Case X43

Members:
GL McDonald DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 6 April 1990.

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G.L. McDonald (Deputy President)

The applicant is applying for a review of a decision of the Commissioner to include a sum of $35,061 in the applicant's taxable income for the year ended 30 June 1987.

There is no dispute about the evidence and the parties filed an agreed statement of facts. The applicant gave brief oral evidence and the documents filed for the purposes of sec. 37 of the Administrative Appeals Tribunal Act 1975 were accepted into evidence.

The facts

I am satisfied that the facts are as follows.

The applicant was employed by a public company (``Z Ltd.'') from 4 September 1973 to 16 October 1987.

On 31 October 1979 Z Ltd. announced the establishment of an employees' share incentive scheme (``the share scheme''). Pursuant to the share scheme all full-time employees of the company with at least two years' service were able to participate. The terms and conditions of the share scheme were contained in a trust deed dated 31 October 1979 and entered into between Z Ltd. and the trustee. On or about 26 November 1979 the applicant signed an ``Application to Participate in the Scheme and Direction to the Trustee'' from requesting the trustee to apply for 2,200 shares at $1 per share. At that time the applicant paid $1,540 which pursuant to cl. 3(1) of the trust deed represented a 10% deposit and six annual payments of $220 each. There was a balance due from the applicant to the trustee of $660 payable at the applicant's option in a lump sum or by three further annual instalments of $220 each.

Pursuant to cl. 2(3) of the trust deed Z Ltd. made an interest-free loan to the trustee of $1,980, being a sum equal to 90% of the subscription amount for the first shares. Those shares were allotted to the trustee on 3 January 1980.

On or about 25 November 1981 the directors of Z Ltd. offered the applicant, amongst other employees, a further opportunity to participate in the share scheme. In the manner outlined above the applicant directed the trustee to apply for a further 2,200 shares at $1.85 per share in relation to which the applicant made four annual payments together with a 10% deposit (total $2,035) with a balance due to the trustee of $2,035 payable at the applicant's option in a lump sum or by five further annual instalments of $407 each.

Pursuant to cl. 2(3) of the trust deed Z Ltd. made an interest-free loan of $3,663 to the

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trustee, that sum representing 90% of the subscription allowed in relation to the second allotment of shares. That allotment was made by Z Ltd. to the trustee on 6 January 1982.

The applicant did not pay any further amount by way of lump sum payments or any further annual instalments to the trustee with respect to either allotment of shares.

On 31 October 1986 the trustee, pursuant to the terms set out in the trust deed, sent a notice to the applicant calling upon him to pay the outstanding instalments in relation to both share allotments by 30 November 1986. The applicant made no further payment and did not contact the trustee. A further notice was sent on 12 January 1987 from the trustee to the applicant calling upon him to pay the outstanding amounts. Again the applicant did not comply or communicate with the trustee.

In March 1987 the trustee, in accordance with cl. 7(1) and 7(2) of the trust deed, caused the shares to be sold on the Australian Stock Exchange.

On 24 March 1987 the trustee forwarded a cheque for $35,061.07 to the applicant, being the surplus from the sale of all of the shares following the payment of stamp duty, brokers' fees and the outstanding instalments.

It is not contested that the applicant did not become the registered holder at any stage of any of the shares allotted to the trustee.

The issues

The sole basis on which the Commissioner seeks to justify the assessment relates to the applicability of sec. 26AAC of the Income Tax Assessment Act 1936 (``the Act'').

The issues raised in these proceedings are:

• (a) whether the applicant can be said to have ``acquired'' any shares in Z Ltd. for the purposes of sec. 26AAC(5) of the Act;
• (b) if the applicant did so acquire the shares, when did the acquisition occur; and
• (c) if the shares were acquired, whether or not sec. 26AAC(15) applies so as to deem the acquisition of shares for the purposes of sec. 26AAC(5) to have occurred (in this case) immediately before the taxpayer disposed of the shares.

The Act

The relevant provisions of the Act are as follows:

``26AAC(1) [Acquisition of share, etc., under employee scheme] 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 acquisition 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.

...

26AAC(5) [Assessable income - acquisition of share] Where a taxpayer has acquired during the year of income a share in a company under a scheme for the acquisition of shares 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.

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...

26AAC(15) [Restrictions on right of disposal of share] 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.''

Did the applicant ``acquire'' any shares?

The applicant contends that he did not acquire, either legally or beneficially, any shares in Z Ltd. and that, pursuant to the terms of the trust deed, he gained nothing more than a contingent right to become the legal and beneficial owner of the shares after compliance with the terms of the trust deed.

Section 26AAC(1) distinguishes between an acquisition of a share in a company and an acquisition of a right to acquire a share in a company. That distinction is evident throughout the subsections of sec. 26AAC. It is also evident that a person may acquire shares even although that acquisition may be subject to conditions.

The Shorter Oxford English Dictionary defines ``acquire'' as having an active as well as a passive connotation, viz.:

``1. To gain, or get as one's own (by one's own exertions or qualities).

2. To receive, to come into possession of.''

By signing the ``Application to Participate in the Scheme and Direction to the Trustee'' form in each case the applicant did not ``acquire'' either a share or a right to acquire a share (
Fraunschiel & Ors v. F.C. of T. 89 ATC 4616 at p. 4634). If the applicant acquired anything it was only acquired at the time the shares were allotted to the trustee.

The applicant submits he acquired nothing because all of the following major elements of ownership which would flow from acquisition are missing:

• • The applicant had no right of disposition of the shares and no right to direct the trustee whether or when to dispose of the shares.
• • The applicant could not call for a transfer of the shares.
• • The applicant could not direct the trustee how to vote with respect to the shares.
• • The applicant had no right to encumber the shares ``or any interest therein''.
• • The applicant was not entitled to the proceeds of sale of any particular shares, i.e. no shares were identifiably beneficially his.
• • Although dividends flowed to the applicant in respect of 4,400 shares, they were received as distributions of trust income by him in his capacity as a beneficiary not as a shareholder.

Additionally, the applicant submitted that the trustee did not hold any specifically identifiable shares on behalf of the applicant but rather it held a fungible pool of shares with the applicant having the right to acquire a certain number from that pool upon the applicant satisfying the terms and conditions set out in the trust. Until that occurred there was no one share which was identifiable as being set aside on behalf of the applicant.

On the other hand Mr Buss, appearing for the respondent, submitted:

• • The applicant signed an irrevocable direction to the trustee to apply on his behalf for a stated number of shares which were in each case allotted.
• • In the ``Application to Participate in the Share Scheme and Direction to Trustee'' form, signed by the applicant, the applicant

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  undertook to be bound by the terms and conditions of the trust deed as if he had executed it himself.
• • In recital A of the trust deed the trustee was enjoined to hold the shares for the nominated employee (i.e. not on its own behalf as trustee) and that the employee was to be the beneficial owner of the shares (subject to the terms of the trust deed).

In Mr Buss' submission the applicant acquired the shares by completing the application form, by agreeing in the application form to be bound by the terms and conditions of the trust deed, by irrevocably directing the trustee to apply on his behalf for the specified number of shares, and in consequence of the expressed terms of the trust deed itself.

Mr Buss submitted that whilst the trustee may not have made a separate allocation for each of the allotments of shares to each of the applying employees, the shares allotted could be treated, by analogy, with the principles of tracing applicable where the property of two or more trusts have become intermingled by the trustee and ultimately, the number of shares allotted to the trustee on behalf of each employee thereby identified.

In Case U3,
87 ATC 118, the facts, including the terms of the trust deed, were similar to the case under review. There the Tribunal decided in interpreting sec. 26AAC(15) that the employee had acquired the ``beneficial ownership'' of the shares (p. 121 para. 9). The argument before the Tribunal in that case seems to have been limited to whether or not existence of conditions or restrictions attached to the shares operated to prevent a person from acquiring them. No argument seems to have been addressed to the question of whether or not, in circumstances where application for the allotment of shares is made through a trustee and the shares are subsequently held by the trustee pending conditions and restrictions being satisfied, there could be said to be an ``acquisition'' by the employee. The Tribunal concluded (p. 121 para. 9):

``... 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.''

The Tribunal went on to hold that the trustee did not act as agent for the employees when selling the shares for non-payment of part of the subscription and (at p. 122 para. 13) said:

``However there is no evidence that the trustee acted as an agent for the applicant to dispose of the shares... Rather it seems clear the trustee acted in its own right... and that, whilst there needs to be an `accounting' for the proceeds of the sale, such sale was not by the trustee as the applicant's agent.''

It seems to me the precondition for the operation of subsec. (15) must be a finding that the taxpayer has acquired a legal interest in the shares in question. If he has so acquired them, then he has the right to dispose of them. The decision in Case U3 assumes that whilst the taxpayer has acquired a beneficial interest in the shares it is the trustee, the legal owner, rather than the taxpayer, who has disposed of them. Those two concepts of ownership are not in my view synonymous and with the utmost respect to the Senior Member, there appears to be an inherent difficulty in suggesting acquisition can embrace equitable interest subject to a trust.

In the instant case, by signing the ``Application to Participate and Direction to Trustee'' form, the applicant cannot be said to have acquired the legal title in the shares.

However, in my view, he does acquire a right, upon satisfaction of the conditions set out in the trust deed, to acquire the shares which are, in the meantime, allotted to the trustee to hold on his behalf. That right arises upon the allocation of the shares by Z Ltd. to the trustee. From the time of that allocation there is nothing stopping the full vesting of the shares other than the satisfaction of the conditions imposed by the trust deed. The trustee has no discretion to refuse to vest the shares upon the applicant meeting the conditions. The applicant therefore has acquired a right to the shares subject to the conditions being satisfied. To the extent that Case U3 (supra) covered this point it is in my view correct and consistent with the provisions of sec. 26AAC.

Mr Buss urged the Tribunal to adopt the reasoning of the majority in
K.L.D.E. Pty. Ltd. (in liq.) v. Commr of Stamp Duties (Qld) 84 ATC 4793; (1984) 56 A.L.R. 337. In that case, with respect to an assessment of stamp duty made under the Stamp Act 1894 (Qld), the High

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Court held that ``ownership'' included ``beneficial ownership''. The facts in that case were somewhat different to those in the instant case because there was a contract between the purchaser and vendor of property which was capable of being specifically performed. In those circumstances the Court held that the purchaser was the beneficial owner of the property, the subject of the contract of sale. In the instant case there is no contract between Z Ltd. and the employee/taxpayer and the employee/taxpayer has no right to specific performance against Z Ltd. At most the employee/taxpayer has an action against the trustee. For those reasons I do not regard that decision as being relevant to the instant case.

It follows from the above finding that sec. 26AAC(5) does not apply to the applicant since that subsection deals purely with the acquisition of shares by a taxpayer and not with the acquisition of rights to a share. This view is confirmed by para. (b) which contemplates the taxpayer acquiring shares as a result of the exercise or operation of a right to acquire them, i.e. it is dealing with the situation where an acquisition of shares has occurred rather than the situation where a right only to acquire the shares exists.

Neither, in my view, does sec. 26AAC(15) apply to the applicant because he has not acquired shares as contemplated by para. (a) for the same reasons set out above with respect to the applicability of sec. 26AAC(5). Since he has not acquired the shares he is not able to dispose, or liable to be divested, of his ownership of them in accordance with para. (b). There is no doubt that pursuant to the provisions of the trust deed the taxpayer is liable to be divested of his right to acquire the shares, but that is not the same as saying that he is liable to be divested of the shares because for the reasons already expressed the taxpayer has never acquired any shares.

For the reasons stated above the decision under review is set aside and the matter remitted to the respondent with a direction that an amount of $35,061 is not assessable income earned by the taxpayer in the year ended 30 June 1987.