In a decision handed down on Wed 3.7.2013, the Full Federal Court has unanimously dismissed a taxpayer’s appeal, and held that for the purposes of the former ITAA 1936 employee share scheme (ESS) provisions (Div 13A), a taxpayer acquired a right with respect to share options approximately 2 months later than when he contended he acquired them (and when they were significantly more valuable).
The facts were not disputed and are the same as in Fowler v FCT [2012] FCA 1040. Broadly, the taxpayer through a company (Tess Aust Pty Ltd) acquired options in Nexus Energy Ltd in respect of his services as a non-executive director of the company in the 2006-07 income year. The timing of the option acquisition was disputed by the ATO after an audit in 2009. The taxpayer contended that he acquired the options when he entered into a contract with Nexus to acquire them on 14 September 2006 or, alternatively, the options were created for the purposes of Div 13A on the same day. In either case, the discount for the purposes of Div 13A was nil.
The Commissioner, however, contended that the options were acquired on 30 November 2006 when the AGM approved the issue of the options. In that event, the discount was $415,800.
At first instance, the Federal Court held that the taxpayer did not acquire the share options on 14 September 2006, and that the relevant acquisition date was 30 November 2006 when the company’s AGM approved the issue of the share options. It also held that the taxpayer failed to take reasonable care to comply with Div 13A and therefore it was open to the Commissioner to impose an administrative penalty of $48,337. The taxpayer then appealed to the Full Federal Court.
Before the Full Federal Court, the taxpayer broadly argued that he had a right to acquire shares on 14 September 2006 within the terms of Div 13A as he had a sufficient contractual right which could lead to the acquisition of the shares. In addition, he argued that he did take reasonable care and that the penalty should not be imposed.
The Full Federal Court held that at 14 September 2006, the taxpayer only had an entitlement, which may have lead to the acquisition of shares. In other words, it said he only had the right to insist that Nexus put the issue of options to its shareholders for approval. Therefore, the Full Court held that on 14 September 2006, the right the taxpayer had was not a right to acquire options, rather it was a conditional right and did not amount to a Div 13A right. In relation to the penalties issue, the Court held that the taxpayer did not discharge the onus of showing the Commissioner had erred in imposing the administrative penalty for failing to take reasonable care, hence, it upheld the penalty.
(Fowler v FCT [2013] FCAFC 69, Full Federal Court, Besanko, Gordon, Dodds-Streeton JJ, 3 July 2013.)
[FJM Note: This might seem to be contradictory to a recent authority referred to below, but the point of distinction is explained in para 49 from the Full Court’s reasons in the Fowler case.
49. The primary judge referred to the recent decision of the Full Court of this Court in Commissioner of Taxation v McWilliam [2012] FCAFC 105; (2012) 204 FCR 478 (“McWilliam”). She concluded that the case was authority for the proposition that a right to a right to acquire shares was an enforceable right within Division 13A (at [103]). However, her Honour considered that the case before her differed from McWilliam because the only right the appellant obtained on 14 September 2006 was conditional on a future event, being the approval of the shareholders of Nexus. Furthermore, her Honour said that in the case before her it was not within the appellant’s own power directly or indirectly to acquire a right to shares, as was the case considered in McWilliam. ]
[LTN 126, 3/7/13]