On 12 November 2021, the Full Federal Court has upheld a first instance decision that payments totalling $15m, to cancel entitlements under an employee options plan and incentive scheme, were not deductible under s 8-1 of the ITAA 1997. However, the payments were deductible over 5 years under s 40-880.
The taxpayer was a publicly listed company andhead company of a consolidated group. The majority shareholder of the taxpayer (M&R) acquired the remaining shares in the taxpayer by way of a scheme of arrangement. As part of the arrangement, one of the taxpayer’s subsidiaries paid just over $15m to employees for the cancellation of employee entitlements under an employee option plan and an employee incentive scheme. After the scheme of arrangement was implemented, the taxpayer was delisted from the ASX.
The taxpayer claimed that the payments were deductible under s 8-1 of the ITAA 1997 in the year they were paid (the 2014 income year). The ATO disagreed, but just before hearing before the trial judge, the ATO conceded that the payments were deductible under s 40-880 (thus one-fifth of the amount was deductible in 2014).
In Clough Ltd v FCT  FCA 108, Colvin J held that the payments were not deductible under s 8-1. The Full Federal Court has now unanimously upheld that decision, as the occasion of the payments lay in the takeover, they were not in the nature of a working expense in the carrying on of Clough’s business and they were not a reward to the employees.
The Full Court also held that the payments were on capital account as the immediate advantage sought by Clough was to bring the various options and rights to an end permanently, in order to complete the takeover of the minority shareholding by M&R, the cancellation of the options and rights had an effect on the capital structure of Clough and the payments were calculated by reference to the share price.
Notwithstanding that the Full Court agreed with Colvin J that the payments were not deductible under s 8-1, the Full Court held that Colvin J should have allowed the taxpayer’s appeal. This was because the ATO’s concession that the payments were deductible under s 40-880 meant that one-fifth of the payments were deductible in 2014 and therefore the 2014 assessment was excessive.
(Clough Limited v FCT  FCAFC 197, Full Federal Court, Kenny, Davies and Thawley JJ.) [LTN 220, 15.11.21]