On Wed 9 Nov 2016, the High Court unanimously dismissed an appeal from a decision of the Full Court of the Federal Court of Australia [2015] FCAFC 154.

The High Court held that a lump sum paid to a taxpayer, in instalments, pursuant, after the termination of his employment, pursuant to to an incentive profit participation agreement, was income according to ordinary concepts, and therefore part of the taxpayer’s assessable income under s6-5 of the Income Tax Assessment Act 1997 (Cth).

The taxpayer (“Mr Blank”) was employed by various companies within the Glencore Group. As part of his employment, Mr Blank participated in a profit distribution plan, which a company in this Group: Glencore International AG (Glencore International), operated for the benefit of certain employees of GI and its subsidiaries. Mr Blank was one of these employees.

His participation was governed by various agreements at various stages. Relevantly, under a profit participation agreement executed in 1999 (1999 Participation Agreement), he was given rights to a share of GI’s profits in the form of a contractual claim and Genussscheine (GS Claim), which were profit sharing certificates provided for under Swiss law. Under a related agreement, Mr Blank was issued shares in Glencore Holding AG (Glencore Holdings), the ultimate holding company of the Glencore Group.

The 1999 Participation Agreement was relevantly replaced in 2005 by another agreement (the 2005 Participation Agreement). All GS Claims or equivalents issued under previous agreements became “Profit Participation Units” (Participation Units) under the 2005 Participation Agreement. Under this Agreement, Mr Blank was granted “deferred compensation” such that if he ceased employment with the Glencore Group, he would be entitled to a lump sum, paid in instalments, if he also executed a declaration under which he relinquished his claims under his Participation Units and assigned his shares in Glencore Holdings.

Mr Blank’s employment with the Glencore Group was terminated on 31 December 2006. He relinquished his claims under his Participation Units and assigned his shares in Glencore Holdings in consideration of the payment of USD 160,033,328.25 in 20 quarterly instalments (the Amount).

Edmonds J of the Federal Court of Australia held that the Amount was income according to ordinary concepts because it was deferred compensation for services rendered by Mr Blank. That decision was upheld by a majority of the Full Court of the Federal Court. By grant of special leave, Mr Blank appealed to the High Court.

The High Court unanimously held that the Amount was paid as deferred compensation for the services that Mr Blank had performed for the Glencore Group and was therefore income according to ordinary concepts. The Amount was not assessable as a capital gain because it did not represent, as Mr Blank contended, the proceeds of the exploitation of interconnected rights that conferred on him a right to receive, in the future, a proportion of the profit of Glencore International.

[Austlii – [2016] HCA 42 & Summary]