Was the taxpayer assessed on a $106k market value of ESS shares, issued to her, despite them becoming valueless less than 12 months later?
  2. Was there any tax consequence for the shares becoming valueless in the next tax year?
  3. Was this any use to her?
  4. Was the basis of her objection, that she’d been coerced into accepting the shares and they were not hers to sell (preventing the taxing point arising in the 2014 year)?
  5. Did this succeed?

[Answers:1.yes;2.yes(aG3CGTeventTriggeringA$106kCapitalLoss);

3.no(AssessableIncomeOneYear-CapitalLossTheNext-NoOffsett-NoReductionInTax);

4.yes;5.no(notOnTheEvidence/Facts).

 

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