The AAT has affirmed the Commissioner’s views and held that employee share scheme awards received by a taxpayer should be treated as qualifying rights and therefore assessable, and that penalties imposed by the Commissioner should be upheld.
The taxpayer was at all material times a senior officer in the Australian subsidiary of a large multi-national company listed on the London Stock Exchange. He was one of a handful of executives who were eligible to participate in the parent company’s employee incentive share scheme. The taxpayer was granted 22,382 Market Value Options and 6,715 Share Awards on 4 March 2004. On 11 March 2005, he received further awards under the scheme. His income tax returns for the 2004 and 2005 years of income did not address issues that might arise under the shares. He argued the Share Awards were not qualifying shares for the purpose of Div 13A of the ITAA 1936. After taking specialist advice, the taxpayer asked the Commissioner to exercise the discretion to allow a late election under s 139E of the ITAA 1936 in respect of the Awards made in 2004 and 2005. The Commissioner declined, audited the taxpayer and issued amended assessments, including penalty. The Tribunal noted that the taxpayer “was left with a huge tax bill” when the value of the shares was assessed having regard to the share price in 2007 and 2008 (although the share price subsequently fell dramatically).
The Tribunal was of the view that the true effect of the scheme was to confer a right on the taxpayer on the grant date that entitled him to receive shares on the vesting date in certain conditions. The Tribunal held that the share awards should be treated as qualifying rights. That means they would be assessed in 2007 and 2008 given there was no election under s 139E. The Tribunal therefore affirmed the objection decision in this respect.
The AAT said that while the taxpayer had been placed in an unfortunate position as a result of various errors and miscalculations, it was not satisfied he had established the imposition of the penalty at 25% was harsh having regard to his circumstances. In affirming the 25% penalty, the Tribunal acknowledged that the quantum of the penalty was large, but said that was a consequence of the operation of the law.
(AAT Case [2013] AATA 367, AAT, McCabe SM, AAT Ref: 2012/1369, 31 May 2013.)
[LTN 105, 3/6/13]