Case U3

Members:
HP Stevens SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 28 November 1986.

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H.P. Stevens (Senior Member)

The question for decision in this application is whether or not an amount of $7,180 received by the applicant from the trustee of his ex-employer's employees share scheme during the year ended 30 June 1982 has been correctly assessed in terms of sec. 26AAC. Before the Tribunal the Commissioner's representative withdrew any reliance upon the provisions of sec. 26(e) and also conceded that the amount "assessable" in terms of sec. 26AAC had been incorrectly calculated and should be reduced to $6,260.

2. Section 26AAC deals with the subject of shares and rights acquired under schemes for the acquisition of shares by employees of companies and applies in relation to acquisitions after 17 September 1974. Previously the provisions of sec. 26(e) were applicable and the new section "seeks to overcome the deficiencies and inequities in the operation of sec. 26(e) by providing, very broadly, that a liability to tax can only arise when a share is acquired by the taxpayer (or an associate) or when a right to acquire a share is disposed of by the taxpayer (or an associate) to a person who is not an associate" (CCH Australian Federal Tax Reporter, ¶15-250). The operative subsec. (5) provides:

"(5) Where a taxpayer has acquired during the year of income a share in a company under a scheme for the acquisition of shares

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by employees, the assessable income of the taxpayer of the year of income includes the value of that share at the time when it was acquired by the taxpayer less the sum of -

• (a) the amount, if any, paid or payable by the taxpayer as consideration for the share; and
• (b) if the taxpayer acquired the share as a result of the exercise or operation of a right (whether that right was unconditional or subject to conditions) to acquire the share - the amount, if any, paid or payable by the taxpayer as consideration for the right."

whilst subsec. (1) and (3) state:

"(1) For the purposes of this section, a taxpayer shall be taken to have acquired a share in a company, or a right to acquire a share in a company, under a scheme for the acquisiton of shares by employees if -

• (a) in the case of a share, the share was acquired by the taxpayer -
  • (i) in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer or a relative of the taxpayer; or
  • (ii) as a result of the exercise or operation of a right to acquire the share, being a right that was acquired by the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer or a relative of the taxpayer; or
• (b) in the case of a right, the right was acquired by the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer or a relative of the taxpayer."

"(3) A reference in this section to a share in a company, or a right to acquire a share in a company, having been acquired by a taxpayer in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer or a relative of the taxpayer includes, but is not limited to, a reference to such a share or right having been acquired by a taxpayer -

• (a) in pursuance of an agreement, arrangement or understanding under which a company was to issue shares in the company to employees of the company or of another company or to relatives of those employees; or
• (b) in pursuance of the terms of a trust deed under which a trustee is required or authorized to sell, or otherwise to transfer, shares in a company to employees of the company or of another company or to relatives of those employees."

3. One of the inequities said to previously exist was that a recipient was assessable even though the shares were subject to conditions and restrictions on the person's right to dispose thereof and which could operate to divest him thereof. Accordingly subsec. 26AAC(15) provides:

"(15) Where -

• (a) a taxpayer acquires a share in a company under a scheme for the acquisition of shares by employees; and
• (b) by reason of any conditions or restrictions (being conditions or restrictions applicable only to shares in the company acquired under such a scheme) attached to, or to the issue of, the share (including conditions or restrictions in relation to the payment of moneys in respect of the share) the right of the taxpayer to dispose of the share is restricted or the taxpayer is liable to be divested of his ownership of the share,

the acquisition of the share by the taxpayer shall be deemed for the purposes of this section to have taken place at the time when the right of the taxpayer to dispose of the share ceases to be so restricted, the time when the taxpayer ceases to be so liable to be divested of his ownership of the share or the time immediately before the taxpayer disposes of the share, whichever first happens."

4. Turning to the facts of the present case they are not in dispute and can be set out relatively briefly.

5. The applicant joined a public company in 1971 and in 1979 his employer resolved to set up an employees share scheme. To this end a deed dated 31 October 1979 between it and a

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trustee was executed. It recited that the employer wished to make available to nominated employees the right to acquire shares in it "on favourable terms for the purpose of encouraging greater interest on the part of such employees" and that the trustee would "hold the shares... for the nominated employees". Clause 2, inter alia, provided that the directors could nominate employees, such employees to direct the trustee to apply for the nominated number of shares (specified application form annexed) and to forward to trustee a sum equal to 10% of subscription, employer to make a 90% interest free loan to trustee, trustee to pay 100% to employer for shares and trustee to inform employee of date of allotment of shares. Clause 3 provided, inter alia, that the remaining 90% would be paid by nine annual instalments of 10%. In terms of cl. 4(1) the trustee was to hold the shares in trust for the employee and he "shall be the beneficial owner of the Shares subject... to the terms of this Deed...". The scrip (none physically issued - on computer) was to be retained by the trustee until the full amount of subscription had been paid (cl. 5) and cl. 6(1) placed a prohibition on dealing with the shares without prior consent of trustee until amount paid. Clause 7 dealt with default in payment and provided for the notification of the employee, the sale of the shares by the trustee if not then satisfied and the application of the proceeds of sale in satisfaction of the amount owing and payment of balance to employee.

6. Immediately after the execution of the deed the staff were notified of the scheme and their entitlements. By letter of 31 October 1979 the applicant was sent a brochure (outline of the scheme), an application form indicating he was offered 4600 shares at par with $460 payable on application (such form directing the "Trustee to apply, in writing, on my behalf" for the shares and the applicant undertaking to be bound by the terms of the deed) and advising the closing date was 30 November 1979. The applicant "accepted" and forwarded the form with his cheque for $460. As a result of his and other employees' acceptances the trustees applied for a total of 1,496,200 shares and these were allotted at a directors' meeting of the employer on 20 December 1979. On the anniversary of his application in November 1980 the applicant paid a further instalment of $960 (leaving an amount outstanding of $3,680).

7. In 1981 the applicant was "headhunted" and he left the employer on 31 May 1981. On 9 June 1981 he was sent a letter requesting payment of the amount of $3,600 but he ignored it as he did a subsequent demand of 17 July 1981. At a meeting on 26 August 1981 the trustees decided to sell the shares (also other persons' shares) and a total of 21,700 shares were sold on the stock exchange. The applicant's shares realised $10,859.98 and by letter of 17 September 1981 he was advised that "as there was no response from you to the demands for payment of the debt the trustee has sold the shares held on your behalf in accordance with the terms of the trust deed. A cheque for $7,179.98 being the amount due to you is now attached". This represents the amount of $7,180 assessed but no allowance was made for the two instalments paid of $920 and thus the Commissioner concedes he is incorrect to the extent of this $920.

8. The terms of sec. 26AAC have not been previously considered and it was the applicant's counsel's view that there had been no acquisition of any shares by the applicant by reason of the restrictions contained in cl. 6 of the trust deed. Nor had there been any acquisition of a right to acquire a share because there was no right until the outstanding instalments had been paid. Even if there had been the right to acquire he had never disposed of that right because it had been lost when he failed to pay the amount outstanding.

9. As indicated at the hearing it was thought that, having regard to the terms of sec. 26AAC(15), it was open to find that the existence of conditions or restrictions did not operate to prevent the acquisition of a share. If this were not so then subsec. (15)(a) would be meaningless. As the present case shows the trustee acts on behalf of the selected employees and holds the shares on trust for the employees who are the beneficial owners thereof. Accordingly it is proposed to resolve this point in favour of the Commissioner. However this does not necessarily conclude the matter in his favour and consideration must be given to the provisions of sec. 26AAA(15) which provide for a deemed time of acquisition.

10. In this regard it was the Commissioner's representative's submission (in fact the only

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submission apart from the adoption of the Tribunal's views indicated at the hearing as set out in the preceding paragraph) that, once the debt had been paid, the restrictions on the shares were lifted and the shares were deemed to be acquired by the applicant at that time. This submission was really an assertion unsupported by argument ("those are my instructions").

11. The submission to have any force requires the subsection to be interpreted on the basis that there is a deemed acquisition when the event that leads to the lifting of the restrictions is the actual sale of the shares and the subsequent application of the proceeds of sale to satisfy the debt that is the cause of the restrictions. By the time this happens the shares have ceased to exist (so far as the trustee and the employee are concerned - someone else has acquired them) and, unless there are clear words requiring such a conclusion, it is difficult to visualise an acquisition at a time after the shares have been sold - even a deemed one.

12. It could also be said that because of the existence of the debt the taxpayer was "liable to be divested of his ownership of the share" and that what occurred was a divestment of such ownership. If this be a correct way of looking at the situation it is similarly difficult to accept that an actual divestment means "the taxpayer ceases to be so liable to be divested of his ownership of the share" and that a deemed time of acquisition results.

13. The only possible argument in favour of the Commissioner (not advanced as such to the Tribunal) would appear to be one based on the sale being one by the applicant (per medium of the trustee or his agent) so that the deemed time of acquisition was "the time immediately before the taxpayer disposes of the share". However there is no evidence that the trustee acted as agent for the applicant to dispose of the shares (no prior consent given in terms of cl. 6). Rather it seems clear the trustee acted in its own right in terms of cl. 7 and that, whilst there needed to be an "accounting" for the proceeds of sale, such sale was not by the trustee as the applicant's agent.

14. It is recognised that such views may mean that, in seeking to remove inequities due to restrictions and possible divestments, a "loophole" has been created - previously assessed when may never have received amounts and now not assessed even though amounts received - but, when the words used are "clear", that is not a matter the Tribunal can correct. Even if two conflicting interpretations were open it is the one in favour of the subject that has to be adopted - particularly where the enactment was to remove inequities suffered by some subjects.

15. For the above reasons the Tribunal upholds the applicant's objection to his assessment for the year ended 30 June 1982 and accordingly sets aside the decision under review.