The Federal Court has held that a resident taxpayer, who was entitled to a deferred payment over 5 years of  USid=”mce_marker”60m following his retirement from a global international commodity trading businesses, was assessable on the payment as ordinary income in the income year in which the right to the payment arose.

The payment to the taxpayer was the result of negotiating a settlement on his termination of employment  in relation to his right to participate in the company’s “profit participation plan” for key employees. 

The taxpayer originally returned the amount as a capital gain in his 2007 tax return, as reduced by the 50% discount. The Commissioner issued amended assessments claiming that the amount was assessable as either ordinary income, an eligible termination payment (ETP) or as dividends or non-share dividends. 

However, the Federal Court found that the amount was assessable as ordinary income to the taxpayer on the basis that in the circumstances, the payment was “deferred compensation for services rendered”. In doing so, it dismissed the taxpayer’s claims that the receipt of the amount was a contractual right to the amount per se rather than a reward for services. Accordingly, in view of its finding, the Court held that the amount was not an ETP and that it was not necessary to consider any CGT consequences. It also found that if the amount was dividends, they would only be dividends by operation of the share buy-back provisions which were not relevant in the circumstances and that, in any event, they would be assessable in an income year not in issue.

Nevertheless, the Court stated that given the nature of its findings in the circumstances, it would not be safe for it to make orders to give effect to its reasons without the benefit of input by the parties for proposed orders.

(Blank v FCT [2014] FCA 87, Federal Court, Edmonds J, 21 February 2014.)

[FJM Note:    I have not had the benefit of reading the case, but do wonder how the amounts could be ‘derived’ before they were received.]

[LTN 36, 24/2/14]