The AAT has held a taxpayer was required to include a discount from the market value of shares he acquired on the exercise of options under an employee share scheme (ESS) in the 2007 year. It also upheld the Commissioner’s decision to impose a 25% shortfall penalty for failure to take reasonable care.
The taxpayer commenced employment with a company in May 2006 and was granted 3 million options under an ESS. In April 2007, he was terminated from his employment and did not exercise any of his options. After legal negotiations between the taxpayer and the company regarding the termination of his employment, both parties signed a deed of release in October 2007, which permitted the taxpayer to exercise 2 million options.
The Commissioner audited the taxpayer and issued a notice of amended assessment to increase his assessable income by $525,600 for 2007 and imposed a 25% shortfall penalty amounting to $61,101 in relation to the exercise of the options. Broadly, the taxpayer argued that the options were new options and not issued under the ESS as the Terms of Conditions of the ESS stated that the options expired upon termination. Therefore, he said the Commissioner had incorrectly included the amount in his 2007 income tax return.
The AAT said the deed of release signed by both the taxpayer and the company made it very clear that the options referred to in the deed were the existing options granted to the taxpayer under the ESS. Therefore, the Tribunal held that no new options outside the ESS were issued to the taxpayer by the company. Accordingly, the Tribunal said that as no new shares were issued, the cessation time under s 139CB of the ITAA 1936 in relation to the original ESS options occurred upon the termination of the taxpayer’s employment (ie in the 2007 year). Hence, it said the taxpayer was required to disclose in his 2007 income tax return as assessable income the discount from market value of the shares acquired on the exercise of the options, which totalled $525,600.
Furthermore, the AAT also affirmed the 25% penalty imposed by the Commissioner for failure to take reasonable care, as it said there was no evidence the taxpayer had consulted either his lawyers or his accountants in the matter. It also found there were no grounds for the remission of the penalty.
(AAT Case [2012] AATA 815, Re Watsford and FCT, AAT, Ref No 2011/2394, Fice SM, 20 November 2012.)
[LTN 226, 21/11]