• The impact of this case on ATO policy is discussed in Decision Impact Statement: Stewart and Commissioner of Taxation (Published 23 January 2014).

ANTHONY STEWART v FC of T

Members:
Middleton J

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2013] AATA 845

Decision date: 28 November 2013

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Justice Middleton, F D O'Loughlin (Senior Member)

28 November 2013

1. The Applicant acquired 60,000 options in the parent company of his employer organization, Toll^[1] Toll Holdings Ltd , in 2004, exercised those options in 2007, and became a shareholder in Toll able to participate in a Toll Scheme^[2] Two dividends and two reductions of capital in association with transfers of assets by Toll entities to Asciano entities under Scheme of Arrangement. under which he was entitled to dividends and capital distributions through which he became an Asciano Stapled Securities^[3] Shares in Asciano and Units in the Asciano Finance Trust. holder. The taxation impacts of these events are now disputed.

2. The principal dispute concerns the taxable amount, whether by force of Division 13A of the 1936 Assessment Act^[4] Income Tax Assessment Act 1936 (C’th) or s 6-5 of the 1997 Assessment Act,^[5] Income Tax Assessment Act 1997 (C’th) that arose in the 2007 year^[6] The year of income ended 30 June 2007 when the Applicant exercised 60,000 options that had been issued to him in 2004 to take up shares in Toll. That dispute turns on the impact that the intervening Scheme had on calculating taxable amounts. The subsidiary dispute concerns the Applicant's entitlements to franking credits associated with a dividend he received in respect of the Toll shares he acquired upon exercise of his options. The appropriate penalty payable pursuant to the Administration Act^[7] Taxation Administration Act 1953 (C’th) in respect of the final shortfall amount is also disputed.

3. Between the 2004 issue of the 60,000 options and their 2007 exercise, Toll had implemented the Scheme that demerged part of the consolidated Toll businesses such that:

• (a) a second listed public company, Asciano,^[8] Asciano Ltd was formed as a parent company of a second group of companies - the Asciano Group;
• (b) a significant part of the underlying Toll group businesses before the Scheme was transferred to the Asciano Group; and
• (c) by reason of their Toll shareholdings, Toll shareholders were entitled to dividend and capital reduction rights which were to be applied to pay up Asciano Stapled Securities.

4. Simultaneously with the Scheme, and substantially if not wholly as a consequence of the Scheme, the value of Toll shares dropped by approximately $10.00 per share and upon their listing on the ASX Asciano Stapled Securities had a value of approximately $10.00.

5. When the Applicant exercised his options on 12 June 2007:

• (a) he acquired Toll shares that carried the right to participate in the Scheme and, when the Scheme was completed, thereby enjoyed the benefit of Asciano Stapled Securities worth approximately $10 per security; and
• (b) the Toll shares had been trading on the ASX^[9] Australian Securities Exchange on a post Scheme basis for one week and the weighted average price at which those shares had been traded over that period was wholly calculated by reference to the value of Toll shares after the impact of the Scheme and divestment of part of Toll's undertaking to Asciano.

6. In relation to the exercise of options, the Commissioner contends the Applicant enjoyed Toll shares that had a right to the Asciano Stapled Securities and the Division 13A taxable amount should be determined accordingly. The Applicant says the rules are definitive and, in his circumstances, they provide that the taxable amount is determined by reference to the weighted average of prices at which Toll shares traded on the ASX over the prescribed period, whatever the result of that calculation is.

7. The principal basis of the Commissioner's contention is that the proper taxable amount under Division 13A includes the value of the Asciano Stapled Securities. The Commissioner also contends that there is an amount taxable as ordinary income under s 6-5 of the 1997 Assessment Act or as a benefit in connection with employment under s 15-2 of the 1997 Assessment Act.

8. The Applicant contends that Division 13A calculates the proper taxable amount by reference to the weighted average trading price of the Toll shares after it had affected the Scheme.

9. The Commissioner has conceded the availability of franking credits and, as a consequence, an amount of $14,571 is to be included in assessable income and franking credits of $4,371.43 are to be allowed.

THE FACTS

10. The facts in this case are largely agreed. The following facts are taken largely from the Commissioner's written submissions that have been adopted by the Applicant.

11. Throughout the period from October 2004 to 30 June 2007, the Applicant was an employee of Toll which was a listed public company whose shares were quoted on the ASX and which had a Senior Executive Option Plan (SEOP.)

12. Clause 2.3 of the SEOP allowed the Toll Board to determine the performance conditions, if any, that would be included in the terms and conditions of options issued under the SEOP.

13. Clause 4.1(b) of the SEOP was in the following terms:

Unless the Rules or the terms upon which an Option has been granted provide otherwise, a Share issued on the exercise of an Option will rank pari passu with all existing Shares from the date of issue and will be entitled to those dividends which have a record date for determining entitlements after the date of issue.

14. Clause 4.2(b) of the SEOP made the options exercisable only if performance conditions had been met or waived by the Toll Board. The definition of performance conditions was expressed similarly. Neither the SEOP, nor the offer to participate in the SEOP made to the Applicant, contained any express power to waive performance conditions. As noted below, they were waived by the Toll Board and the basis on which it did so was presumably clause 4.2(d).

15. Clause 4.3(a) of the SEOP gave the Toll Board a discretion to bring forward the exercise period for the SEOP options.

16. In October 2004, Toll issued the Applicant with 60,000 options to acquire unissued Toll Shares pursuant to Toll's SEOP. The Applicant was eligible to participate in the SEOP because he was a Toll employee. He did not pay any consideration for the options.

17. The terms on which the options were issued included:

• (a) on exercise each option would be exchanged for one Toll Share;
• (b) the exercise price for each option was based on the weighted average price at which Toll Shares had traded in the period 2 to 8 September 2004. That amount was $10.95 per option;
• (c) subject to the conditions noted below being satisfied, the options could be exercised between 9 September 2007 and 9 September 2009 when, if not exercised, they expired. A two year exercise period was permitted;
• (d) the right to exercise the options was subject to conditions, called performance hurdles, that needed to be satisfied. The performance hurdles for the Applicant's options required what was called Toll's total shareholder return (TSR) relative to companies comprising the top 100 ASX listed companies (excluding companies in particular industries) to rank in the 50 ^th percentile or higher over a performance period that started on 1 July 2004 and ended on 30 June 2007. All options would be exercisable if the TSR ranking was in the 75 ^th percentile or higher. Fifty percent of them would be exercisable if Toll's TSR ranked in the 50 ^th percentile. A straight line progression applied to rankings between the 50 ^th and 75 ^th percentiles;
• (e) the options would lapse if the Applicant ceased to be a full time employee of Toll for reasons other than death or permanent disability; and
• (f) the exercise prices and/or the number of shares over which options could be exercised could vary if Toll made a rights issue, a bonus issue or restructured its capital.

18. The terms on which the options were issued did not provide for acquisition of anything other than a fully paid ordinary share in Toll. Clause 4.1(b) of the SEOP was not activated.

19. Accordingly, while the Applicant had been issued options in connection with his employment in the 2005 income year, in the 2007 income year he was not able to exercise them. He would not have been able to exercise them in the 2007 year unless the conditions concerning vesting and performance hurdles referred to above were waived by Toll.

20. As a prelude to what was to be announced the following day, on 12 December 2006, the Toll Board resolved that, subject to the Scheme being approved, it would bring forward the exercise period for the SEOP options granted in October 2004 and waive the performance hurdles.

21. On 13 December 2006, Toll announced a proposal under which it would divide its existing assets and businesses and liabilities into two separate listed public companies:

• (a) Toll itself, to retain the Australian, New Zealand and Asian logistics businesses as well as Toll's stake in Virgin Blue; and
• (b) what would become Asciano that would acquire Toll's Australian ports and stevedoring operations, New Zealand stevedoring operations and 100 per cent of Pacific National.

22. The Scheme was to be effected by a reduction of capital by Toll and associated Scheme of Arrangement. Both were conditional on Toll shareholder and Court approval. Under the Scheme, Toll shareholders would retain their Toll shareholdings and would become Asciano Stapled Security holders.

23. In association with the issue of Asciano Stapled Securities to eligible Toll shareholders, the Scheme provided for Toll to pay and or distribute to shareholders:

• (a) a fully franked dividend and a return of capital to be applied on behalf of Toll shareholders to subscribe for a unit in the Asciano Finance Trust;
• (b) an unfranked dividend and a further return of capital to be applied on behalf of Toll shareholders for the issue of shares in Asciano.

24. As a product of the Scheme Toll shareholders were to:

• (a) retain their existing Toll shareholdings; and
• (b) receive one new stapled Asciano security for each Toll Share held. The stapled security would consist of one Asciano share and one unit in the Asciano Finance Trust that were to be stapled in the sense that the units were not to be tradable without the stapled share.

25. The effect of the proposed Scheme was to be a division of Toll's existing assets and businesses into two entities.

26. Absent the initiative of the Toll Board on 12 December 2006, the Scheme would have had implications for Toll employees who held SEOP options, including the Applicant. Before the Scheme, upon the performance conditions being satisfied and the exercise period commencing, the shares over which employees could exercise their SEOP options at the pre-determined exercise price were shares in a company that owned all of the pre-Scheme assets, and were shares that reflected the value of all those assets. After the Scheme, if nothing else were to change, the employees would have had rights to shares in the same company which would only reflect Toll's post Scheme assets. Consequently, and again if nothing else were to change, the SEOP options would be expected to have a lower value: the exercise price remaining the same but a lower value Toll Shares receivable on exercise. Further, because the exercise period for the SEOP options had not begun, and would not begin before the proposed Scheme, absent an initiative of Toll, holders of SEOP options would not be able to avoid this undesirable consequence by exercising their SEOP options. The Toll Board initiative of 12 December 2006 removed that potential impact on employee option holders.

27. On 12 April 2007, it was anticipated that based on the current timetable for the Scheme there would be a "trading window" between 4 June and 11 June 2007 during which executives, if they wished, would be able to exercise their SEOP options and participate in the Scheme. A subsequent estimate of the trading window for SEOP options made on 23 April 2007 was that SEOP options would be able to be exercised between 26 April 2007 and 11 June 2007. The minutes of a 23 April 2007 Toll Board meeting noted that the trading window would be from 26 April 2007 to 13 June 2007.

28. On 23 April 2007 Toll announced that:

• (a) Court approval to proceed to shareholder votes on the proposed Scheme had been granted;
• (b) a Scheme Book had been prepared and lodged with ASIC and ASX and would be distributed to Toll shareholders shortly;
• (c) the new entity to own part of Toll's assets would be the stapled entities Asciano and Asciano Finance Trust; and
• (d) the shareholder meetings to approve the Scheme would be held on 28 May 2007.

29. The Toll announcement included an updated timetable for the Scheme which included:

5 June 2007 -	Effective date and last day Toll shares trade cum entitlement; and
6 June 2007 -	Trading of Toll shares ex-entitlement and listing of Asciano Stapled Securities.

30. On 30 April 2007, Toll mailed a copy of the Scheme book to all Toll shareholders. Toll shareholders were advised that they could "sell … Toll Shares on ASX. Until (and including) the Effective Date (intended to be 5 June 2007), Toll Shares will trade cum the entitlement to receive Stapled Securities. From (and excluding) the Effective Date, Stapled Securities will trade excluding the entitlement to received Stapled Securities."

31. The Scheme book set out the following Key Dates:

Event	Date
• Meetings	• 28 May 2007
• Court approval of Scheme	• 1 June 2007
• Effective Date and last date Toll Shares trade cum-entitlement	• 5 June 2007
• Trading of Toll Shares ex-entitlement and ASX listing of Asciano	• 6 June 2007
• Record Date	• 13 June 2007
• Implementation Date	• 15 June 2007
• Dispatch of holding statements	• 19 June 2007
• Commencement of normal trading in Stapled Securities	• 20 June 2007
• Securities sold under Sale Facility	• 20 June to 10 July 2007
• Dispatch of payment to Ineligible Overseas Shareholders	• 13 July 2007

32. The Scheme Book addressed SEOP options holders' positions:

In 2004 Toll granted Options under the SEOP, of which 6.512 million remain unexercised. The initial vesting period of these Options was to end in September 2007 and the Options were subject to performance hurdles. On 12 December 2006, Toll Directors resolved, subject to the Scheme being approved, to exercise their discretion under the SEOP rules to bring forward the vesting date of these Options and to waive the performance hurdles on the basis that the performance hurdles had, at that time, been substantially satisfied. Holders of these Options will be able to exercise the Options at any time after the date the Scheme are approved and, if the underlying shares are issued prior to the Record Date, the holders will participate in the Scheme.

33. The effect of the decisions of the board of Toll to accelerate the start of the exercise period for the SEOP options and to waive the performance hurdle conditions, when combined with the record date of 13 June 2007 for participation in the Scheme, was that if a Toll Share was acquired upon exercise of a SEOP Option in the period from 1 June to 13 June 2007, then the acquirer would be entitled to participate in the Scheme. In this event, the acquirer would get Toll Shares cum entitlement. This is to be contrasted with a Toll share being acquired otherwise than under the SEOP after from 5 June 2007, whereby the acquirer would get Toll Shares ex-entitlement and, in respect of those shares, would not be entitled to participate in the Scheme.

34. On 1 June 2007, Toll announced that the Court had approved the Scheme and, amongst other things, that Toll Shares and Asciano Stapled Securities would trade separately on ASX from 6 June 2007 with Toll Shares trading ex-entitlement from that date.

35. On 5 June 2007, Toll announced that a copy of the Court orders had been lodged with ASX and that the Scheme was then effective. As such they became legally binding on the Scheme participants including Toll shareholders, Toll, Asciano Limited and Asciano Trust. The Applicant became bound as well when he acquired Toll shares. Toll repeated the statements concerning the trading of Toll Shares ex-entitlement as from 6 June 2007. On 5 June 2007 Asciano Group was admitted to the Official List of ASX. Official quotation of Asciano Stapled Securities on ASX was to commence at 11am on 6 June 2007 on a deferred settlement basis.

36. As from 6 June 2007, Toll shares traded on ASX on an ex-entitlement basis. Anyone purchasing Toll shares from that date on ASX paid a price that reflected a Toll share that would not be entitled to participate in the Scheme and, in particular, receive Asciano Stapled Securities.

Table 2

Date	Trading Prices	Weighted Average Share Prices
	Toll $	AIO $	Toll & AIO $	Toll $	AIO $	Toll & AIO $
1/6	23.30	-	23.30	22.84	-
4/6	23.62	-	23.62	23.11	-	23.11
5/6	23.77	-	23.77	23.34	-	23.34
6/6	13.26	10.76	24.02	16.50	10.76	27.26
7/6	13.57	10.73	24.30	15.20	10.74	25.94
8/6	13.63	10.75	24.38	15.20	10.74	25.40
12/6	13.91	11.15	25.06	13.49	10.79	24.28
13/6	14.00	11.08	25.08	13.71	10.84	24.55
14/6	14.41	11.14	25.55	13.90	10.99	24.89
15/6	14.78	11.15	25.93	14.19	11.13	25.32
18/6	15.35	11.38	26.73	14.47	11.19	25.66
19/6	15.40	11.34	26.74	14.83	11.26	26.09
Toll: Toll Ordinary Shares
AIO: Asciano Group Stapled Securities
WASP: Weighted average sale prices over the preceding week as per s 139F(1)(a) of the 1936 Assessment Act.

37. The prices at which Toll shares traded over the date range in Table 2 shows the impact of the division of the Toll group assets and liabilities among the two groups. Toll Shares that moved from cum entitlement to ex-entitlement, dropped in value by $10.51 and Asciano Stapled Securities had started trading on ASX from 6 June 2007, with a closing price of $10.76 on that day.

38. On 12 June 2007, the Applicant exercised his options, paid the exercise price of $10.95 per option and was issued with 60,000 Toll Shares.

39. The Applicant was recorded as being the holder of 60,000 Toll Shares on or before the 13 June 2007 record date, and was thus entitled to participate in the Scheme.

40. On 12 or 13 June 2007, the Applicant could have contracted to sell his 60,000 Toll shares. He did not do so.

41. On 13 June 2007, Toll filed an Appendix 3B with ASX requesting that an additional 7,218,000 Toll Shares be quoted as a result of shares issued upon exercise of SEOP options from 4 to 13 June 2007.

42. On 15 June 2007, Asciano filed an Appendix 3B with ASX requesting that additional Asciano Stapled Securities be quoted including, amongst others, a further 7,218,000 as a consequence of the increase in the number of Toll Shares issued from 6 June 2007 to 13 June 2007.

43. 15 June 2007 was the Implementation Date under the Scheme and accordingly:

• (a) the special dividend and capital reduction amounts were paid by Toll and applied on behalf of shareholders (including the Applicant) to subscribe for units in the Asciano Finance Trust;
• (b) the further special dividend and the capital reduction amounts were paid by Toll and applied on behalf of shareholders (including the Applicant) to subscribe for shares in Asciano; and
• (c) the Applicant was issued with 60,000 Asciano Stapled Securities, each consisting of one Asciano share and one Asciano Finance Trust unit.

44. On 30 April 2008, the Commissioner issued Class Ruling CR2008/32 concerning the taxation effects of the Scheme.

45. The Applicant did not make an election pursuant to s 139E nor did he dispose of any Toll shares, or Asciano Stapled Securities, within 30 days of their acquisition.

THE ISSUES

46. The principal issue in dispute between the parties concerns the value of the Asciano Stapled Securities, namely $647,310, that the Applicant acquired following exercise of his SEOP options and acquiring Toll shares. The Commissioner says that that value is taxable and the Applicant says it was not.

47. The parties are in broad agreement that Division 13A includes the market value of the 60,000 Toll Shares, $13.49 per Toll share, in the Applicant's assessable income for the 2007 Year: when s 139CC(4) is applied to the Toll Shares acquired, and only those shares, the taxable amount is $152,400.

48. The Commissioner contends that, just like the 60,000 Toll Shares, the 60,000 Asciano Stapled Securities were received by the Applicant as part of his remuneration as an employee of Toll, that their market value should be included in his assessable income for the 2007 Year and that the Applicant's position appears to be that the 60,000 Asciano Shares should be received free of any income tax consequences.

49. The Commissioner puts his case on four bases that:

• (a) the shares that were acquired on exercise of the SEOP options by the Applicant were the Toll Shares and the Asciano Stapled Securities and both need to be valued and that aggregate value brought to account;
• (b) in the alternative, if it is only the value of the Toll shares that is to be brought to account then the proper Toll share to value is a Toll share cum entitlements under the Scheme which would need to be calculated pursuant to s 139FB and not s 139FA;
• (c) in the alternative, if it is only the value of the Toll shares that is to be brought to account and the proper Toll share to value is a Toll share ex entitlements under the Scheme, then the there was a separate and distinct employee share scheme that provided for Asciano shares. It is then the value of those shares that needs to be included in the Applicant's assessable income as well under ss 139B(1) and (2), and 139 FB;
• (d) to the extent that Division 13A does not apply, then either ss 6-5 or 15-3 brings to account the value of the Asciano Stapled Securities.

50. The Applicant resists each proposition the Commissioner advances.

Key Division 13A taxing provisions

51. Section 139B(1) is the relevant taxing provision and s 139B(3) determines the year in which taxable amounts are to be calculated in the present circumstances. It taxes discounts given in relation to rights acquired under an employee share scheme. In the present circumstances, the discount given is determined by reference to the s 139CC(4) rules.

52. Section 139CC(4) provides:

If subsection 139B(3) applies to the discount, and the share or right (or any share acquired as a result of the exercise of the right) is not disposed of by the taxpayer in an arm's length transaction at the cessation time or within 30 days after the cessation time, the discount is:

• (a) the market value of the share or right (or the share acquired as a result of the exercise of the right) at the cessation time;

  reduced by:

• (b) the amount of any consideration paid or given by the taxpayer as consideration for the acquisition of the share or right; and
• (c) for a right that has been exercised - the amount of any consideration paid or given by the taxpayer to exercise the right.

53. The market value of a share or a right on a particular day is determined in accordance with Subdivision F of Division 13A.

Other taxing provisions

54. Sections 6-5 and 15-2 of the 1997 Assessment Act is also relied on by the Commissioner. They provide:

SECTION 6-5

Income according to ordinary concepts (ordinary income)

• (1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

  Note: Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.

• (2) If you are an Australian resident, your assessable income includes the * ordinary income you * derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

SECTION 15-2

Allowances and other things provided in respect of employment or services

• (1) Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums *provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).
• (2) This is so whether the things were *provided in money or in any other form.
• (3) However, the value of the following are not included in your assessable income under this section:
  • (a) a *superannuation lump sum or an *employment termination payment;
  • (b) an * unused annual leave payment or an * unused long service leave payment;
  • (c) a *dividend or *non-share dividen;
  • (d) an amount that is assessable as * ordinary income under s 6-5.

The Commissioner's first basis of assessment

The shares that were acquired on exercise of the SEOP options by the Applicant were the Toll Shares and the Asciano Stapled Securities and both need to be valued and brought to account.

55. The first basis of assessment advanced by the Commissioner begins with the unexceptional proposition that the s 139CC(4)(a) language 'the share acquired as a result of the exercise of the right' whilst expressed in singular can accommodate the plural.

56. The Commissioner's contentions then call in aid the proposition that the language 'as a result of exercise of the right' does not require the share to be directly acquired as the result of exercise of the right and that that language is such that a right to a share within the meaning of Division 13A is a right to a share that might be acquired directly or indirectly. He contends that so long as the exercise of the right is in the chain of events that lead to the acquisition of the share then the share will have been acquired as a result of exercise of the right. In support the Commissioner refers to the Full Court decision in
F.C. of T. v McWilliam.^[10] (2012) 204 FCR 478 at [72]-[84]

57. Next, the Commissioner advances the proposition that the taxable discount is the discount given in relation to the right (SEOP option in this case) and that the words in relation to are words of wide meaning.

58. Finally, the Commissioner contends that the result produced by his construction corresponds to the general purpose and policy of Division 13A and the narrower interpretation advanced by the Applicant would frustrate this object and lead to an unreasonable or irrational result.

59. We do not accept the Commissioner's propositions or his contended conclusion.

60. Undoubtedly, if two shares are acquired on exercise of an option then the value of two shares is brought to account under Division 13A. However, this is not the real dispute in this case.

61. On the facts of this case, the acquisition of the relevant Asciano Stapled Securities is explained by events other than exercise of an option to acquire a different share. The latter acquisition is not acquired as a result of exercise of an option to acquire the share. It cannot be said that the Asciano Stapled Securities were acquired as a result of the exercise of the right, other than in the remotest of ways. The decision in McWilliam does not assist the Commissioner. There the Court held that a contract to acquire an option to acquire a share was a right to acquire a share for Division 13A purposes. This can be accepted. Here, the share has been acquired. Once that occurred, the relevant entitlement of the Applicant was satisfied, and that part of the process was completed. What happened consequently arose independently from that entitlement. The antecedent right was a right to the share acquired, the Toll share.

62. As to the argument of the Commissioner concerning the relevant discount, the relevant discount to be brought to account is "the market value of the share or right (or the share acquired as a result of the exercise of the right) at the cessation time", which calls for identifying the relevant share acquired. As indicated above, this share does not include the Asciano Stapled Securities.

63. Contrary to the Commissioner's proposition concerning unreasonable or irrational results, what Division 13A does, is set out numerous rules catering for different circumstances in a methodical way. When introduced, it harmonized with the then operative Part IIIA, which included in assessable income, taxable capital gains. For example, if s 139CC(2) applied to bring a discount into a taxpayer's assessable income, the terms of s 160ZYJB(2) were such that the taxpayer was taken to have paid as consideration for the acquisition of the share or right the greater of the market value of the share or right at the time of acquisition and the amount paid as consideration for the acquisition. Similarly, if s 139CC(4) applied to bring a discount into a taxpayer's assessable income, the terms of s 160ZYJB(4) were such that the taxpayer was taken to have paid as consideration for the acquisition of the share or right the market value of the share or right at the cessation time. Section 160ZYJE provided that the concepts of cessation time and market value had the same meanings in Division 13A and Division 9 of Part IIIA. The effect of these provisions was such that when s 160ZYJB(2) was paired with s 139CC(2), if there was a taxable discount under s 139CC(2), that discount would be the cost base for Part IIIA purposes, and, when s 160ZYJB(4) was paired with s 139CC(4), if there is a taxable discount under s 139CC(2), that discount is the cost base for Part IIIA purposes.

64. For the 2007 year, the system of bringing capital gains to taxation was comprised within Parts 3-1 and 3-3 of the 1997 Assessment Act. Division 13A continued to harmonize with that system through the operation of s 130-83(2) and (3).

65. Together, Division 13A worked with Parts 3-1 and 3-3 to comprise a system of determining a taxable amount which is then used as the cost base of the shares acquired for calculating taxable amounts upon later events occurring. Division 13A seeks to tax an initial value and allows the remainder of the Assessment Acts to afford appropriate taxation treatment to events that occur in relation to the shares or options that have been brought into the taxation system by Division 13A. Dividends received after acquisition events which were taxed under Division 13A were not regarded as remuneration. Nor were proceeds of CGT events that occur post acquisition events that were taxed under Division 13A.

The Commissioner's second basis of assessment

The proper Toll share to value is a Toll share cum entitlements under the Scheme, which would need to be calculated pursuant to s 139FB and not s 139FA

66. The Commissioner's second basis of assessment relies on his contention that those shares were shares of a different class to the shares trading ex-entitlement to participate in the Scheme, and that the prices at which the ex-entitlement shares were traded is not relevant. That being the case, he contends that the taxable discount needs to be calculated pursuant to s 139FB, and not s 139FA. The Commissioner says that the Toll shares acquired by the Applicant were shares of a different class that had not been either traded on the ASX or subject to an offer on the ASX in the seven day period up to and including the day the options were exercised, the period from 6 June to 12 June 2007 inclusive as required to enliven s 139FA(1)(a) or s 139FA(1)(b)(i). In these circumstances, s 139FA(1)(b)(ii) applies to enliven s 139FB and an arm's length value of a share cum entitlements Toll share is to be used to calculate taxable discounts which would produce the result he contends is appropriate.

67. Section 139FA details procedures for valuing listed shares by reference to the prices at which they trade on an approved stock exchange (and the ASX is such an exchange) or by reference to prices at which offers are made on such an exchange. If there has been a trade of shares of the same class or an offer made to buy of the same class within one week to and including the day of exercise of the options, then a weighted average trading price, or the offer price (if there have not been any trades) is called for and that becomes the value used to calculate the assessable discount if there be one.

68. In support of the separate class of share contention the Commissioner refers to
Clements Marshall Consolidated Ltd v ENT Ltd^[11] [1988] Tas R (NC) N1; (1988) 13 ACLR 90 ; (1988) 6 ACLC 389 where Neasey J said,

The expression "class of shares" has no special meaning in s 16(2) of the Code. It is a simple English expression, commonly used by text writers in company law. It refers to a category of shares which differs sufficiently in respect of rights, benefits, disabilities, or other incidents, as to make it distinguishable from any other category of shares, if there are any, in the capital structure of the company. The treatment of the subject "classes of shares", in, for example, Ford, op cit, ch 9, and in Gore-Brown on Companies, 42nd ed, pp 302-315, illustrates the meaning of this expression in s 16(2). (Note that Gore-Brown, ibid, at p 310, mentions employees' shares as a class). In the present case the employee shares are a class separate from the ordinary shares, because they differ from them in respect of voting rights (pursuant to art 83), dividend rights, liability to calls, and other aspects.^[12] At 13 ACLR 93 , 6 ACLC 393

69. The Commissioner accepts, correctly,^[13] Acknowledging Ford: Principles of Company Law looseleaf edition[17.360] and following, Greenhalgh v Aderne Cinemas Ltd [1945] 2 All ER 719 at 723 and the appeal Greenhalgh v Aderne Cinemas Ltd [1946] 1 All ER 512 that the concept of a class of shares is fluid and for different purposes the delineation between classes of shares may differ.

70. The Applicant contends that there was no separate class of shares for the purposes of s 139FA: the shares issued to the Applicant being ordinary shares carrying exactly the same rights as all other ordinary shares, and that was made explicit by the SEOP. He notes that:

• (a) the ASX listing rules restrict companies to one class of ordinary shares unless particular exceptions apply and the Toll shares acquired by the Applicant were ordinary shares and the exceptions were not applicable;
• (b) the request for quotation of the newly issued Toll shares which included the Applicant's shares indicated that they were ordinary shares that ranked equally in all respects from the date of allotment with the existing ordinary shares;
• (c) section 57 of the Corporations Act 2001 (C'th) provides that share comprise a single class if not divided into separate classes;
• (d) the terms of the SEOP, that is "a Share issued on the exercise of an Option will rank pari passu with all existing Shares from the date of issue and will be entitled to those dividends which have a record date for determining entitlements after the date of issue …" did not differentiate between SEOP shares and other shares.

71. Further, the Applicant contends that his circumstances should be contrasted with the employee shares examined in
Clements Marshall Consolidated Ltd v ENT Ltd^[14] Above and the remarks on which the Commissioner relies reproduced above need to be read in the context of what was there before the court:

In the present case, the employee shares are a class separate from ordinary shares because they differ from them in respect of voting rights, dividend rights, liabilities, cause and other aspects.

72. In support of his contention that the only difference between the shares able to be acquired on market after 6 June 2007 and those the Applicant acquired some days later on 12 or 13 June 2007, was that the former no longer enjoyed the rights to participate in the Scheme and the latter were entitled. The Scheme entitlements for the former would be enjoyed by the vendors of the shares and not the purchaser. The Applicant refers to the decision in
Beck v Weinstock^[15] [2013] HCA 15 at [69] per Hayne, Crennan and Kiefel JJ that there is a difference between rights attached to shares and enjoyment of those rights. Reference was also made to the decision of Little J in Re Fowlers Vacola Manufacturing Co Ltd^[16] [1966] VR 97 at 103 that there is a difference between altering rights and doing something that affects the value of rights.

73. It is true that for certain purposes holders of Toll shares cum entitlements may have constituted a 'separate class' of shareholders from those who held shares ex entitlements, and may well be afforded protection in relation to voting on particular resolutions that may have affected their rights to those entitlements. However, this does not mean that these are, for all purposes two classes of shareholder, or more importantly, two classes of share. Much turns on the context in which it might be necessary to determine whether a separate class of share exists. The terms of Division 13A, and s 139FA, are not such that they call for identification of shareholders with a common or community of interest that need to be treated separately or differently. Division 13A calls for identification of types of shares and uses, as a touch stone, shares of classes traded on stock exchanges. The ordinary Toll shares were a single class of shares under ASX rules and that touch stone used in the statutory scheme of Division 13A indicates that ordinary shares cum and ex entitlements are to be regarded as a single class of share.

74. Further, the Commissioner's contention blurs the distinction between shares whose rights have been spent and shares that have different rights. It will be recalled that the Toll shares were ordinary shares. All ordinary shares had rights to participate in the Scheme. The concept of a separate class of share for present purposes does not differentiate between two shares carrying identical rights over a period with those rights spent for some shares and not others.

The Commissioner's third basis of assessment

If it is only the value of the Toll shares that is to be brought to account and the proper Toll share to value is a Toll share ex entitlements under the Scheme, then the there was a separate and distinct employee share scheme that provided for Asciano shares and the value of those shares needs to be included in the Applicant's assessable income as well under ss 139B(1) and (2), and s 139 FB

75. The Commissioner contends that the Asciano Stapled Securities or the rights to them constitute rights to shares affected by Division 13A because they were acquired directly or indirectly acquired as a consequence of the Applicant's employment. In support the Commissioner calls in aide what Dixon CJ and Williams J said in
F. C. of T. v Dixon^[17] (1952) 86 CLR 540 at p 553-554 concerning the words in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him as used in s 26(e) of the 1936 Assessment Act:

… Before turning to the other grounds upon which the commissioner rested his case, we shall state our reasons for declining to apply s. 26(e) to the supplementary payments provided by Macdonald, Hamilton & Co. as allowances &c. given &c. in relation directly or indirectly to the taxpayer's employment by that firm or services rendered by him to them. There can, of course, be no doubt that the sum of 104 pounds represented an allowance, gratuity or benefit allowed or given to the taxpayer by Macdonald, Hamilton & Co. Our difficulty is in agreeing with the view that it was allowed or given to him in respect of or in relation, directly or indirectly, to any employment of or, services rendered by him. It is hardly necessary to say that the words "directly or indirectly" extend the operation of the words "in relation … to". In spite of their adverbial form they mean that a direct relation or an indirect relation to the employment or services shall suffice. A direct relation may be regarded as one where the employment is the proximate cause of the payment, an indirect relation as one where the employment is a cause less proximate, or, indeed, only one contributory cause. It may be conceded also that the proviso has an effect upon the construction of par. (e) of s. 26, but the effect is only to show that the allowance may be in consequence of a retirement from or termination of the office, not to show that a mere historical connection, as it may be called, is sufficient. We are not prepared to give s. 26(e) a construction which makes it unnecessary that the allowance, gratuity, compensation, benefit, bonus or premium shall in any sense be a recompense or consequence of the continued or contemporaneous existence of the relation of employer and employee or a reward for services rendered given either during the employment or at or in consequence of its termination….

76. In Dixon, the taxpayer (Mr Dixon) left his employment to enlist as a soldier and serve in the Second World War. Before he had enlisted, Mr Dixon's employer advised employees that it would endeavour to supplement the earnings of employees who enlisted so that their earnings from the government while enlisted and the amounts paid by the former employer would not be less than the former employment earnings. Mr Dixon received payments of £104 pursuant to his former employers voluntary plan arrangement but not as consideration for past services or for any undertaking to return to his employment. The payments were voluntary. It was the case that but for his employment with his former employer Mr Dixon would not have received the additional amounts.

77. Notwithstanding the connection to the earlier employment relationship, not one of the members of the Court held that s 26(e) could apply: Dixon CJ and Williams J for the reason that it is necessary for the proximate cause or one of the causes of the payment to be the employment, McTiernan J for the reason that the payments were beyond the employment relationship,^[18] At p 558-559 Webb J because the payments were made as a reward for enlisting and for no other purpose,^[19] At p 562 and Fullagar J because the employment was not the occasion of the payments received notwithstanding the fact of his employment explained Mr Dixon's selection as a recipient of the payments.^[20] At p 563-564 In the result, by three to two majority, Mr Dixon was found to be liable to tax but not because of the historical connection with employment bringing the payments within s 26(e). Dixon CJ and Williams J. concluded that the amounts were income according to ordinary concepts largely due to their periodicity and that they were a supplemental contribution to restore the aggregate means by which Mr Dixon supported himself and his family to the pre-war service levels and paid to him for that purpose.^[21] At p 556 and 557 Fullagar J held they were income for similar reasons but expressed slightly differently, namely that they were periodical payments,^[22] At p 567-568 made with the expressed object to be an addition to earnings that were income as a substitute for what would have been received as income thereby taking the character of what it was a substitute for.^[23] At p 568

78. The Commissioner also relies on the decision of the High Court in
Smith v F.C. of T.^[24] (1987) 164 CLR 513 That decision concerned an allowance paid to an employee under an encouragement to study scheme where under payments were made to the employees upon completion of approved courses the employer bank considered would increase bank employees' knowledge of matters relevant to banking. Wilson J^[25] At p 519 held that s 26(e) of the 1936 Assessment Act was enlivened if the benefit was given or granted for or in relation directly or indirectly to his employment. He thought it helpful to ask the question was the benefit a consequence of employment^[26] At p 519 and concluded^[27] At p 520 that the allowance was an incident or consequence of employment and in no sense a personal gift.

79. Justice Brennan^[28] At p 521 thought the enquiry was as to whether the allowance was a consequence of employment and that if the employment was one of multiple reasons for the allowance being paid then s 26(e) is enlivened, albeit insubstantial reasons are immaterial.^[29] At p 526

80. The conclusion reached and the reasoning underlying this authority is of limited assistance. The Appellant in Smith received the benefit from his employer because of his employment in relation to matters that were perceived to be of assistance to his employment. The decision and reasoning do not concern a matter where one asset is acquired in connection with employment related arrangements and, subsequently, another asset is acquired because the first asset is held and not disposed of before the second asset is acquired. The decision and reasoning do not deal with matters where employment is a historical setting to an event which, after intervening events have occurred, produces a benefit to the employee.

81. In
F. C. of T. v Crown Insurance Services Ltd,^[30] (2012) 207 FCR 247 at [92] to [93] also referred to by the Commissioner, Jessup J canvassed the concepts of the terms directly and indirectly as used in s 26(e). He concluded that the s 26(e) authorities assisted where the concepts to be considered are relational. In the present context, whether the Asciano Stapled Securities, or the rights to them, constitute rights to shares affected by Division 13A because they were acquired directly or indirectly as a consequence of the Applicant's employment is a relational enquiry. However, the relevant relation in the present setting, was to the acquisition of Toll shares, and the fact that the Applicant did not sell them

82. In the present case it may have been that the Applicant's employment informed his selection as a recipient of the rights to shares in his employer company but the relevant test is not a but for test. The real question for determination is to ask what was the true contributing cause of the acquisition of the Asciano Stapled Securities. The answer to that enquiry takes into account the events that occurred including the earlier conferral of rights to shares in Toll, the acquisition of the shares that were acquired pursuant to those rights, the fact that the Applicant decided to hold and not sell those shares and the effect of the Scheme. On this basis, despite the undoubted width of the phrase used in the legislation, the acquisition of the Asciano Stapled Securities arose in the context of only an historical connection with the Applicant's employment.

83. Accordingly, the value of the Asciano Stapled Securities is not assessable on the footing that they were rights within the meaning of Division 13A.

The Commissioner's fourth basis of assessment

To the extent that Division 13A does not apply, then ss 6-5 or 15-2 brings to account the value of the Asciano Stapled Securities

84. The Commissioner's fourth basis of assessment suffers the same problem as his earlier contentions. The Asciano Stapled Securities or shares were not acquired as a result of an employee share scheme. They were acquired, with the background of the Applicant having been a shareholder and having held the Toll shares. It will be recalled that the Applicant could have contracted to sell the Toll shares issued to him before the Asciano Stapled Securities were issued. Had he done so the taxing value would have been determined by different rules. Whilst the Applicant's receipt of the Asciano Stapled Securities arose because he became a Toll shareholder on exercise of the options and decided to hold those shares, the SEOP entitlements did not have sufficient connection with the ultimate acquisition of the Asciano Stapled Securities.

Principal issue conclusion

85. The conclusion that follows in relation to the principal issue is that the value of the Asciano Stapled Securities, namely $647,310, that the Applicant acquired following exercise of his SEOP options and acquiring Toll shares is not brought to tax under Division 13A or ss 6-5 or 15-2. The agreement between the parties as to that taxable discount that arises under s 139CC(4) in respect of the Toll Shares acquired, and only those shares, namely $152,400, is correctly reached.

86. It is noteworthy that the Toll shares received on exercise of the options could have been sold and the Asciano Stapled Securities never acquired. The taxable amount would have been the sale price less the exercise price that was paid. Alternatively, the Toll shares might have been acquired earlier than the Applicant acquired them. Then, the weighted average trading price included days when Toll shares traded cum entitlements and days when they traded ex entitlements. On the Commissioner's analysis, this would produce a different result and potential taxation of more than the aggregate value received, if the value of the Asciano Stapled Securities was to be added to the value of the Toll shares. Further, because they would have been different amounts they may not have had the protection afforded by s 6-25 of the 1997 Assessment Act which prevents the same amount from being taxed twice. That is not the same as preventing the same gain from being taxed twice as referred to by the Commissioner in his submissions.

87. On a similar theme, and raised squarely by what the Commissioner agrees is the correct application of the Assessment Acts^[31] The 1936 Assessment Act and the 1997 Assessment Act in the present circumstances, the Applicant is liable to be taxed in respect of the franked dividend he received as part of the Scheme and the associated franking credits. That dividend was satisfied wholly by the issue of the Asciano Stapled Securities. That the Commissioner also seeks to tax the value of the Asciano Stapled Securities indicates the flaw in his contentions.

Franking credits

88. The Applicant received a dividend of $10,200 in respect of his shares. The dividend was fully franked by Toll. The associated franking credit was $4,371.43. Neither the dividend nor the franking credits were included in the Applicant's 2007 income tax return.

89. The Commissioner denied the tax offset entitlement in respect of the franking credit on the basis that the Applicant was not a qualified person.

90. The Commissioner has subsequently conceded that the Applicant was a qualified person and is entitled to the franking credits offset.

91. The Applicant's assessment is to be amended to include the dividend and franking credit associated with it and to allow the franking credit tax offset.

Penalty

92. The Administration Act creates a penalty regime for false or misleading statements that lead to shortfall amounts.

Subsection 284-75(1) of Schedule 1 to the Administration Act applies if:

• (a) the taxpayer or its tax agent makes a statement to the Commissioner;
• (b) the statement is false or misleading in a material particular; and
• (c) because of the statement there is a tax shortfall.

93. The Applicant's 2007 year income tax return was the relevant statement. The consequence of the Tribunal's findings is that the Applicant has made a false statement by omitting a taxable amount of $166,971.43 ($152,400 under Division 13A and the balance being the omitted dividend). He is therefore potentially liable to a penalty.^[32] Administration Act, Schedule 1, s 284-75(1).

94. The Commissioner has assessed administrative penalty at the base rate of 25 per cent of the tax shortfall based on his calculation of what that shortfall was.

95. Some further factual matters are relevant here.

96. On being invited in 2004 to participate in the SEOP the Applicant was given preliminary and overview advice by Toll. That advice suggested employees may need to get advice concerning their own circumstances. The Applicant does not appear to have acted on this recommendation. He may have been unwise in not doing so.

97. Nevertheless, in September 2007 the Applicant consulted his accountant and tax agent. His tax agent did not know how to treat the circumstances of the Applicant's participation in the Toll SEOP. The tax agent referred the Applicant to a financial planner. The Applicant consulted the financial planner in November 2007 and received some written advice in December 2007. The financial planner is now deceased and precisely what advice was given orally is not known. The Applicant gave evidence of his recollection of his understanding of the advice given. That evidence was that the advice appeared to focus on a s 139E election and whether it had been made in the year of issue of the options. There appears to have been a mistaken understanding by the Applicant of what he was told. The Applicant relayed that advice back to his tax agent. It is apparent, that even after consulting the financial planner, the Applicant believed that his taxing events were to occur on sale of the shares and not before.

98. In these circumstances, the Applicant cannot be criticised for failure to make an attempt to have his tax affairs dealt with properly.

99. The Applicant consulted a tax agent. He then went to another person upon referral. He provided proper instructions to both the tax agent and financial planner, within his own abilities to do so. That constitutes a reasonable attempt to comply with the law, or in other words, reasonable care.

100. The remaining question is whether the Applicant's tax agent took reasonable care. He took steps down that path in referring the Applicant to someone else in an area beyond his expertise but his choice of adviser is questionable. A financial planner is not a registered tax agent or a practicing lawyer. It is only registered tax agents and practicing lawyers who for the 2007 Year were permitted to give taxation advice for reward.^[33] 1936 Assessment Act, s 251L(1), c.f. Sinclair and Commissioner of Taxation [2010] AATA 902 Without more evidence as to the skills and attributes of the person involved, it is difficult to see how someone who is entitled to give taxation advice for reward would be taking reasonable care in circumstances where the referral is to someone who is not so entitled. One of the underlying principles of requiring tax agents to be registered is to protect those who need professional assistance in relation to their taxation affairs from being given advice and acting on advice from those not equipped to give it.^[34] See for example 1936 Assessment Act ss 251BC, 251JA and 251JC, and the Explanatory Memorandum to the Tax Agent Services Bill 2008 (C’th), para’s 1.7 and 1.8 in relation to the current regime for registration of tax agents. The consumer protection goals of the current regime being an expansion of those of the former regime. There is also no evidence as to the approach of the tax agent himself in making his own assessment in giving advice to the Applicant.

101. On the evidence led, the Applicant has not discharged the onus of showing that both he and its tax agent took reasonable care in preparing his 2007 income tax return.

102. The Applicant accepts that to the extent of the $166,971.43 he failed to include in his assessable income in his 2007 tax return he does not have a reasonably arguable position.

Penalty remission

103. The Commissioner and the Tribunal on review have a discretion to remit penalties.^[35] Administration Act Schedule, s 298-20. The Administration Act does not set out any guidelines for exercising that discretion. The issue is simply whether it is appropriate in the circumstances to remit penalties in whole or in part.

104. A significant consideration in the exercise of this discretion is whether, having regard to the particular circumstances of the taxpayer, the outcome would otherwise be harsh or produce an unjust, inappropriate or unreasonable outcome.^[36] Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50 at [248]-[249] Griffiths J with whom Edmonds J agreed.

105. The Applicant contends that penalty ought to be remitted on the ground that it produces a harsh and unjust result having regard to the earlier contentions that he had taken reasonable care and the facts that:

• (a) he ultimately made a loss through his ownership of the Asciano Stapled Securities and Toll shares;
• (b) the Asciano Stapled Securities and Toll shares were highly geared; and
• (c) he paid all outstanding tax, interest and penalties assessed to him in November 2011.

106. The Applicant also advanced a submission in relation to remission of penalty that the position he had adopted was reasonably arguable. It is not necessary to address this submission because the tax shortfall that remains is the $166,971.43 and the Applicant has conceded that the position in relation to this shortfall was not reasonably arguable.

107. The Commissioner contends that these are not relevant factors in considering remission and that there is insufficient material for the Tribunal to justify remission of the penalties.

108. The Tribunal accepts the Commissioner's submission. The Applicant did not have a reasonably arguable position in relation to the $166,971.43. He has not shown that both he and his tax agent took reasonable care. How a taxpayer chooses to fund an investment ought not make a difference to the penalty associated with errors in reporting taxable amounts associated with the investment, and the fact of the investment making a loss is the product of decisions to hold the investment after the taxable event has occurred. It is the taxing event and reporting of the appropriate taxable amounts associated with the taxing event that are the relevant foci and not decisions taken after those events have occurred. Finally paying taxes when they are due is a responsibility of all taxpayers under the law. If taxes are not paid when due, General Interest Charge is payable. Paying taxes is not a matter that goes to remission of penalty for shortfalls.

109. A penalty calculated by reference to the reduced shortfall at the 25 per cent rate for failure to take reasonable care or failure to have adopted a reasonably arguable position does not produce an inappropriate or unreasonable result.

DECISION.

110. The Tribunal sets aside the decision under and refers allows the objection in part by reducing the taxable amount to $166,971.43, allowing a franking credit of $4,371.43 and by reducing penalty to 25 per cent of the resultant tax shortfall being the tax payable on $166,971.43 less the $4,371.43, and directs that the Applicant's assessment be amended accordingly.