FEDERAL COURT OF AUSTRALIA
Fowler v Commissioner of Taxation [2013] FCAFC 69
| IN THE FEDERAL COURT OF AUSTRALIA | |
| Appellant | |
| AND: | Respondent |
| DATE OF ORDER: | |
| WHERE MADE: |
THE COURT ORDERS THAT:
2. The appellant pay the respondent’s costs of the appeal.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
| VICTORIA DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 795 of 2012 |
| ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA |
| BETWEEN: | MICHAEL PATRICK FOWLER Appellant |
| AND: | COMMISSIONER OF TAXATION Respondent |
| JUDGES: | BESANKO, GORDON, DODDS-STREETON JJ |
| DATE: | 3 JULY 2013 |
| PLACE: | adelaide (via video link to MELBOURNE) |
REASONS FOR JUDGMENT
besanko J:
Introduction
1 This is an appeal from orders made by a judge of this Court on 8 October 2012. By those orders the appellant’s application to the Court was dismissed and the appellant was ordered to pay the respondent’s costs.
2 The background to the appeal is as follows. The appellant lodged an objection to an amended notice of assessment dated 29 October 2009 issued to him by the respondent in respect of the year of income which ended on 30 June 2007. On 22 September 2010 the respondent disallowed the appellant’s objection to the assessment of primary tax and to the imposition of a penalty. Pursuant to s 14ZZ of the Taxation Administration Act 1953 (Cth) the appellant brought the proceeding in this Court which is the subject of the appeal. By reason of s 14ZZD he bore the onus of establishing that the respondent’s assessment was excessive. The appellant failed to discharge that onus and the primary judge dismissed his application (Fowler v Commissioner of Taxation [2012] FCA 1040).
3 There was little dispute about the primary facts and the principal issue was the proper construction of provisions in Division 13A of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”) which dealt with employee share schemes. That Division applied at the relevant time. It was enacted in 1995 and repealed in 2009. Section 139 in Division 13A stated that the Division provided for the taxation treatment of shares and rights acquired under employee share schemes. There was no dispute before the primary judge that during the year of income ended 30 June 2007 the appellant acquired rights under an employee share scheme within the meaning of that expression in Division 13A. The dispute related to the date upon which he acquired those rights because that had a material bearing on the discount which was, by reason of s 139B, to be included in his assessable income for the year of income ended 30 June 2007. The date for which the appellant contended was 14 September 2006 whereas the date for which the respondent contended was 30 November 2006. The primary judge decided that issue in favour of the respondent.
4 Before the primary judge the appellant also challenged the respondent’s decision to impose a penalty of 25% under ss 284-75 and 284-90 item 3 (a failure to take reasonable care) of Schedule 1 to the Taxation Administration Act 1953 (Cth). The appellant alleged, among other things, that he had taken reasonable care to comply with a taxation law. The primary judge rejected the appellant’s challenge to the respondent’s decision to impose a penalty.
5 On the appeal to this Court the appellant contends that the primary judge erred with respect to both matters.
The facts
6 The appellant challenged only one finding of fact made by the primary judge and I will identify that challenge and deal with it later in these reasons (at [51] and [95]).
7 Although the primary judge did not accept every aspect of the respondent’s case, the respondent has not filed a notice of contention and does not challenge any of her Honour’s findings of fact. For example, in the Court below the respondent alleged that there was no contract between the appellant and his employee on 14 September 2006. The primary judge found that there was such a contract.
8 Nexus Energy Limited (“Nexus”) was a public corporation under s 9 of the Corporations Act 2001 (Cth) and it was first listed for quotation on the Australian Securities Exchange (“ASX”) on 8 September 2000. Shortly after April 2000 the company commenced to conduct the business of oil and gas exploration and production. In 2006 it had not yet engaged in the commercial production of oil and gas.
9 The appellant was appointed a non-executive director of Nexus on 11 April 2000 and he continued in that position until 16 November 2007, when he was appointed the non-executive chairman of the board.
10 Tess Aust Pty Ltd (“Tess Aust”) was the trustee of the appellant’s family trust. It was an incorporated company and a resident of Australia for the purposes of the 1936 Act. The appellant’s family trust was a trust established by deed and it was a tax resident of Australia for the purposes of the 1936 Act. At all material times, the appellant was an “associate” of Tess Aust within the meaning of s 139GE of the 1936 Act.
11 Nexus had an employee share option plan (“ESOP”) which it had established in November 2003. The ESOP was governed by the ESOP Rules (“the Rules”).
12 In 2006, an issue arose within the company concerning the grant of options to directors in lieu of cash fees. At a meeting of the board of directors held on 26 July 2006 the board passed a resolution in the following terms:
Accordingly, IT WAS RESOLVED to increase base director’s fees to $60,000 per annum and the chairman’s fees to $120,000 per annum effective immediately.
It was also resolved that directors would be entitled to take part or all of their remuneration in the form of options priced on the same basis as under the ESOP scheme and subject to any shareholder and other approvals required. Directors were to notify the chairman of their preferred mix of remuneration.
13 Following this resolution, the managing director of the company, Mr Tchacos, prepared a paper entitled “2006 Employee Share Scheme and Board Options Recommendation” dated 9 September 2006. The paper contained recommendations for the issue of options under the ESOP and the issue of options to members of the board in lieu of cash remuneration.
14 There was a meeting of the board of directors on 14 September 2006 at which the minutes of the meeting of 26 July 2006 were accepted as a correct record and the following matters noted and resolved:
The chairman presented a recommendation from the remuneration committee based upon a recommendation to the board from IZT [Mr Tchacos] dated 9th September in which the company’s employees and directors remuneration and incentives were outlined. Following discussion on the remuneration philosophy for the company the following board resolutions were agreed to:
…
IT WAS RESOLVED that the following options be issued to the directors of the company [on] the same terms and conditions as the company’s employees share option plan and that shareholder approval be obtained prior to being issued.
Directors name Number of options Exercise Price Expiry date
Neil Philip 742,500 87 cents 31 October 2007
Robert Boyson 742,500 87 cents 31 October 2007
Michael Fowler 742,500 87 cents 31 October 2007
Alastair Haydock 742,500 87 cents 31 October 2007
Total 2,970,000
15 At the same meeting the directors resolved to approve the issue of options to employees.
16 Before the primary judge the appellant challenged the accuracy of the board minutes insofar as they recorded the above resolutions and, in particular, he challenged their accuracy insofar as they referred to the need for the approval of shareholders. That challenge was rejected by the primary judge ([86] – [92]) and her conclusion on this point was not challenged on appeal.
17 In late September 2006 Nexus took action under the ESOP. On 26 September 2006 Mr Tchacos on behalf of the directors of Nexus wrote to employees inviting them to participate in the plan and offering to grant options on the terms indicated in the letter. The letter stated that the offer closed at 5 pm on 29 September 2006 and could be accepted before that time by returning the acceptance form enclosed with the letter. The primary judge referred to the rules of the ESOP, but for reasons which will become clear, it is not necessary for this Court to set out the details of those rules. The appellant was not sent a letter relating to the ESOP and he did not provide an acceptance in accordance with the rules by 29 September 2006.
18 In his appeal statement lodged under the Rules of Court the appellant had alleged that, in the alternative to his allegation that he acquired rights to acquire shares on 14 September 2006, he had acquired rights to acquire shares on 29 September 2006. That argument was put on the basis of an allegation that the non-executive directors’ options were granted under the ESOP. That factual proposition was rejected by the primary judge ([67]) and the appellant does not challenge that conclusion on the appeal.
19 Nexus made an announcement to the ASX on 29 September 2006 to the effect that it had issued 6,624,300 options at an exercise price of 87 cents per share to eligible Nexus employees pursuant to the ESOP. The announcement also foreshadowed the following:
In addition and subject to shareholder approval at the next Annual General Meeting, a further 4,770,000 million [sic] options are intended to be issued to the Managing Director and the non-executive directors. These options will also have an exercise price of 87 cents per share and will also expire on the [sic] 31 October 2007.
20 At a meeting of the board of directors on 29 November 2006, the board approved the minutes of the meeting held on 14 September 2006 subject to minor amendments which are not material.
21 The Annual General Meeting of the shareholders of Nexus was held on 30 November 2006. The notice of meeting identified an item of business being the approval of the issue of options to the appellant. The explanation in relation to this item included the following:
9. Approval for Issue of Options to Michael Fowler
To consider and, if thought fit, to pass with or without amendment, the following resolution as an ordinary resolution:
“That for the purposes of Listing Rules 7.1 and 10.11 and Chapter 2E of the Corporations Act and for all other purposes, approval is given for the Company to allot and issue 742,500 Options exercisable at $0.87 each on or before 31 October 2007 to acquire ordinary fully paid Shares in the capital of the Company to Michael Fowler on the terms and conditions set out in the Explanatory Statement accompanying this notice with a vesting date of 30 November 2006, subject to resolution 9 being passed.”
22 The Notice of Meeting was accompanied by an Explanatory Memorandum and that document provided the following information in relation to the resolution for the approval of the issue of options to the appellant:
Resolution 8 [sic] seeks Shareholder approval for the Company to grant 742,500 Options to Michael Fowler a Director of the Company.
Shareholder approval for the grant of the Options the subject of Resolution 8 is sought for the purposes of:
• Division 3 of Part 2E.1 of the Corporations Act – which governs the giving of financial benefits to “related parties”, e.g. directors of a company;
• Listing Rule 7.1 – which generally prohibits a company from issuing more than 15% of its capital within a 12 month period without shareholder approval; and
• Listing Rule 10.11 – which requires the grant of securities to a director of a company be approved by shareholders.
As part of the annual performance remuneration review of all employees and directors for the year ending 30 June 2006, the Directors recommended the grant of 742,500 Options to Michael Fowler. The exercise price of the Options is 87 cents and will expire on 31 October 2007.
The policy for pricing these Options was set by the board in May 2005 and is determined by taking a minimum 40% premium to the Volume Weighted Average Price (VWAP) of the Nexus Shares traded on the Australian Stock Exchange in June and July 2006. The price and terms of the Options are the same as those granted to other employees for the same review period. The pricing of the options was then ratified at a board meeting held on 14 September 2006.
The purpose of the proposed grant of Options is to honour remuneration agreements and to provide Michael Fowler with added incentive in lieu of salary whilst enabling the Company to preserve its cash reserves for expenditure on its existing business. The number of Options proposed to be granted to Michael Fowler has been determined on the basis that it is reasonable relative to the number of Options offered under the Company’s Share Option Plan to other employees of the Company, having regard to their respective levels of seniority in the Company. The Options are being granted for no consideration. Consequently no funds will be raised as a result of the grant of the Options. A total of $645,975 in additional Share capital would be raised if the Options were exercised in full.
Subject to Shareholder approval, the Options will be granted on the terms and conditions set out below in this Explanatory Statement.
…
The proposed grant of Options to Michael Fowler involves the provision of a financial benefit to a related party of the Company and, therefore, requires prior Shareholder approval.
…
23 The shareholders passed the resolution which approved the allotment and issuing of 742,500 options to the appellant.
24 On 8 December 2006 and in accordance with rule 3.19A of the ASX Listing Rules, Nexus submitted an Appendix 3Y form, “Change of Director’s Interest Notice”, to the ASX wherein it advised it that the appellant’s indirect interest in Nexus had changed on 30 November 2006 in that the appellant had acquired a further 742,500 options, with an exercise price of 87 cents and an expiry date of 31 October 2007, through Tess Aust.
25 In its annual report for the year ended 30 June 2007, Nexus stated that it had granted the 742,500 options to the appellant on 30 November 2006 and that the options had vested, with a “fair value per option at grant date” of $0.5552.
Legislative Provisions
26 The key section in Division 13A of the 1936 Act was s 139B. That section provided relevantly as follows:
(1) If a taxpayer has acquired a share or right under an employee share scheme, the assessable income of the taxpayer includes the discount given in relation to the share or right.
Note: Employee share scheme is defined in section 139C
…
(2) Unless subsection (2A) or (3) applies, the discount is included in the taxpayer’s assessable income of the year of income in which the share or right is acquired.
…
(3) If the share or right is a qualifying share or right and the taxpayer has not made an election under section 139E covering the share or right, the discount is included in the taxpayer’s assessable income of the year of income in which the cessation time (see sections 139CA and 139CB) occurs.
27 There is no need for the Court to examine the notions of qualifying share or right or the cessation time.
28 The concept of acquiring a share or right in subsection 139B(1) was defined in s 139G which appears in subdivision G (“Definitions”):
A person acquires a share or right if:
(a) another person transfers the share or right to that person (other than, in the case of a share, by issuing the share to that person); or
(b) in the case of a share—another person allots the share to that person; or
(c) in the case of a right—another person creates the right in that person; or
(d) the person otherwise acquires a legal interest in the share or right from another person; or
(e) the person acquires a beneficial interest in the share or right from another person.
In those circumstances, the other person provides the share or right.
29 The concept of “employee share scheme” was dealt with in s 139C which was as follows:
(1) A taxpayer acquires a share or right under an employee share scheme if the share or right is acquired by the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of the taxpayer or an associate of the taxpayer.
(2) A taxpayer acquires a share or right under an employee share scheme if the share or right is acquired by the taxpayer in respect of, or for or in relation directly or indirectly to, any services provided by the taxpayer or an associate of the taxpayer.
(3) The taxpayer does not acquire a share or right under an employee share scheme if the consideration for the acquisition is equal to, or more than, the market value of the share or right at the time that it is acquired.
(4) The taxpayer does not (except for the purposes of Subdivision DA) acquire a share under an employee share scheme if the taxpayer acquires the share as the result of exercising a right that the taxpayer acquired under an employee share scheme.
(5) The taxpayer does not acquire a share or right under an employee share scheme if the taxpayer is the trustee of a trust whose sole activities are obtaining shares, or rights to acquire shares, and providing those shares or rights to employees of a company or to associates of those employees.
30 The concept of the “discount” was explained in s 139CC and for present purposes it is sufficient to set out subsections (1) and (2):
(1) This section sets out how to calculate the discount given in relation to a share or right.
(2) If subsection 139B(2) or (2A) applies to the discount, the discount is the market value of the share or right at the time when it was acquired by the taxpayer less any consideration paid or given by the taxpayer as consideration for the acquisition of the share or right.
31 In this case it was accepted by the appellant that he provided no consideration for the acquisition of the share or right.
32 Division 13A also covered cases where two parties were associates and one party was employed or rendered services and the other acquired a share or right under an employee share scheme. Section 139D provided relevantly as follows:
(1) This section applies if:
(a) a taxpayer has acquired a share or right under an employee share scheme; and
(b) the share or 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, an associate of the taxpayer; and
(c) apart from this section, an amount:
(i) would be included in respect of the acquisition in the assessable income of the taxpayer of a year of income under this Division; or
(ii) would have been so included if the taxpayer had been a resident at the time of the acquisition.
(2) Subject to subsection (3), if this section applies, the amount is included in the associate’s assessable income of the year of income instead of in the taxpayer’s assessable income.
33 In this case the appellant rendered services to Nexus, but the company issued the options to Tess Aust.
34 Division 13A also dealt with cases where a right was acquired but later lost before it was exercised. Section 139DD provided relevantly as follows:
(1) For the purposes of this Division, a right to acquire a share in a company is never acquired by a taxpayer if the following 2 requirements are satisfied.
(2) The first requirement is that the taxpayer loses the right without having exercised it.
…
(3) The second requirement is that the company was, at the time the right was acquired, the employer of the taxpayer or a holding company of the employer of the taxpayer.
…
(4) Section 170 does not prevent the amendment of an assessment at any time for the purpose of giving effect to this section.
35 Section 139FD appeared in the sections dealing with the determination of the market value of shares or rights. It provided:
In determining the market value of a share or right under section 139FB or 139FC, the share or right, and any share that may be acquired as a consequence of the exercise or operation of the right, is taken not to be subject to any conditions or restrictions.
36 Finally, s 139FF addressed the valuation of a share or right where the employee or his or her associate acquired either the beneficial interest or the legal interest in the share or right. It provided:
To avoid doubt, if a person acquires either the beneficial interest or the legal interest in a share or right, the value that is applicable for the purposes of this Division is the value of the share or right, not the value of the interest in the share or right.
Notes: 1. It is the value of the share or right that is relevant because the taxpayer is taken to have acquired the share or right—see section 139G.
2. Double taxation is avoided by section 139DA.
The Primary Judge’s Reasons
37 As I have already said, it was common ground before the primary judge that the rights acquired by the appellant or Tess Aust were acquired under an employee share scheme within the meaning of s 139C of Division 13A and that neither the appellant or Tess Aust gave any consideration for the acquisition of the rights within s 139CC(2) (or 139C(3)). In those circumstances, the discount was equal to the market value of the right at the time that it was acquired.
38 The respondent included the discount in the appellant’s assessable income for the year of income ended 30 June 2007 on the basis that the options had been issued to Tess Aust. He applied s 139D. The relationship between the appellant and Tess Aust was not explored in any detail before the primary judge because, so far as I can see, neither party considered it an issue in light of the operation of s 139D. The primary judge referred interchangeably to acquisition by the appellant and acquisition by Tess Aust.
39 The primary judge referred to evidence which she said supported the conclusion that the 746,500 options were granted by Nexus to the appellant on 30 November 2006.
40 First, the primary judge noted that under the Corporations Act a company must keep a register of option-holders and information about the grant of options must be entered in the register within 14 days after the grant of options (s 170(1) and (2)). In addition, copies of all documents that grant options over unissued shares or interests must be kept with the register (s 170(3)). Under s 176 the register of option holders is proof of the matters shown in the register in the absence of evidence to the contrary. Although the register of option holders was not in evidence before the primary judge she concluded that 30 November 2006 was the date of the grant of the options having regard to the Appendix 3Y form and the fact that the 2007 annual directors’ report required by the Corporations Act also stated that the appellant’s options were granted on 30 November 2006.
41 Secondly, the primary judge referred to the conduct and other statements of the company on 30 November 2006 and before this date including the ordinary resolution of the shareholders passed on 30 November 2006 which referred to “a vesting date of 30 November 2006” and the Explanatory Memorandum which included advice to shareholders that “the proposed grant … requires prior Shareholder approval” and said that these matters supported the conclusion that the options were granted to the appellant on 30 November 2006.
42 Thirdly, the primary judge referred to the fact that the company’s announcement to the ASX on 29 November 2006 stated that subject to shareholder approval at the next Annual General Meeting “options are intended to be issued” to various parties including the appellant and said that that supported the conclusion that the options were granted to the appellant on 30 November 2006.
43 The appellant submitted to the primary judge that notwithstanding these considerations, he had acquired the options within s 139G(c), (d), or (e) of the 1936 Act either on 14 September 2006 or 29 September 2006.
44 As I have said, the argument that the rights were acquired by the appellant on 29 September 2006 was rejected by the primary judge and her decision in that respect is not challenged on appeal. It need not be noticed any further.
45 The primary judge said that the appellant’s submission that he acquired a right to acquire shares on 14 September 2006 depended as a minimum on there being a contract between him and the company on 14 September 2006. The primary judge found, having regard to the evidence and, in particular, to the fact that the appellant’s salary sacrifice came into effect immediately after the 14 September 2006 meeting, that there was a contract entered into on 14 September 2006.
46 The primary judge found that the requirement for shareholders’ approval was not a condition precedent to the formation of the contract between Nexus and the appellant, but rather “the performance of the contract on the company’s part by the grant of the options required the fulfilment of a contingency, namely, the obtaining of the shareholders’ approval”. She referred (at [94]) to the well-known observations of Mason J (as his Honour then was) in Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 552 (see also Gibbs CJ at 541, 545) concerning the difference between a condition precedent to the existence of a binding contract and a condition precedent to the obligation to perform under a binding contract.
47 With respect, her Honour summarised her conclusions succinctly in the following passage from her reasons (at [95]):
In summary, the company granted the 742,500 options to Mr Fowler on 30 November 2006, pursuant to a contract made by the company with him on 14 September 2006. This contract was subject to a condition precedent to performance — that the shareholders’ approval first be obtained before the options were granted. Mr Fowler was unable to exercise any right to acquire the shares the subject of the option prior to 30 November 2006; and he did not have an immediate equitable interest in the shares prior to that date. Pursuant to the contract, however, the company was obliged to take all reasonable steps to obtain the shareholders’ approval; and Mr Fowler had such equitable rights as equity would afford, by way of specific performance or injunction, to ensure that the company took these steps.
48 The primary judge then turned to the authorities which bore on what she described as the “scope of Division 13A rights”. As I will discuss the authorities in considering the issues on the appeal I can refer to her Honour’s conclusions briefly.
49 The primary judge referred to the recent decision of the Full Court of this Court in Commissioner of Taxation v McWilliam [2012] FCAFC 105; (2012) 204 FCR 478 (“McWilliam”). She concluded that the case was authority for the proposition that a right to a right to acquire shares was an enforceable right within Division 13A (at [103]). However, her Honour considered that the case before her differed from McWilliam because the only right the appellant obtained on 14 September 2006 was conditional on a future event, being the approval of the shareholders of Nexus. Furthermore, her Honour said that in the case before her it was not within the appellant’s own power directly or indirectly to acquire a right to shares, as was the case considered in McWilliam.
50 The primary judge also referred to Fraunschiel v Federal Commissioner of Taxation (1989) 20 ATR 955 (“Fraunschiel”) and said that there was a similarity between that case and the case before her in that as at 14 September 2006 the appellant’s contingent right to the grant of options might never have vested since it was open to the shareholders to deny approval. Had they done so the appellant’s contingent equitable interest in the shares would have been defeated. The appellant’s “ultimate right to shares in the company was dependent on the actions of third parties, which were outside his control” (at [105]). The primary judge’s principal conclusion was that as at 14 September 2006 the appellant did not have a right within Division 13A because he did not have an enforceable right directly or indirectly to acquire shares in the company.
51 Her Honour said that there was some limited evidence before her that some of the directors considered that there would be little difficulty in obtaining shareholder approval. Her Honour said that the evidence went no further than establishing the confidence which would ordinarily be entertained by directors that their decisions were reasonable and in the best interests of the company and therefore likely to be approved by shareholders. Her Honour doubted the relevance of the evidence in any event saying that the shareholders’ giving or withholding of approval lay outside the control of the directors.
52 Finally, with respect to the principal issue, the primary judge rejected an alternative submission made by the appellant by reference to Brown v Heffer (1967) 116 CLR 344 at 351 – 352 per Windeyer J and Hill End Gold Ltd v First Tiffany Resource Corporation [2010] NSWSC 375 at [18] per Brereton J to the effect that the shareholders’ approval had a retroactive effect so that there was in effect an unconditional contract as and from 14 September 2006.
53 The primary judge said that she did not find it necessary to consider an argument by the respondent that there could not have been a grant of options on 14 September 2006 because that would have entailed a contravention of Rule 10.11 of the AXS Listing Rules and s 208 of the Corporations Act. Her Honour said that she did not need to consider the submission because she had found that shareholders’ approval was a condition precedent to the grant of options to the appellant and shareholders’ approval was in fact given ([at 117]).
54 As to that part of the respondent’s decision which imposed a penalty of 25%, the primary judge concluded that the appellant had made a statement to the respondent that was false or misleading in a material particular and that the appellant had a shortfall amount as a result of the statements within s 284-75(1) of the Taxation Administration Act 1953 (Cth). Her Honour upheld the respondent’s conclusion that the appellant’s statement resulted from a failure by him (or his agent) to take reasonable care to comply with a taxation law (see s 284-90(1) item 3). The primary judge described the appellants’ evidence in support of his contention that he had taken reasonable care as “general, limited and vague”. She said that there was a lack of cogent evidence that the appellant made any relevant inquiries and his failure to keep basic records relating to the grant of the options justified the imposition of an administrative penalty for failure to take reasonable care ([at 130]). Her Honour said that s 284-90 item 3 (reasonable care) and s 284-90 item 4 (reasonably arguable) (see also s 284-15) provided for two different and independent standards, and that whether or not the appellant’s position was reasonably arguable, he had failed to take reasonable care that he complied with Division 13A of the 1936 Act.
Issues on the Appeal
55 In large measure, the appellant reiterated the submission he put in the Court below. He submitted that he had a right to acquire shares on 14 September 2006 within the terms of Division 13A of the 1936 Act. He submitted that he had a contractual right at that time which could lead to an acquisition of shares and that that was sufficient. He submitted that an analysis of the cases showed that the fact that the right was subject to conditions did not mean that it was not a right to acquire shares. He further submitted the word “creates” in s 139G(c) strongly supports the conclusion that it is the contract which gives rise to the right and therefore the relevant date is the date of the contract. The appellant also repeated his submission based on Brown v Heffer to the effect that the shareholder approval had retroactive effect so that the contract is to be treated as an unconditional contract as from 14 September 2006.
56 The appellant put an argument on the appeal which was not put to the primary judge, nor was it included in the appellant’s written submissions on the appeal. It was identified as a result of a question from the Court in the course of oral submissions, although counsel for the appellant frankly acknowledged that he was intending to put the argument in any event.
57 The argument concerned the interaction between Division 13A and the CGT provisions in the Income Tax Assessment Act 1997 (Cth) (“the 1997 Act”) and it was that Parliament intended that in relation to rights under employee share schemes the two sets of provisions operate conformably. For that to be done (so it was argued) the acquiring of a right to acquire a share within Division 13A must, in the circumstances of a case such as the one before the Court, be held to result from the contract which gave rise to the right, and that is the contract made on 14 September 2006.
58 In oral submissions, the appellant’s submissions were primarily directed to the CGT provisions in force during the relevant year of income. With the leave of the Court the respondent responded in writing and he did so by reference to those provisions. The appellant’s written reply (again lodged with leave of the Court) also referred in some detail to the CGT provisions at the time Division 13A was introduced.
59 In responding to the appellant’s argument, the respondent sought to uphold the reasoning of the primary judge.
60 It is convenient to begin by noticing some matters of background.
61 Division 13A in the 1936 Act replaced s 26AAC in that Act. Section 26AAC had in turn replaced s 26(e) of the 1936 Act (see new s 15-2 of the 1997 Act but see also s 139DE of the 1936 Act).
62 The parties put forward the following extrinsic material in connection with the issue of the proper construction of Division 13A.
(1) The Explanatory Memorandum relating to the introduction in 1974 of s 26AAC of the 1936 Act;
(2) The Explanatory Memorandum relating to the introduction into the House of Representatives of the Taxation Laws Amendment Bill (No 2) 1995 which contained Division 13A;
(3) The Explanatory Memorandum relating to the introduction into the Senate of the Taxation Laws Amendment Bill (No 2) 1995.
63 I do not think the extrinsic material is of any real assistance on the critical issue of construction because it does not identify anything that is not apparent from the sections themselves. The third item of extrinsic evidence provides some context to the purpose of s 139DD and the related amendments to Part III of the 1936 Act:
2.44 Situations may arise where rights to acquire shares are given to employees and there are conditions attached to those rights which result in the employee being unable to exercise the rights. These rights to acquire shares would have been valued as if the restrictions did not apply. Where an employee loses these rights to acquire shares without ever having had the power to exercise the rights, solely because of termination of employment or because the exercise of the rights was conditional on certain employer performance targets being met, the employee, on application, will be treated as never having provided thebenefit (sic).
2.45 The refund will only be provided in respect of rights received in the employer company or holding company of the employer company. [New section 139DD]
…
2.1 Where a share or right under an employee share scheme is acquired by an employee, the amount that will be taken to have been paid by the taxpayer as consideration for the purposes of the CGT provisions will be:
where the discount on the share or right to acquire a share is to be included in assessable income in the year of income in which the share or right was acquired – the greater of the amount actually paid for the share or right or the market value of the share or right at the time of acquisition of the share or right [new subsection 160ZYJB(2)];
where the share or right is a qualifying share or right and the discount has been included in the taxpayer’s assessable income in a later year of income, i.e., the year of income in which the ‘cessation time’ occurs, then:
if the share or right is disposed of by the taxpayer at the ‘cessation time’ or within 30 days of the ‘cessation time’, Part IIIA of the ITAA does not apply in respect of the disposal of the share or right by the taxpayer [new subsection 160ZYJB(3)];
if the share or right is not disposed of by the taxpayer at or within 30 days of the ‘cessation time’, the taxpayer will be taken to have paid, at the ‘cessation time’ an amount equal to the market value of the share or right [new subsection 160ZYJB(4) of the ITAA].
2.2 A provision is inserted which applies to shares or rights disposed of by an associate of a taxpayer. For the purpose of calculating the capital gain on the disposal of the share or right, the associate will be taken to have paid the greater of the amount paid by the associate and the market value of the share or right at the tie of acquisition. [New section 160ZYJC]
64 It is plain enough, as her Honour held, that although s 139B, for example, refers to the acquisition of a share or right, the right being referred to is a right to acquire a share. That follows from the terms of ss 139E, 139CD(1)(b), 139DD, 139FC(1), 139F, 139FE, 139FF and 139G in Division 13A. As her Honour noted, in the predecessor to Division 13A i.e., s 26AAC, it was expressly stated that the right was a “right to acquire a share in a company”.
65 An option is a right to acquire a share within Division 13A. An option is a conditional contract to sell the property to which it relates and it gives the option holder a contingent equitable interest in the property to which it relates. It is a contract to sell the property (or I might add issue shares) on condition that the grantee gives the notice and does the other things stipulated in the option. The granting of an option is the granting of a new right by the grantor and the grantee’s equitable interest is measured by what a court of equity will decree in an action for specific performance: Commissioner of Taxes (Queensland) v Camphin (1937) 57 CLR 127 at 133 – 134 per Latham CJ; Laybutt v Amoco Australia Pty Limited (1974) 132 CLR 57 at 75 – 76 per Gibbs J (as he then was).
66 Where a contract for the sale, transfer or creation of property is conditional upon, for example, the consent of a third party the proposed transferee will be able to obtain relief in equity, but that relief will be limited to an order that the proposed transferee do all such things as might be necessary to obtain the consent of the third party: McWilliam v McWilliams Wines Pty Limited and Others (1964) 114 CLR 656 at 660 – 661 per McTiernan and Taylor JJ.
67 The Court was taken to authorities which have addressed the question of what rights under employee share schemes fall within Division 13A or its predecessors. It is convenient at this point to address these authorities.
68 In Abbott v Philbin (Inspector of Taxes) (1959) 39 TC 82; [1959] 1 WLR 667 (Roxburgh J); [1961] AC 352 (House of Lords) the issue was whether an option contract for the acquisition of shares was a perquisite within the Income Tax Act 1952 (UK) Schedule E Rule 1. The Inspector of Taxes assessed the appellant for income tax when shares were issued to him pursuant to the exercise of an option. The appellant was assessed on the profit being the difference between the market price and the option price less the consideration paid for the options. The appellant contended that he should have been assessed on the options in the prior year when he purchased the options. The company had to secure the consent of H.M. Treasury to the issue of shares as a result of the exercise of options before it could issue option certificates. It obtained that consent and issued the option certificates in the same year of income as the company decided to issue the options. Roxburgh J said that the option contract was a perquisite within the taxing provision. His Lordship said that the option contract before exercised nevertheless gave the option holder a right, albeit contingent or conditional, to some shares (at 99 (TC); 681 – 682 (WLR)).
69 The Court of Appeal allowed an appeal by the Inspector of Taxes, but on a further appeal by the taxpayer the House of Lords restored the decision of Roxburgh J. Viscount Simonds said (at 365) that when the appellant was granted the options he acquired something of value and it mattered not whether the right fell into the category of proprietary or contractual right, “or into some dim twilight that divides those juristic conceptions”. As long as they could be turned to pecuniary account, they were a perquisite or profit within the taxing provision.
70 Lord Reid said (at 372 and 376):
It appears to me that if a right can be turned to pecuniary account that in itself is enough to make it a perquisite.
…
… but I can sum up my view by saying that conditions and restrictions attached to or inherent in an option may affect its value, but are only relevant on the question whether the option is a perquisite if they would in law or in practice effectively prevent the holder of the option from doing anything when he gets it which would turn it to pecuniary account …
71 Lord Radcliff’s speech was to similar effect (at 378 – 379).
72 In Donaldson v Commissioner of Taxation [1974] 1 NSWLR 627 the issue was whether options under a “Supplemental Key Personnel Option Scheme” were taxable in the year of income in which the rights were created. The Commissioner of Taxation found that they were and Bowen CJ in Eq. dismissed an appeal by the taxpayer. The relevant provision of the taxation legislation was s 26(e) of the Income Tax Assessment Act 1936 – 1971 (Cth) which provided that included in a taxpayer’s income was:
(e) the value to the taxpayer of all allowance, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise.
73 Bowen CJ in Eq. decided first that the rights conferred on the taxpayer were of an income character and secondly, that they involved a benefit which could be valued and the value of which could be cast in money terms. As to the second matter, he said that he was not persuaded that the rights, which related to shares quoted on the Sydney Stock Exchange, had no immediate value to the taxpayer or were incapable of being valued in money terms. As to a third matter, namely, whether the rights had a present value to the taxpayer and were enjoyed or were capable of being enjoyed by him in the income year, Bowen CJ in Eq. said (643 – 644):
I am unable to accept a proposition that the option rights conferred on Donaldson did not “come in” to him or were not enjoyed by him in the year of income. Items rendered assessable income by s. 26(e) have to be regarded according to their nature, whether they are meals, use of quarters, or option rights. To say the option rights could not be exercised in the year of income is no answer to the application of s. 26(e). Indeed, it is to confuse the enjoyment of the fruit of the rights with the enjoyment of the rights, a mistake made in argument on behalf of the Crown in Abbott v. Philbin. Again, to say rights are non-transferable is no answer to the application of s. 26(e). Meals which are consumed may be non-transferable and yet they are within s. 26(e). What is made assessable income by s. 26(e) is the value to the taxpayer of the benefit allowed, given or granted to him, that is to say, the rights conferred on him which others lack. Whether they have any value to him, and what that value is, are matters to be determined according to the facts of each particular case, preferably with the assistance of expert evidence, but that does not affect the principle that, where such rights are given they are present rights, though exercisable in the future, and confer an immediate benefit upon the taxpayer which he enjoys as the owner of them.
74 In Fraunschiel the issue was whether rights given to employees of a company under an employee investment plan “fell within s 26AAC(6) of the 1936 Act”, or, in the case of Mr Fraunschiel, in the alternative, s 26(e) of the Act. Lee J considered the circumstances in which it can be said that a person has a right to acquire shares. His Honour considered that under an option to purchase the option-holder held a right to acquire shares even before actual acquisition by exercise of the option. The same could not be said about a right to accept an offer because such a right has no enforceable quality attached to it. His Honour stated (at 975):
The offer may be withdrawn or revoked and the right to accept vanishes with the destruction of the offer.
75 Nicholas J considered Abbott v Philbin (Inspector of Taxes) and Donaldson in Tagget v Commissioner of Taxation [2010] FCA 25. His Honour’s decision was upheld on appeal: (2010) 188 FCR 128. There are aspects of his Honour’s reasons which are consistent with the conclusions I reach in this matter, but other aspects which are perhaps inconsistent with the reasoning of the Full Court in the subsequent decision of McWilliam (at [60] – [62]).
76 In McWilliam the Full Court of this Court considered an appeal from the Administrative Appeals Tribunal under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth). The appeal was on, and limited to, a question of law.
77 It is necessary to address the facts in McWilliam in some detail. The taxpayer, Mr McWilliam, had acquired certain options to purchase shares in Seven Network Ltd, a public company. The issue in the case was, like the issue in the present case, the date on which the taxpayer had acquired a right to acquire a share in the company for the purposes of the calculation of the discount under s 139CC of the 1936 Act. The taxpayer’s case was that he had acquired the right on 1 July 2003 whereas the Commissioner’s case was that it had occurred on 22 December 2003, or alternatively, 28 November 2003.
78 The Court referred to the following findings of fact made by the Tribunal:
(1) the taxpayer was offered employment by the company and one of the matters discussed was the issue of options in the company to the taxpayer;
(2) an agreement between the taxpayer and the company was reached that the taxpayer would have 2,000,000 options at specified share prices on assuming office;
(3) a draft contract was prepared and it referred to the issue of the options. However, the draft contract was never executed by either party;
(4) the taxpayer commenced employment with the company in the position of Commercial Director on 1 July 2003 and he was appointed a director of the company on 3 September 2003;
(5) on 28 November 2003 the annual general meeting of the shareholders of the company passed a resolution approving the issue of options for the taxpayer;
(6) the taxpayer and the company executed an option deed on 22 December 2003 wherein the company granted the taxpayer 2,000,000 options on the terms of the deed and on the basis that there was no option issue fee. The issue date of the options was said to be 22 December 2003. Clause 3 of the option deed made provision for the options to vest in three tranches described by the Full Court as follows (at 482 [24]):
Clause 3 of the Option Deed made provision for the options to vest in three tranches: 1 million options with an exercise price of $5.00 on 9 May 2004 if certain conditions as to Seven Network Limited's share price were satisfied; 500,000 options with an exercise price of $6.00 on 9 May 2005 if certain other conditions as to its share price were satisfied; and 500,000 options with an exercise price of $7.00 on 9 May 2006, again, if certain further conditions as to its share price were satisfied.
79 For the purposes of the appeal to the Full Court, the important factual conclusion by the Tribunal was that as at 1 July 2003 the taxpayer had an immediate legally enforceable entitlement to the options which had been previously discussed and to the acquisition of shares upon exercise of the options.
80 The Full Court noted that the Tribunal held that the right to obtain options was a relevant right within the meaning of s 139B. The Tribunal found that the agreement in force as at July 2003 was not conditional upon approval, or a formal deed or upon shareholder approval (at 486 [39]). For reasons which will become clear that is a key finding.
81 The Commissioner’s principal submission in McWilliam was that the taxpayer did not have a right to acquire shares until the option deed was executed on 22 December 2003 and that until then he had no more than a right to require his employer to issue him with options and that was not a relevant right within Division 13A.
82 The Full Court drew a distinction between a right to acquire an option and the acquisition of the option. The Court noted that on the appeal the Commissioner did not challenge any of the Tribunal’s findings of fact. The Court concluded that the Tribunal found as a matter of fact that the taxpayer had acquired the options themselves on 1 July 2003 and that in those circumstances the appeal must be dismissed.
83 The Court went on to consider whether, on the assumption that all the taxpayer acquired on 1 July 2003, was a right to acquire an option that was a right to acquire a share within Division 13A. The Court’s conclusions were obiter dicta. The Court said that a right to acquire options which is not conditional on future events is a right to acquire shares within Division 13A. The Court made it clear that not all entitlements which may lead to an acquisition of shares is a right to acquire shares within Division 13A. The Court said (at 491 [74]):
For example, a right to accept an offer will not be such a right (see Fraunschiel v Federal Commissioner of Taxation [1989] FCA 236; (1989) 89 ATC 4616; (1989) 20 ATR 955 per Lee J) nor, if it be different, will a pre-emptive right to be offered shares to buy if the prospective vendor is desirous of selling.
84 The Court went on to say that the categories in s 139G were not mutually exclusive and that paragraph (c) could apply where there was the creation of a beneficial interest in the right to acquire shares.
85 I turn now to set out my reasons for concluding that the primary judge was correct.
86 The terminology which is used in connection with options to acquire shares is that the options are “granted” or “issued”. In equity at least, I do not understand that that involves a particular act or event such as registration before it can be said that the options are granted or issued. Assuming the existence of an enforceable contract the question of when options are granted or issued depends on the intention of the parties. For example, in McWilliam the option deed granting the options was dated 22 December 2003 and in that deed the parties agreed that the issue date of the options would be 22 December 2003. Nevertheless, there was an unconditional agreement to grant or issue the options entered into on 1 July 2003.
87 This case raises a question not dealt with in the previous authorities. To explain why this is so it is convenient to postulate the possible steps between an enforceable contract and the issuing of shares. After the contract there may be a condition precedent to performance of the obligation to grant or issue options. That condition may or may not be met. If met, the options are granted or issued. There may be some other act involved at this point or later such as the issue of option certificates or entering of the details of the grant of options on the company’s register under s 170 of the Corporations Act 2001 (Cth) but those matters are of no consequence for present purposes. Shares are not acquired until the options are exercised and there may be conditions upon the exercise of the options. In the case of an employee share scheme situation the conditions may include matters such as continued employment with the company at certain dates, or the achievement by the employee of performance targets, again at certain dates. The important point is that those conditions may not be met and therefore shares may never be acquired. If the conditions are met and the options exercised then the shares are actually acquired.
88 Ever since Abbott v Philbin (Inspector of Taxes) and Donaldson it has been recognised that options fall within the legislation which was replaced by Division 13A. To hold otherwise would, as Bowen CJ in Eq. said in Donaldson, “confuse the enjoyment of the fruit of the rights with the enjoyment of the rights”. This was acknowledged by the Commissioner in his argument in McWilliam.
89 Furthermore, the provisions of Division 13A and, in particular, ss 139DD and 139FD, recognise that a taxpayer may have a right to acquire a share under an employee share scheme in the form of an option where, because of the non fulfilment of conditions on the exercise of the option, the right is lost. That is consistent with the decision in Donaldson.
90 The obiter dicta of the Full Court of this Court in McWilliam go a step further in that the Court held that the right to acquire options as distinct from the actual acquisition of options, was a right to acquire shares within Division 13A. However, the remarks of the Court do not cover this case because the Court in McWilliam was considering an unconditional right to acquire shares. That is not the case here. The respondent accepted the correctness of the decision in McWilliam.
91 At the other end of the spectrum we know from Fraunschiel (approved in McWilliam at 491 at [74]) that there are “rights” which are not rights within Division 13A such as the ability to accept an offer (which may be withdrawn at any time) or a pre-emptive right to be offered shares if the owner decides to sell. As the Full Court said in McWilliam not all entitlements which may lead to the acquisition of shares are rights for the purpose of Division 13A.
92 In this case the appellant’s right on 14 September 2006 lies somewhere between the examples given in Fraunschiel and the right which was the subject of the obiter dicta in McWilliam. The appellant had a right without any further action on his part or anybody else, but he did not have an unconditional right to acquire options.
93 I have referred above to concepts of equitable proprietary rights as did the primary judge. That is because self evidently the concept of a right to acquire a share involves the concept of the right to acquire an item of property. On one view the appellant had a contingent right to a contingent equitable interest in shares on 14 September 2006. Another way of expressing the matter is that he had a conditional right to options on 14 September 2006. I do not think an analysis of property law concepts and the differences between contingent interests and mere expectations (Australian Securities and Investments Commission v Carey and Others (No 6) (2006) 153 FCR 509 at 519 – 520 [34] per French J (as his Honour then was) is decisive of the present question. Rather, the solution is to be found by focusing on the particular rights the appellant had on 14 September 2006 in the context of the statutory provisions in Division 13A.
94 On 14 September 2006 the appellant had a right to insist that the company put the issue of options to him to its shareholders for their approval. His right went no further than that. The company’s shareholders were perfectly entitled to reject the proposal and, if they did, the appellant had no redress against the company. To my mind such a right is not properly characterised as a right to acquire shares in the company. The right the appellant had as a result of the contract entered into on 14 September 2006 was, as a matter of fact, an essential pre-condition to the right to acquire shares. But for the directors’ resolution there would have been no right to acquire shares. Another way of putting the matter is that as at 14 September 2006 the appellant had an entitlement which may have led to the acquisition of shares. It may be said that the directors’ resolution was the source of the appellant’s right to acquire shares. All of these things may be accepted at a general level, but to my mind they do not address the essential question of the nature of the legal right the appellant had as at 14 September 2006. That was a right that may have led to the acquisition of a right to acquire shares, but it was not a right to acquire shares.
95 I would add that I do not think the level of certainty about whether the shareholders would approve the issue of options to the appellant affects the legal conclusion. I see no basis to interfere with her Honour’s conclusions of fact in relation to that matter which I have summarised above (at [51]), but even if there was, it does not affect the legal conclusion.
96 I am unable to discern anything in the provisions of Division 13A which suggests that the conclusion that the appellant did not have a right to acquire shares on 14 September 2006 is not correct.
97 In the course of submissions the Court’s attention was drawn to Section 139FD which is set out above (at [35]). It provides that in determining the market value of an unlisted share or unlisted right, the share or right and any share that may be acquired as a consequence of the exercise or operation of the right is taken not to be subject to any conditions or restrictions.
98 As at 14 September 2006 the appellant did not have a right which he could “exercise” and which would result in the acquisition of a share. Can it be said that, by contrast, as at 14 September 2006 the appellant had a right whose “operation” resulted in the acquisition of a share? If so, does it follow that the right that the appellant had on 14 September 2006 fell within the provisions of Division 13A?
99 I think s 139FD is inconclusive on the present issue. On the one hand, the agreement of 14 September 2006 operates together with other matters, including shareholder approval, compliance with any other conditions and the exercise of the options themselves to result in the acquisition of shares. On the other hand, it may be that exercise or operation are concepts intended to act in a mutually exclusive way and as the Court is undoubtedly dealing with options in this case the relevant, and indeed only, concept is the exercise of a right. If that view is correct, s 139FD would in fact be an argument in the respondent’s favour. Although I would be inclined to the first view, I do not think arguments based on s 139FD are strong enough to carry the argument of either party very far.
100 Section 139G provided a definition of the circumstances in which a person acquires a share or right. Paragraphs (a) and (b) are not relevant in the circumstances of this case. I do not think paragraphs (d) and (e) assist the appellant’s argument. They refer to a legal or beneficial “interest” in a right to acquire shares and before determining if there is an interest one must be satisfied of the prior question that the right being considered is a right to acquire a share. It is true, as I have said, that the right the appellant had on 14 September 2006 included the right to invoke the aid of a court of equity, but that did not amount to a beneficial interest in an option to purchase shares.
101 If any assistance is to be gained from s 139G then it is from paragraph (c) which provides that a person acquires a right to acquire shares if another person “creates” that right in that person. That no doubt occurred in this case, but the question is when it occurred. I do not think the word “creates” points to 14 September 2006. By at least 30 November 2006 the right had been created, but I do not think the word “creates” means that 14 September 2006 is the relevant date, if the right created on that date is not otherwise properly characterised as a right to acquire shares.
102 My conclusion is that by reference to Division 13A and the common law concepts which I have identified the right the appellant had on 14 September 2006 was not a right to acquire shares.
103 However, the new argument raised by the appellant on the appeal was that the Court should also take into account as a relevant contextual matter the CGT provisions and the relationship between them and Division 13A.
104 There are two aspects to the appellant’s new argument. The first aspect is to say that it was intended that Division 13A and the CGT provisions operate together and in conformity with each other and then consider the facts of this case to determine whether the CGT provisions pointed to an acquisition date for CGT purposes of 14 September 2006 or 30 November 2006. A difficulty with this argument is that this is an associate case and as this argument was not raised below not all the matters relevant to the possible application of the CGT provisions were explored. The second aspect is to approach the matter more broadly and consider the CGT provisions in 1995 when Division 13A was enacted.
105 I start with the broader argument.
106 Division 13A was enacted by the Taxation Laws Amendment Act (No 2) 1995 (“the 1995 Amendment Act”).
107 In the 1995 Amendment Act Parliament addressed the relationship between Division 13A and the CGT provisions. I have already set out a relevant passage from the Explanatory Memorandum (at [63]).
108 The 1995 Amendment Act enacted a new Division 9A in Part IIIA in the 1936 Act and that Division included s 160ZYJB (a non associate case) and s 160ZYJC (an associate case). These sections were as follows:
Section 160ZYJB:
Shares or rights under employee share scheme
(1) This section applies if an amount is, or apart from section 139BA would be, included in a taxpayer's assessable income under Division 13A of Part III as a result of the taxpayer acquiring a share or right.
(2) If subsection 139CC(2) applies, the taxpayer is taken for the purposes of this Part to have paid, at the time when the share or right is acquired by the taxpayer, as consideration in respect of the acquisition, the greater of:
(a) the amount paid by the taxpayer as consideration in respect of the acquisition; and
(b) the market value of the share or right at the time of the acquisition
Note: Market Value is defined in Subdivision F of Division 13A of Part III.
(3) If subsection 139CC(3) applies, this Part does not apply in respect of the disposal mentioned in that subsection.
(4) If subsection 139CC(4) applies, the taxpayer is taken for the purposes of this Part to have paid, at the cessation time, an amount equal to the market value of the share or right at that time as consideration in respect of the acquisition.
Note: Cessation time is defined in sections 139CA and 139CB.
Section 160ZYJC:
Shares or rights under employee share scheme-associates
(1) This section applies if an amount is included in a taxpayer's assessable income under Division 13A of Part III as a result of an associate of the taxpayer acquiring a share or right.
Note: Associate is defined in section 139GE.
(2) The associate is taken for the purposes of this Part to have paid, at the time when the share or right is acquired by the associate, as consideration in respect of the acquisition, the greater of:
(a) the amount paid by the associate as consideration in respect of the acquisition; and
(a) the market value of the share or right at the time of the acquisition.
109 The appellant contends that the assumption underlying these sections is that the time of acquisition of the share or right is the same under the CGT provisions and Division 13A. That appears to be the case. The appellant contends a contextual matter relevant to the determination of the time of acquisition of a share or right under Division 13A is the time of acquisition of a share or right under an employee share scheme within Part IIIA. I agree that that would be a relevant matter. The appellant contends that in 1995 the time of acquisition of a share or right under an employee share scheme within Part IIIA was the time of the contract. Section 160U of the 1936 Act dealt with the time of acquisition or disposal of an asset and it provided relevantly:
(3) Where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract.
110 The High Court applied this subsection in Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Limited (2000) 201 CLR 520. The issue in that case was the date of the disposal of assets by a United States corporation and its subsidiaries and associated companies. There was the main purchase and sale agreement entered into on 31 May 1991 which dealt with the disposal of the assets. On 30 August 1991 the buyer assigned rights and obligations under the agreement, there was an amending agreement and settlement under the agreement was effected. The question for the Court was when, for the purposes of CGT, the subsidiary of the seller had disposed of its assets to the subsidiary of the buyer. The subsidiary of the buyer was a company incorporated between 31 May 1991 and 30 August 1991. The answer to the question determined whether the capital gain on the disposition was made during the 1991 income year or the 1992 income year.
111 The High Court found that the fact that the obligation of the purchaser under the agreement dated 31 May 1991 was subject to a number of conditions (condition precedent to performance of the contract; not conditions precedent to the formation or existence of the contract) was not a bar to a conclusion that the disposition of the relevant assets occurred on 31 May 1991 (at 535 [30]).
112 There was no question in the case but that the disposal of the assets had been under a contract for the purposes of s 160U(3) of the 1936 Act.
113 The Court considered that it was significant that subsection 160U(3) referred to “the time of acquisition or disposal”, not the time of acquisition and disposal (at 538 [38]).
114 The High Court did not seem to disagree with the following observations of the Full Court which they summarised as follows (at 537 [40]):
The Full Court, before coming to the issue to be resolved, made the following observations as to the legislative scheme. There is no reason why the date of disposition and the date of acquisition referred to in s 160U are necessarily the same. The section refers to the time of acquisition or disposal. Other provisions make it clear that disposal and acquisition are not necessarily contemporaneous, and it is not difficult to think of cases where they may be different. In order for there to be a disposal under a contract for the purposes of s 160U(3) it is not necessary that the contract be unconditional or specifically enforceable. What is relevant is the time of the making of the contract, not the time when it became unconditional, or specifically enforceable. Nor is there any reason why an asset cannot be said to be disposed of under a contract even though the transferee of the asset was not a party to the contract.
115 The Court said that the words “under a contract” in s 160U(3) directed attention to the “source of the obligation which was performed by the transfer of assets which constituted the relevant disposal” (at 537 [42]). The Court said that the source of the obligation to effect the disposal was the agreement of 31 May 1991. The case was about disposal and the Court found that the transferor was acting in performance of a pre-existing contract. The Court said that whether the same was true of the transferee was beside the point (at 538 [43]).
116 In a case like the present, there is only one contract and there is force in the appellant’s submission that it was the source of the right to acquire the options and that by reason of s 160U(3) the date of the making of the contract was the date of acquisition.
117 By the year of income in issue (i.e., year ended 30 June 2007) the CGT provisions were in the 1997 Act. They were very complex. Part 3-1 of the 1997 Act dealt with CGT (general topics) and Part 3-3 dealt with CGT (special topics). Employee Share Schemes were dealt with in Subdivision 130-D of Part 3-3. In broad terms there were two sections, which seemed to have a similar purpose or function to s 160ZYJB and s 160ZYJC of the 1936 Act, that is to say, in a non associate case, to equate the market value determined under Division 13A with the cost base (or reduced cost base) for CGT purposes and to do the same thing in an associate case in relation to the cost base or reduced cost base of the acquirer of the share or right. The relevant parts of the two sections are as follows:
Section 130-80:
Share or right acquired under employee share scheme
(1) This section sets out what happens if you:
(a) *acquire a *share or right at a discount (within the meaning of Subdivision C of Division 13A of Part III of the Income Tax Assessment Act 1936) under an *employee share scheme; or
(b) acquire a share or right that, because of section 139DQ of that Act, is treated, for the purposes of Division 13A of Part III of that Act, as if it were a continuation of a share or right acquired under an employee share scheme.
Note: The fact that you made an election under section 139E of the Income Tax Assessment Act 1936 does not prevent a share or right from being treated as a continuation of a share or right acquired under an employee share scheme.
(2) The first element of the *cost base and *reduced cost base of the *share or right is its *market value (worked out under sections 139FA to 139FF of the Income Tax Assessment Act 1936) when you *acquired it.
…
Section 130-85:
Share or right acquired under employee share scheme involving your associate
(1) This section sets out the modification to the rules about *cost base and *reduced cost base that happens if:
(a) you *acquire a *share or right at a discount (within the meaning of Subdivision C of Division 13A of Part III of the Income Tax Assessment Act 1936) under an *employee share scheme; and
(b) an amount is included, under section 139D of the Income Tax Assessment Act 1936, in:
(i) your *associate’s assessable income; or
(ii) the assessable income of a company (an affiliate company) where you own an indirect interest in a *share in the company or in a right to acquire a share in it through one or more interposed companies, partnerships or trusts.
(2) The first element of the *cost base and *reduced cost base of the *share or right is it market value (worked out under sections 139FA to 139FF of the Income Tax Assessment Act 1936) when you *acquired it.
118 The Court was referred to the time of acquisition provisions in the 1997 Act. The dictionary definition of “acquire” in s 995 refers relevantly to Division 109 as setting out the circumstances in which and the time at which a CGT asset is acquired.
119 It must be remembered that the case before the primary judge and on appeal did not involve an examination of the date of acquisition of a right for CGT purposes. Nor was any consideration given to the circumstances in which Tess Aust acquired the right. Nevertheless, to make good his submission the appellant took the Court to Division 109 to establish the proposition for which he contended, namely, that for CGT purposes in this case the date of acquisition of the right was the date of the contract (i.e., 14 September 2006).
120 The appellant submitted that this case was covered by s 109-10 item 2, that is to say, the date of acquisition in a case where a company issues or allots equity interests or non equity shares in the company is when the contract is entered into or, if none, when equity interests or non-equity shares are issued or allotted. In the alternative, and if this be wrong the appellant relied on s 109-5(2) item D1, that is to say, the date of acquisition when an entity creates contractual or other rights in a person is when the contract is entered into or the right created.
121 The respondent responded to these arguments by putting a number of propositions. A number of the propositions had a good deal of force. First, he submitted that there was already an asymmetry in an associate case (like the present) because the discount was included in the taxpayer’s assessable income for Division 13A purposes whereas the market value was relevant to the cost base of the rights held by the acquirer. Secondly, the appellant’s approach to Division 109 was wrong because the starting point was s 109-5(2) item D1 and not s 109-10 item 2. Tess Aust had not entered into a contract so that the relevant date was the date upon which the right was created. In this case that was 30 November 2006. Thirdly, s 109-10 item 2 was not relevant in a case such as the present because the right acquired by Tess Aust was not an equity interest within Subdivision 974-C of the 1997 Act and, in particular, s 974-75(1) item 4(b) and s 974-130(1) and (3).
122 The issues raised by the submissions of the parties are complex. I have decided that I do not need to address them. Even if I was to reach the view with a fair degree of confidence that in the non-associate case and in the associate case or only in the former, the date of acquisition for CGT purposes in a case like the present is the date of the contract (i.e., 14 September 2006) that is only one factor in the interpretation of the expression a right to acquire a share within Division 13A and it cannot prevail over the clear view I have reached about the meaning of the expression. The expression does not include the right acquired by the appellant or Tess Aust on 14 September 2006.
123 The appellant put an alternative submission to the effect that the approval of shareholders on 30 November 2006 operated retrospectively in the sense that he is taken to have had an unconditional right on 14 September 2006 and that this was so for the purposes of Division 13A. He seemed to submit, as I understood him, that there was a general principle of common law, more particularly contract law, that a contract subject to a condition is taken to have effect from the date of the contract even though the condition is not satisfied until some time afterwards.
124 The primary judge rejected the submission and so would I. Even if there was such a principle, I am far from convinced that it would be appropriate to apply it in the case of Division 13A. That Division provided its own quite detailed regime which included a valuation at a particular date and inclusion of the discount in the taxpayer’s assessable income in a particular year of income.
125 In any event, I do not think the cases the appellant relied on support the proposition he advanced. Brown v Heffer was a case about the doctrine of ademption and it was decided in the context of the Closer Settlement Acts (NSW). Windeyer J, who wrote separate reasons from the joint reasons of Barwick CJ, McTiernan, Kitto and Own JJ, said (at 352) that the giving of consent had a kind of “retroactive effect” making the entitlement effective as from its date. Nevertheless, he joined in the orders of the other members of the Court who decided that there was no ademption because the equity or equitable interest remained inchoate until the testator’s death. It seems to me that the result in the case would have been different had the Court expounded the principle for which the appellant said it was authority.
126 As to the other authority the appellant relied on, Hill End Gold Ltd v First Tiffany Resources Corporation, I respectfully agree with the primary judge that this case does not advance the matter because in it Brereton J was merely intending to follow Brown v Heffer and the other authorities to which his Honour referred.
The Penalty
127 The appellant submitted that even if he failed on his principal argument, nevertheless, the primary judge ought to have found that he had taken reasonable care in submitting his tax return for the year of income ended 30 June 2007.
128 The primary judge described the appellant’s evidence with respect to this issue as “general, limited and vague”. With respect, her Honour was correct in describing the evidence in this way. The evidence given by the appellant in cross-examination was as follows:
In those circumstances, did you make any inquiries concerning the tax treatment of the options that were issued to you?---I believe so, yes. There would have been, obviously recalling events back then is a long ago, but I would have spoken to people like Brendan Brown, who was advising the company. But in my personal circumstances I had an account, obviously, with my tax agent. So all tax matters I would discuss, at some point, with them.
Okay. Brendan Brown was advising the company, you say?---Yes.
Were you given advice – on what basis did you form the decision not to include an amount in your assessable income?---On the basis of the view of mine at the time, which forms a basis of the case, I guess, your Honour, in that I agreed to salary sacrifice from 1 July. So I take myself out of the company. I mean, this is about me as a tax payer. And had a commitment and financial risk from that point onwards by sacrificing my salary for options in the company. So if those options, for instance, had have gone the other way, as they did in the following year, my remuneration would have been nil.
And you made inquiries to that effect?---I believe I did, yes.
129 Having referred to that evidence her Honour set out her reasons for concluding that the appellant had not discharged the onus of showing that the respondent had erred (at [130]):
Having regard to Mr Fowler’s position as a company director and the nature of agreement pursuant to which the options were granted, a reasonable person in the circumstances of Mr Fowler would be expected to have made some reasonable enquiries concerning the tax treatment of the options under the relevant tax law — here Division 13A of the ITAA 1936 Act. Indeed, given that Mr Fowler had agreed to forego cash fees that were undeniably in the nature of assessable income in his hands, a reasonable person in his position would have expected his agreement to forego cash for options in lieu would have some income tax consequences. Such a person would have foreseen, as reasonably likely, that the failure to include in his assessable income an amount in respect of the options would result in a shortfall amount. The lack of cogent evidence that Mr Fowler made any relevant enquiries and his failure to keep basic records relating to the grant of the options justified the imposition of administrative penalty for failure to take reasonable care.
130 With respect, I see no error in that reasoning.
Conclusion
131 For these reasons I would order that the appeal be dismissed with costs.
| I certify that the preceding one hundred and thirty-one (131) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko. |
Associate:
| IN THE FEDERAL COURT OF AUSTRALIA | |
| VICTORIA DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 795 of 2012 |
| ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL |
| BETWEEN: | MICHAEL PATRICK FOWLER Appellant |
| AND: | COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent |
| JUDGES: | BESANKO, GORDON, DODDS-STREETON JJ |
| DATE: | 3 july 2013 |
| PLACE: | adelaide (via video link to MELBOURNE) |
REASONS FOR JUDGMENT
GORDON J:
INTRODUCTION
132 The Appellant, Mr Michael Fowler, was a non-executive director of Nexus Energy Limited (Nexus) between 11 April 2000 and 16 November 2007. During the 2007 financial year, Tess Aust Pty Ltd (Tess Aust), the trustee of the Fowler Family Superannuation Fund, was granted 742,500 options to acquire ordinary shares in Nexus (the Options), as part of Mr Fowler’s remuneration as one of its non-executive directors.
133 The grant of the Options attracted the operation of Div 13A of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act), which concerns the taxation treatment of shares and rights acquired under employee share schemes. At trial, it was not disputed that Mr Fowler had acquired rights under an employee share scheme within the contemplation of Div 13A. Rather, the primary issue was the identification of the date on which Mr Fowler acquired a right with which Div 13A of the 1936 Act is concerned (a Div 13A right).
134 Mr Fowler contended that he acquired the Options on 14 September 2006, when the Board of Nexus resolved that the Options be issued to Mr Fowler and resolved that shareholder approval be obtained prior to the Options being issued (the Board Resolution). The value of the Options on 14 September 2006 was $31,928. The Respondent (the Commissioner) contended that Mr Fowler did not acquire the Options until 30 November 2006, when the shareholders gave their approval. Mr Fowler’s liability in relation to the Options as at 30 November 2006 was assessed at $415,800.
135 The primary judge accepted the Commissioner’s argument and held that Div 13A did not apply until “Mr Fowler had an enforceable right [to] directly or indirectly acquire shares in the company”: Fowler v Commissioner of Taxation [2012] FCA 1040 (Reasons) at [106].
136 Mr Fowler appealed. The principal issue on appeal is the date upon which Mr Fowler acquired a Div 13A right and the resulting amount which Mr Fowler should have included in his assessable income (the Primary Tax Issue). A second, and subsidiary issue, is whether Mr Fowler is liable to penalty for a failure to have taken reasonable care (the Penalty Tax Issue).
137 This judgment deals with the Primary Tax Issue. I have had the benefit of reading the draft reasons of Besanko J. For the reasons that follow, I agree with Besanko J that the appeal should be dismissed.
BACKGROUND
138 The facts, the relevant legislative provisions and the judgment below are summarised at [6]-[54] of the reasons for judgment of Besanko J. It is unnecessary to repeat them. For present purposes, it is sufficient to note that:
1. on 26 July 2006, the board of Nexus passed a resolution in the following terms:
Accordingly, IT WAS RESOLVED to increase base director’s fees to $60,000 per annum and the chairman’s fees to $120,000 per annum effective immediately.
It was also resolved that directors would be entitled to take part or all of their remuneration in the form of options priced on the same basis as under the ESOP scheme and subject to any shareholder and other approvals required. Directors were to notify the chairman of their preferred mix of remuneration.
2. on, or shortly after, 26 July 2006, Mr Fowler informed Mr Neil Philip, the Chairman of the Board, that he would forego 100% of his cash remuneration in exchange for the issue of options;
3. on 9 September 2006, Mr Ian Tchacos, the Managing Director of Nexus, prepared a paper entitled “2006 Employee Share Scheme and Board Options Recommendation”. In a section headed “Board Remuneration”, Mr Tchacos stated that:
Several of the directors of the Company have requested the opportunity to sacrifice board fees in exchange for options. Providing the opportunity for board members to be remunerated via options is recommended because it aligns the board with the interests of shareholders. In order to encourage directors [to] take up options in lieu of salary it is recommended that directors are rewarded with a 10% bonus in the number of options offered as an incentive to sacrifice fees for options in the same way as has been recommended for staff.
| Board member | Remuneration Cash | Equivalent Options | Proposed Options+10% |
| … | |||
| Michael Fowler | $60,000 | 900,000 | 990,000 |
| 4,950,000 |
4. on 14 September 2006, the Board of Nexus passed the following resolutions:
IT WAS RESOLVED that the following resolutions be put to the forthcoming Annual General Meeting tentatively set for 30 November 2006. The secretary was authorised to prepare a notice of meeting and arrange a venue.
…
That 990,000 options exercisable at 87 cents each on or before 1 October 2007 to acquire ordinary shares in the capital of the company be issued to Michael Fowler. Full details are contained in the attached draft notice of meeting
9.6 Employee, Management and Board Remuneration
…
The chairman presented a recommendation from the remuneration committee based upon a recommendation to the board from [Mr Tchacos] dated 9th September in which the company’s employees and directors remuneration and incentives were outlined. Following discussion on the remuneration philosophy for the company the following board resolutions were agreed to:
…
IT WAS RESOLVED that the following options be issued to the directors of the company [on] the same terms and conditions as the company’s employees share option plan and that shareholder approval be obtained prior to being issued:
| Directors name | Number of options | Exercise price | Expiry date |
| … | |||
| Michael Fowler | 742,500 | 87 cents | 31 October 2007 |
| … | |||
| Total | 2,970,000 |
5. later on 14 September 2006, Nexus sent a notice of annual general meeting (AGM), an explanatory memorandum (also referred to as an explanatory statement) and a proxy form to its shareholders. Item 9 of the notice proposed the following resolution (to be passed as an ordinary resolution):
That for the purposes of Listing Rules 7.1 and 10.11 and Chapter 2E of the Corporations Act and for all other purposes, approval is given for the Company to allot and issue 742,500 Options exercisable at $0.87 each on or before 31 October 2007 to acquire ordinary fully paid Shares in the capital of the Company to Michael Fowler on the terms and conditions set out in the Explanatory Statement accompanying this notice with a vesting date of 30 November 2006, subject to resolution 9 being passed.
6. the explanatory memorandum, supplied to all shareholders on 14 September 2006, included the following relevant statements:
8. [SIC] ISSUE OF OPTIONS TO MICHAEL FOWLER
Resolution 8 [sic] seeks Shareholder approval for the Company to grant 742,500 Options to Michael Fowler a Director of the Company.
…
The purpose of the proposed grant of Options is to honour remuneration agreements and to provide Michael Fowler with added incentive in lieu of salary whilst enabling the Company to preserve its cash reserves for expenditure on its existing business. …
Subject to Shareholder approval, the Options will be granted on the terms and conditions set out below in this Explanatory Statement.
…
The proposed grant of Options to Michael Fowler involves the provision of a financial benefit to a related party of the Company and, therefore, requires prior Shareholder approval.
…
In accordance with the requirements of Part 2E of the Corporations Act, and in particular sections 218 and 221, the following information is provided to Shareholders to allow them to assess the proposed grant of Options:
…
(g) following the passing of Resolution 8 [sic] Michael Fowler will hold an interest in 2,382,004 Shares and 742,500 Options.
…
The following information is provided for the purposes of Listing Rules 7.1 and 10.11:
…
(c) The Options will be issued within one month of Shareholder approval.
7. on 29 September 2006, Nexus made an announcement to the ASX that foreshadowed:
In addition and subject to shareholder approval at the next Annual General Meeting, a further 4,770,000 million [sic] options are intended to be issued to the Managing Director and the non-executive directors. These options will also have an exercise price of 87 cents per share and will also expire on the [sic] 31 October 2007.
8. on 30 November 2006, Nexus held its AGM and the shareholders approved the grant of the Options to Mr Fowler; and
9. on 8 December 2006, Nexus submitted to the ASX a Change of Director’s Interest Notice in connection with the acquisition of the Options by Mr Fowler (through Tess Aust).
ANALYSIS OF PRIMARY TAX ISSUE
139 The critical question on appeal is: when did Mr Fowler acquire a Div 13A right? Answering that question requires consideration of two matters:
1. what right did Mr Fowler acquire on 14 September 2006;
2. was the right acquired on 14 September 2006 (if any) a “right” within the meaning of Div 13A?
What sort of right did Mr Fowler acquire on 14 September 2006?
140 As identified by the primary judge, Mr Fowler’s contention that 14 September 2006 was the date of acquisition for the purposes of Div 13A relies on the proposition that there was a contract between Mr Fowler and Nexus on that date and that this contract gave rise to a Div 13A right. Mr Fowler placed primary reliance on the Board Resolution.
Existence of Contract
141 The primary judge’s finding that a contract was made between Nexus and Mr Fowler with respect to the grant of the Options was not contested on appeal.
142 Consistent with established authority, the terms of the Board Resolution are to be considered by reference to what a reasonable person in the position of the parties would have understood them to mean. That requires consideration not only of the text, but also the surrounding circumstances known to the parties and the purpose and object of the transaction: see Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40]; International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at [53] and Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at [11]. Having regard to the surrounding circumstances, it is clear that both Nexus and Mr Fowler intended that a contract with respect to the grant of the Options be formed on 14 September 2006: see the Reasons at [71]-[82].
143 In particular:
1. at the board meeting on 26 July 2006, the directors agreed in principle to receive part or all of their remuneration in the form of options in unissued Nexus shares in lieu of cash payments;
2. prior to the board meeting on 14 September 2006, Mr Fowler informed Mr Philip, the chair, that he would forego the entirety of his cash remuneration in exchange for options; and
3. the directors’ salary sacrifice came into effect immediately after the 14 September 2006 meeting.
Indeed, the essential terms of the Options were recorded in the Board Resolution: see [138] above.
Construction of the Board Resolution
144 The first question (see [140] above) turns on the text of the Board Resolution. The starting point must be the terms of the Board Resolution. In the first line it stated that the Options were to “be issued” but in the third line it stated that “shareholder approval be obtained prior to being issued”. If the first use of the word “issued” is read as meaning an immediate issuance, while the second use is read as meaning an issuance at a later date, the two propositions appear contradictory. However, the use of the word “be” does not necessarily connote an immediate issuance in this context.
145 Applying established principles of contractual interpretation, the terms of the Board Resolution bear one meaning – the conclusion that the Options were not intended to be “issued” to Mr Fowler on 14 September 2006, but rather at some later date. The whole of the instrument has to be considered, “since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another.”: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109. See also Metropolitan Gas Co v Federated Gas Employees Industrial Union (1925) 35 CLR 449 at 455. Read as a whole, the two clauses of the relevant sentence have distinct work to do. Whereas the first clause of the Board Resolution specified the terms and conditions pertaining to the Options once issued (i.e. the same terms and conditions as the Nexus Employee Share Option Plan (Nexus ESOP)), it is the second clause which indicates when the Options would be issued (upon shareholder approval being obtained). Accordingly, the Board Resolution must be read as providing that:
1. the issue of the Options was not to occur until shareholder approval had been obtained; and
2. once shareholder approval was obtained, the Options would be issued subject to the same terms and conditions applicable to the Nexus ESOP.
146 Such a construction avoids any inconsistency resulting from the ambiguity identified in [144] above: Australian Broadcasting Commission at 109. Moreover, when regard is had to the background to the transaction (as is permissible to aid interpretation: see International Air Transport Association at 160), this construction is consistent with evidence of:
1. the paper prepared by Mr Tchacos on 9 September 2009 and circulated to board members prior to 14 September 2006, which clearly acknowledged that the proposed issue of options to board members could not occur without shareholder approval:
[T]he issue of options is subject to shareholder approval hence issue of options can only occur after the AGM. It is imperative however that the options package is announced as soon as practically possible to avoid shareholder dissention in the event that the share price escalates substantially prior to the AGM.
(Emphasis added.)
2. the notice of annual general meeting and the explanatory memorandum thereto, sent to shareholders on 14 September 2006, which referred to the “proposed grant of Options to Michael Fowler” and the requirement of “prior Shareholder approval”: see [138] above.
147 Mr Fowler’s submissions to the contrary are rejected. Before the primary judge, the directors gave evidence as to their recollection of the July and September board meetings and the decision to issue options in lieu of cash remuneration. Their evidence was to the effect that they considered the Options to have been issued as a result of the Board Resolution. Mr Fowler did not think shareholder approval was necessary. Mr Tchacos understood that it was necessary, but did not consider that it meant that the Options had not already been issued. Mr Philip was of the view that, while “Nexus would obtain shareholder approval before it could issue the [Options]”, he “did not consider [that] to alter the terms of the agreement reached between Nexus and [the] directors at the September Meeting”. Mr Philip considered “shareholder approval [to be] a formality that had to be attended to before Nexus could complete the agreement”. Mr Boyson did not have a view one way or the other. That evidence may be put to one side. The task of interpretation must focus not upon the actual beliefs or intentions of the parties, but to what their words and conduct would be reasonably understood to convey: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at [34]; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352. The Board Resolution provides evidence of the resolutions to which they relate, unless the contrary is proved: s 251A(6) of the Corporations Act 2001 (Cth); Australian Securities and Investments Commission v Hellicar (2012) 286 ALR 501 at 550. The directors’ evidence does not establish the contrary and, in fact, Mr Fowler, Mr Tchacos, Mr Philip and Mr Boyson each gave evidence that the Board Resolution was consistent with their respective recollections. The Board Resolution provided that the Options would not, and could not, be issued until shareholder approval had been obtained.
148 This construction of the Board Resolution raises a question about the nature of the contract that was formed and, in particular, whether that contract was a conditional contract. As referred to by the primary judge (see Reasons at [94]), a construction which leads to the conclusion that a “subject to …” stipulation is a condition precedent to performance will, in general, be favoured as against that leading to the conclusion that the stipulation is a condition precedent to the formation of a contract unless the contract read as a whole plainly compels this conclusion: Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 552.
149 In some cases, the precise terms and surrounding circumstances may justify the conclusion that the relevant condition is precedent to formation rather than performance. For example, in Roach v Bickle (1915) 20 CLR 663, the Crown Lands Consolidation Act 1913 (NSW) prohibited a lessee from the Crown of an irrigation farm from entering into a sub-lease without the consent of the Commissioner for Water Conservation and Irrigation. In its terms, that Act relevantly provided:
Such transfer or other dealing shall not be effected, or if effected shall not be valid, unless the consent thereto ... of the Commissioner has been obtained.
150 In that case, Mrs Bickle purported to sub-lease an irrigation farm to Roach. Clause 13 of the written instrument provided “[t]his lease is subject to the written approval of the Commissioner … and the lessor will use her best endeavours to procure same.” It came to be that the Commissioner’s consent was not obtained by the parties. So far as is relevant for present purposes, the High Court held (at 671) that:
… the document ought to be construed as not attempting to violate the law, and therefore as not intended to effect a dealing forbidden. In other words the bargain was not absolute, but inchoate only, and as the necessary consent was never obtained, the transaction never emerged from the inchoate stage, and no lease in fact ever existed.
151 In this case, it is true that s 208 of the Corporations Act required that Nexus obtain shareholder approval before granting the Options to either Mr Fowler or Tess Aust (being the conferral of a financial benefit on a related party). However, unlike Roach, the present case does not require the conclusion that formation of the contract was dependant on the satisfaction of s 208. This is not a case where the grant of options was absolutely prohibited by statute subject to conditions, as the granting of a sub-lease was in Roach. Indeed, a contravention of s 208 “does not affect the validity of any contract or transaction connected with the giving of the benefit”: see s 209 of the Corporations Act. In this legislative context, it was open to Nexus and Mr Fowler to agree that shareholder approval be a condition precedent to the Options being issued. A consideration of the requirements of ASX Listing Rules 7.1 and 10.11 does not give rise to a different conclusion: see Mott and Another v Mt Edon Goldmines (Aust) Ltd and Others (1994) 12 ACSR 658 at 664-665.
At what point were the Options “acquired” for the purposes of Div 13A?
152 The next question is whether the Options were “acquired” by Mr Fowler for the purposes of Div 13A at the time they were issued (30 November 2006) or at the time of entry into the contract with respect to the Options (14 September 2006). For the reasons that follow, for the purposes of Div 13A, the Options were not “acquired” until their issue on 30 November 2006.
153 Section 139G of the 1936 Act indicates when a “right” is “acquired” for the purposes of Div 13A. For the purposes of considering when Mr Fowler acquired the Options, the relevant provision is s 139G(c):
A person acquires a share or right if:
…
(c) in the case of a right—another person creates the right in that person;
…
154 So far as subsection 139G(c) is concerned, the issue of the Options conferred upon Mr Fowler the right to compel Nexus to allot and issue 742,500 shares at an exercise price of 87 cents per share prior to 31 October 2007. But until shareholder approval was obtained, Mr Fowler had no right to be issued the options. As Besanko J points out at [87] above, the condition of obtaining shareholder approval may never have been met and therefore the Options never acquired by Mr Fowler. For this reason, this case is distinguishable from Commissioner of Taxation v McWilliam [2012] FCAFC 105. The issue of the options in McWilliam was not subject to any condition outside the control of Mr McWilliam and his employer, Seven Network Limited. On the terms of the Board Resolution, Nexus was not able to issue Mr Fowler the Options until shareholder approval was obtained. As the primary judge held (at Reasons [54]), it is only when an option-holder is able to compel the issue of the option that the option-holder can be said to have “acquired” the option.
155 On appeal, Mr Fowler advanced submissions in relation to (a) the interaction between Div 13A and the CGT provisions and (b) Brown v Heffer (1967) 116 CLR 344. It is unnecessary for me to address these submissions in any detail. I agree with the reasons and conclusions of Besanko J at [103]-[126] above.
What rights had Mr Fowler acquired as at 14 September 2006
156 So far these reasons for judgment have considered the question is whether the Options were “acquired” by Mr Fowler for the purposes of Div 13A and if so, when. Of course, as at 14 September 2006, Mr Fowler enjoyed some rights in respect of the Options. On the terms of the Board Resolution, the rights Mr Fowler enjoyed in respect of the Options prior to shareholder approval were limited to the relief available to him in equity. In this respect, I agree with the reasons and conclusion of Besanko J (at [65]-[66] and [93]-[94] above). As at 14 September 2006, Mr Fowler merely had the right to insist that Nexus put the issue of Options to him to its shareholders for their approval. This is in contrast to the position in McWilliam where the taxpayer’s unconditional entitlement to acquire the options and shares would have been recognised by a declaration of right or an order for specific performance: at [27].
157 The position in this case may also be contrasted with that involving the grant of an option for value over issued share capital, which can create in the grantee an equitable interest in the shares: Trade Practices Commission v Arnotts Ltd (1990) 93 ALR 657 at 662. In the present case, Mr Fowler’s conditional right to the Options on the terms of the Board Resolution did not create an equitable interest in either the Options or the shares the subject of the Option (which were, prior to 30 November 2006, yet to be issued). It is not possible to have a beneficial interest in future property: Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 at 16 and 24; Federal Commissioner of Taxation v Everett (1980) 143 CLR 440 at 450-451. Accordingly, s139G(e) of the 1936 Act (regarding the acquisition of a beneficial interest in a share or right) is not applicable to the present case.
Was the right acquired on 14 September 2006 a Div 13A right?
158 The final question is whether, as a matter of statutory construction, the rights Mr Fowler enjoyed as at 14 September 2005 were “rights” with which Div 13A is concerned?
159 I accept and adopt Besanko J’s analysis : see [64]-[91] above. In particular, I accept that:
1. options to acquire shares are Div 13A rights;
2. there will be occasions on which something less than, or other than, an option will constitute a Div 13A right: see McWilliam at [71]-[73];
3. the obiter dicta of the Full Court in McWilliam indicates that an unconditional right to acquire options will suffice whereas a mere a right to accept an offer will not: Fraunschiel v Federal Commissioner of Taxation (1989) 20 ATR 955; and
4. as in the present case, a conditional right to acquire options will not amount to a Div 13A right.
160 The word “right” is not defined in Div 13A. It extends to rights, other than options, which give rise to an acquisition of shares. On 14 September 2006, Mr Fowler did not have a contractual right to have the Options issued to him. He had a right to insist that Nexus put the issue of Options to him to its shareholders for their approval. That is all. Put another way, on 14 September 2006, Mr Fowler did not have any power, directly or indirectly, to acquire a right to shares in Nexus. The power was with, and remained with, the shareholders of Nexus and that power was not exercised until 29 November 2006.
161 Accordingly, it was the Options themselves, rather than an antecedent conditional right to acquire the Options, which were the relevant Div 13A rights. For the reasons set out at [153]-[154] above, the Options were not relevantly acquired by Mr Fowler until 30 November 2006.
CONCLUSION
162 For the reasons set out above, Mr Fowler’s appeal on the Primary Tax Issue fails. In respect of the Penalty Tax Issue, I agree with, and adopt, the reasons and conclusions of Besanko J at [127]-[130] above. Accordingly, the appeal should be dismissed with costs.
| I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon. |
Associate:
Dated: 3 July 2013
| IN THE FEDERAL COURT OF AUSTRALIA | |
| VICTORIA DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 795 of 2012 |
| ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA |
| BETWEEN: | MICHAEL FOWLER Appellant |
| AND: | COMMISSIONER OF TAXATION Respondent |
| JUDGES: | BESANKO, GORDON AND DODDS-STREETON JJ |
| DATE: | 3 july 2013 |
| PLACE: | adelaide (via video link to MELBOURNE) |
REASONS FOR JUDGMENT
DODDS-STREETON J:
163 I have had the advantage of reading in draft the reasons for judgment of Besanko J. I agree with the disposition proposed by his Honour for the reasons he states.
| I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Dodds-Streeton. |
Associate:
Dated: 3 July 2013
