The Federal Court has held that bonuses paid to a managing director of a company were assessable as ordinary income.
The taxpayer was the managing director and CEO of a company. His employment contract provided for cash bonuses to be paid that fell into 3 categories: (i) those that had accrued and were payable; (ii) those for which some eligibility conditions had not been satisfied; and (iii) those that had not yet accrued in any sense.
In November 2001, his employment arrangements were changed so that his accrued, emerging and future bonus entitlements of $11.6m were extinguished and instead were paid into an executive share trust established on his behalf and in which he subsequently acquired all the units (by way of a loan from the trust under a round-robin arrangement). The $11.6m was used to buy 5 million shares in the company and these had a minimum “vesting period” of 12 months before the taxpayer, as the sole participating executive in the scheme, could cash in his units in the trust. As a result, the tax would be deferred until final disposal of the underlying shares. The Commissioner assessed the $11.6m as assessable income of the managing director as ordinary or statutory income and imposed 50% administrative shortfall penalties.
In a 25 March 2011 decision in AAT Case [2011] AATA 198, Re Sent and FCT, the AAT ruled that the taxpayer was assessable on that part of a payment of $11.6m paid into an executive trust on his behalf that represented the forgoing of “accrued” bonuses, but not that part of the payment that represented future or contingent bonuses as that amount had not been derived. At the same time, the AAT held that Pt IVA did not apply to include any part of the $11.6m in the managing director’s assessable income.
The Federal Court held that the whole of the $11.6m payment was assessable as ordinary income pursuant to s 6-5 of the ITAA 1997. As a result, the Court said it was unnecessary to determine whether Pt IVA applied. The Court also upheld the penalties imposed.
(Sent v FCT [2012] FCA 382, Federal Court, Murphy J, 16 April 2012.)
[LTN 72, 17/4]