Decision impact statement

Stewart and Commissioner of Taxation

Venue: Administrative Appeals Tribunal
Venue Reference No: 2012/1439
Judge Name: Middleton J, SM O' Loughlin
Judgment date: 28 November 2013
Appeals on foot: No
Decision Outcome: Partly Unfavourable

Impacted Advice

Relevant Rulings/Determinations:

• None

Subject References:
Employee share scheme
Employment benefit
Market value
Share options
Administrative penalty

Précis

Outlines the ATO's response to this case which concerned the amount assessable to the taxpayer in the 2007 income year when he exercised 60,000 share options issued to him by his employer in the 2004 income year

Brief summary of facts

The taxpayer acquired 60,000 share options from his employer, Toll Holdings Ltd (Toll), in October 2004 under Toll's Senior Executive Option Plan (SEOP) for no consideration. Subject to meeting certain performance conditions during the 2005 to 2007 income years, each option could be exercised between 9 September 2007 and 9 September 2009 to acquire a share in Toll for $10.95. As the options were qualifying rights under Division 13A of Part III of the Income Tax Assessment Act 1936 (ITAA 36), and as the taxpayer did not elect under section 139E to be taxed in the 2005 income year on any discount given to him on the options when acquired, he would be taxed on the discount in the year in which the 'cessation time' of the options occurred under section 139CB.

After the taxpayer acquired the options, Toll decided to implement a Scheme of Arrangement in 2007 to demerge part of its business to a new group, the Asciano Group. Under the Scheme, each Toll shareholder was entitled to dividend and capital reduction rights, which would be applied to acquire Asciano stapled securities. Because the Scheme would be implemented in 2007 before the SEOP options could be exercised, Toll waived the performance conditions and brought forward the exercise 'window' for the options to between 1 and 13 June 2007. Options exercised within that time enabled the holders to participate in the Scheme, i.e., to obtain Toll shares cum entitlements to Asciano stapled securities. The taxpayer exercised his options on 12 June 2007 to acquire 60,000 Toll shares, and then acquired 60,000 Asciano stapled securities on 15 June 2007 when the dividends and capital reduction amounts were applied.

As the 'cessation time' for the taxpayer's options was when they were exercised, the taxpayer was required to include in his assessable income for the 2007 year the value of the discount on the options, as calculated under subsection 139CC(4), i.e., the market value of 'the share' acquired as a result of the exercise of each option less the exercise price. The taxpayer did not include any amount in his 2007 income tax return in relation to the options. Just before the Scheme was implemented, Toll shares were trading at $23.77. Just after implementation, they traded at between $13 and $14, and the Asciano stapled securities traded at between $10 and $11.

The Commissioner assessed the taxpayer to the market value of both the Toll shares and the Asciano stapled securities acquired by him, less the exercise price of the options. The taxpayer accepted before the AAT that his taxable income for the 2007 year should include the market value of the Toll shares ex entitlement less the option exercise price. However, he argued that the value of the Asciano stapled securities should not be included in his assessable income for that year.

Issues decided by the court

The AAT agreed with the taxpayer that the value of the Asciano stapled securities was not assessable to the taxpayer in the 2007 year under Division 13A or under either section 6-5 or section 15-2 of the Income Tax Assessment Act 1997 (ITAA 97).

The AAT found that, while the taxpayer acquired the Toll shares 'as a result of the exercise of' the share options, for the purposes of subsection 139CC(4), he did not so acquire the Asciano stapled securities. The acquisition of the stapled securities was explainable by events (the application of the dividends and capital reduction amounts) other than the exercise of the options. Once the Toll shares were acquired, the taxpayer's entitlements under the share options were satisfied. The AAT then rejected the Commissioner's argument that the value of the Toll shares acquired was their value cum entitlement under section 139FB. The shares were not of a different class to the Toll shares trading ex-entitlement, and should be valued as any such shares would be under section 139FA.

The AAT also rejected the Commissioner's argument that the value of either the rights to the Asciano shares acquired on 12 June 2007, or the Asciano shares acquired on 15 June 2007, should be assessed to the taxpayer under Division 13A or under either of sections 6-5 or 15-2 of the ITAA 97, being the value of that which has been acquired directly or indirectly as a consequence of the taxpayer's employment with Toll. The true contributing cause of the acquisition of the Asciano rights or shares was not the taxpayer's employment with Toll - the employment provided merely a historical connection with the acquisition.

Finally, the AAT found that the taxpayer had not discharged the onus of showing that his tax agent took reasonable care in failing to include the discount assessable under Division 13A in his 2007 income tax return, and that it was not appropriate in the circumstances to remit the administrative penalty.

ATO view of Decision

The ATO accepts that, on the facts as found, it was open for the AAT to find that the value of the Asciano stapled securities was not assessable to the taxpayer in the 2007 year.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

None

Implications on Law Administration Practice Statements

None

Court citation:
[2013] AATA 845
2013 ATC 10-340
(2013) 97 ATR 963

Legislative References:
Income Tax Assessment Act 1936
s 26(e)
Division 13A
s 139B
s 139CC
s 139FA
s 139FB
s 169ZYJB
s 169ZYJE

Income Tax Assessment Act 1997
s 6-5
s 15-2
s 130-83

Taxation Administration Act 1953
Schedule 1
s 284-75
s 298-20

Case References:
Beck v Weinstock
[2013] HCA 15

Clements Marshall Consolidated Ltd v ENT Ltd
[1988] Tas R (NC) N1
(1988) 13 ACLR 90
(1988) 6 ACLC 389

FC of T v Crown Insurance Services Ltd
(2012) 207 FCR 247
2012 ATC 20-359

FC of T v Dixon
(1952) 86 CLR 540

FC of T v McWilliam
(2012) 204 FCR 478
2012 ATC 20-339

Re Fowlers Vacola Manufacturing Co Ltd
[1966] VR 97

Sanctuary Lakes Pty Ltd v FC of T
[2013] FCAFC 50
2013 ATC 20-395

Smith v FC of T
(1987) 164 CLR 513
19 ATR 274