PAGONE J:
113 This appeal concerns the tax treatment of payments received by the appellant, Mr Blank, or which were dealt with at his direction, from Glencore International in the 2007 to 2010 years of income. The Commissioner's principal contention is that the payments were assessable upon Mr Blank's receipt as ordinary income under s 6-5 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act") as deferred compensation. Mr Blank's principal contention is that he was assessable for the payments as a capital gain in consequence of CGT Event C2 happening upon the execution of a declaration. Each of the parties had alternative contentions but it may be convenient to deal with their principal contentions before turning to the alternative ways in which their cases were put.
114 Mr Blank signed a document on 15 March 2007 headed "Declaration of Assignment and General Release" confirming his termination of employment. In executing that declaration he relinquished and assigned certain rights in consideration of payment to him of USD$160,033,328.25 by Glencore International and CHF80,000 by Glencore Holding AG. These amounts were calculated by reference to entitlements which had accrued to him under incentive profit participation arrangements which attached to his employment since 1993.
115 Mr Blank was at all material times employed by a company within a group which may for convenience be referred to as the Glencore Group, although the relevant names changed over time as did Mr Blank's employer within the group depending, in particular, on the country in which Mr Blank worked for the group. The Glencore Group operated one of the world's largest international commodity trading businesses. Glencore International had been incorporated in Switzerland under the name Marc Rich & Co AG and changed its name to Glencore International AG in 1994. At all times Glencore International was a majority owned subsidiary of Glencore Holding AG which in turn had been incorporated in Switzerland under the name Newgen AG. Its name was changed to Glencore Holding in 1994.
116 Between November 1991 and 31 January 1996 Mr Blank was a resident of South Africa and was employed by SA Ore Pty Ltd (which was later named Glencore SA Pty Ltd) as a commodity trader in the coal division. Between 1 February 1996 and July 1999 Mr Blank was a resident of Switzerland and was employed by Glencore International as a trader in the coal division. Between 8 July 1999 and 1 January 2002 Mr Blank was a resident of Hong Kong and was employed by Glencore Asia Limited as a commodity trader in the coal division of the Glencore Group. In 2002 Mr Blank was employed by Glencore Australia as a senior trader in the coal division and became a resident of Australia. He held that position and worked for the Glencore Group between 2 January 2002 and 31 December 2006.
117 Glencore International had a profit participation plan between about 1993 and 2010 as part of the means by which key employees were rewarded and encouraged to remain within the group. Mr Blank was selected to participate in one of these plans from about May 1994 and continued his participation in the plans (as varied over time) until he ceased employment with the Glencore Group with effect from 31 December 2006. The general objective of the employee profit participation plans was for the Glencore Group, through the relevant employer, to provide an incentive to key employees by giving them a stake in the economic performance of the group during the time of their employment. Mr Andreas Hubmann, head of the share based compensation program of Glencore International plc (which at the time he gave evidence was then named Glencore Xstrata plc), said in an affidavit made for the proceedings that the purpose of the employee profit participation plans was as described in the annual prospectuses for the 2003-2007 years under the heading "Shareholders". Under that heading in the 2007 prospectus the relevant arrangement with the employees was described as follows:
Glencore International is fully owned by its management and key employees through Glencore Holding AG ("Glencore Holding") and Glencore L.T.E AG ("LTE"). The shareholding arrangements as described below are designed to promote management stability and to preserve Glencore's capital. The arrangements lead to an alignment of the interests of management and key employees with those of Glencore. By investing their own capital (through sharing in Glencore International's shareholders' funds) management and key employees are motivated to take a long-term view on Glencore's key performance drivers, including long-term producer and customer relationships, prudent risk management and protection of invested capital through succession planning that preserves continuity and stability. Only active employees of the Group are permitted to become shareholders of Glencore Holding or LTE.
This description is not of itself sufficient to determine the tax outcomes in dispute but provides a broad and convenient description of the purpose sought to be achieved by what was offered to employees including Mr Blank. That is to say, that part of his annual rewards included an ability to participate in the profits of the company by receiving entitlements which he could access only upon termination. The plan, as described, was seen as a means of having key employees "investing" what was described as "their own capital" and was only open to "active employees".
118 The first Profit Participation Agreement entered into by Mr Blank was with Marc Rich & Co AG (as the relevant company within the group was then called). The arrangement involved two agreements bearing the date of 5 May 1994. At that time Mr Blank was employed by the Glencore Group in South Africa and he had no relevant connection with Australia. One of the agreements was headed "Profit Participation Agreement", the other was headed "Shareholders' Agreement". The former recited in the preamble that Mr Blank's employer (which at the time was, and was named, SA Ore Pty Limited) was willing to grant him "a participation in future profits" of the employer. The agreement then provided, by clause A.1, that the employer was to grant Mr Blank "a participation in future profits of [the employer], in the form of (a) 'Genussscheine' (GS) as per section 657 of the Swiss Code of Obligations (CO) and (b) a contractual claim hereunder, both defined herein and collectively referred to as 'Profit Participation 1993'". Clause A.2 provided the means for calculating Mr Blank's profit participation by reference to the employer's net income as stated in audited accounts. Mr Blank's specific entitlement depended upon the number of GS issued to him as at a measuring date. Clause A.2 provided:
Calculation
The basis for the calculation of the EMPLOYEE's Profit Participation 1993 shall be the net income as stated in the consolidated statement of income of the consolidated financial statements of [the employer] expressed in US$ as at December 31, as audited by [the employer's] statutory auditors, prepared in accordance with International Accounting Standards (IAS) consistently applied by [the employer] and its subsidiaries (the Net Income), adjusted by the change in open contracts, if applicable, by the change of cumulative translation adjustment account, by any preferred dividend paid or accrued on shares B of [the employer] to [Glencore Holding], and by the net income attributable to shares A of [the employer], calculated as per Exhibit D to the sale and purchase and option agreement entered into between Marc Rich & Co Holding AG and [the employer] as of November 29, 1993, all adjustments to be calculated as per Annex C hereof (Net Income for Profit Participation).
Such Net Income for Profit Participation shall be calculated once yearly as of December 31 of each year or such other date as of which [the employer] closes its business year (Measuring Date) and the claims for Profit Participation 1993 shall finally be determined by [the employer's] auditors. The first basis for the calculation of Profit Participation 1993 shall be the consolidated financial statements of [the employer] expressed in US$ as at December 31, 1993.
Such Net Income for Profit Participation shall be divided by the number of GS actually issued as of a respective Measuring Date and then multiplied by the number of GS actually held by the EMPLOYEE as of such Measuring Date (Yearly Profit Participation 1993). The Yearly Profit Participation 1993 will then be allocated as profit participation under GS and under the contractual claim in the proportion indicated herein (See C.3.5. and C.4.) and accumulated over the period the EMPLOYEE holds GS (Cumulative Profit Participation 1993).
Clause A.3 dealt with the GS generally and recorded that the employer was authorised under its Articles of Incorporation to issue GS registered in the name of their respective holders which granted to the respective holders a claim to profit participation. Clause B.1 made the Profit Participation Agreement conditional upon the execution by Mr Blank of the other agreement entered into, namely, the Shareholders' Agreement. Clause B.1 of the Profit Participation Agreement provided:
Execution of Shareholders' Agreement [Glencore Holding]
This Agreement shall only be valid if the Employee has executed the agreement for the administration of [Glencore Holding] (Shareholders' Agreement [Glencore Holding]) and fulfilled his obligations thereunder, in particular to subscribe and pay the par value for the same number of shares in [Glencore Holding] as the number of GS the EMPLOYEE is entitled to receive hereunder.
Annexure C to the Profit Participation Agreement contained a form for the calculation of net income for profit participation.
119 The grant in clause A.1 of the Profit Participation Agreement was expressed to be a grant of two things, namely of the GS and of a contractual claim. The former was governed by clause A.3 and the latter by clause A.4. Clause A.3.1 described the GS as the "grant [of] a claim to profit participation":
Under its articles of incorporation [the employer] is authorised to issue GS registered in the name of their respective holder which grant a claim to profit participation. While [Glencore Holding] as major shareholder of [the employer] will take the necessary resolutions, [the employer] shall undertake all corporate actions necessary to provide for a profit distribution as agreed herein.
Clause A.3.2 provided that the employer shall "issue to" the employee the number of GS indicated in annexure A. In the case of Mr Blank, 50 GS were provided to him in his first year of participation. Clause A.3.3 provided that the GS which were held by him were to be "returned" to the employer at the end of his employment together with an assignment in the terms of annexure B. Clause A.3.4 required Mr Blank to deposit all GS which were issued to him then or which may subsequently be issued to him in the future in a special blocked safe keeping account with the employer and provided that the GS could only be disposed of upon his instructions or based on a final judgment of a competent court. Clause A.3.5 provided that Mr Blank was to receive 55% of his Cumulative Profit Participation 1993 as profit distribution under his GS for as long as an approval by the Swiss Federal Tax Authorities was maintained. Clause A.4 provided that he was to receive the other 45% of his Cumulative Profit Participation 1993 as the contractual claim under the agreement.
120 No amount of any entitlement under the profit participation plan, however, was payable to Mr Blank under the Profit Participation Agreement until the termination of his employment. Clause A.5 provided for the due date of payment being, at the time, 30 days after notice of termination of employment or death. Clause A.6 relevantly provided for payment of the accumulated entitlements to be by instalments over a period of years once they became payable upon termination of employment in accordance with the terms of the agreement. The Commissioner's assessment placed significant weight upon the fact that no amount was payable to Mr Blank until the termination of his employment. The Commissioner's principal contention was that the participation plan provided for deferred payment of wages which Mr Blank, as a receipts taxpayer in the 2007 tax year, did not derive until receipt of his entitlement.
121 An additional and essential condition upon Mr Blank's ability to take part in the profit participation plan was, as mentioned, the requirement that he enter into a Shareholders' Agreement for the purchase of shares in Glencore Holding. Mr Blank purchased the requisite number of shares in Glencore Holding pursuant to the Shareholders' Agreement which were held by him pursuant to that agreement. The Shareholders' Agreement entered into by Mr Blank in 1994 recited, amongst other matters, the desire of the holding company to provide stability and to promote the continuity of the management and policies of both the employer and the holding company. In the same recital the parties recorded a desire "to restrict the manner and means by which the [relevant] shares in [the holding company] may be sold assigned or otherwise transferred".
122 Mr Blank was required under the combined effect of the Profit Participation Agreement and the Shareholders' Agreement to purchase the same number of shares in the holding company as had been issued to him by his employer as GS. Initially that required the acquisition by Mr Blank of 50 shares for which he paid 2,500 Swiss Francs in cash. One of the corresponding conditions in the Shareholders' Agreement for the issue of shares under that agreement was that Mr Blank had entered into the Profit Participation Agreement. Clause D.2 required Mr Blank to deposit all of the shares in a special blocked safe keeping account which could not be disposed of except by joint instructions from him and the holding company or upon a final judgment of a competent court. Clause D.3 prevented Mr Blank from transferring or encumbering the shares thus acquired in the following terms:
Any [Glencore Holding] shares owned by a Shareholder may not be sold, assigned, transferred, disposed of, pledged or given any other lien on, nor shall any option, pre-emption right or right of first refusal or the like be granted in connection with [Glencore Holding] shares without the prior consent of [Glencore Holding] in writing.
Clause D.4 granted an option to Glencore Holding to purchase Mr Blank's shares upon the occurrence of a number of triggering events including the termination of his employment.
123 Mr Blank had been allocated a combined total of 1,200 GS before he commenced employment in Australia in 2002. He had received allocations totalling the 1,200 GS in varying amounts from effective allocation dates of 1 January in each of the years 1993 and 1995 to 2001. Mr Blank would then not have been subject to any Australian tax had he terminated his employment and become entitled to enjoy the fruits of 1,200 GS in 2002 rather than to have become an employee of the group in Australia. He was thereafter issued with a further 300 shares in Glencore Holding and a further 300 GS by Glencore International on 6 May 2002 with an allocation date of 1 January 2002 after transferring to Australia.
124 The terms upon which the GS and shares were issued to Mr Blank varied from time to time but did not differ materially as far as concerns the tax issues in dispute. One variation which was made during this period that should be mentioned is that made by an amendment dated 23 August 1996 affecting the 1996 allocation. Amongst the amendments made to the Profit Participation Agreement at that time was the introduction of a vesting date which had the effect of deferring enjoyment of entitlements flowing from the profit participation plan by 24 months after termination of employment. Clause A.2.3 was substituted by the following provision:
Such Net Income for Profit Participation shall be divided by the number of GS actually issued and participating as of a respective Measuring Date and then multiplied by the number of GS actually held by EMPLOYEE as of Measuring Date (Yearly Profit Participation). The Year Profit Participation will then be allocated as profit participation under GS and under the contractual claim in proportion indicated herein (see A.3.5 and A.4 respectively). Only such GS are participating in the net income for profit participation which at the date of receipt of notice of termination of the employment of EMPLOYEE as per A.5 hereof have been issued for more than 24 months, the date of issue being January 1 of the first calendar year for which such GS have been issued. This vesting period shall apply to such GS only which have been issued to EMPLOYEE in the 1996 or subsequent years and shall not apply in case of death or permanent disability of the EMPLOYEE.
Clauses A.5 and A.6, amongst others, were also amended, but in general terms they continued to provide for a payment mechanism which converted an employee's entitlement under the GS to a debt which would become due 30 days after notice of termination of the employment and became payable by instalments over five years.
125 Another change that requires mention was made with effect from 2003 for units to be issued by Glencore AG, a subsidiary of Glencore International. The mechanism to give effect to the profit participation arrangements from that year was for Glencore AG to issue what were described as phantom units rather than GS. A new Incentive Profit Participation Agreement was entered into with Mr Blank but in general terms the phantom units were treated in the same way as the GS which had been issued under the previous arrangements. The phantom units were used for the purpose of calculating Mr Blank's profit participation in respect of which the units applied and were no doubt called "phantom" units because they were given by the Glencore subsidiary to reflect interests in Glencore International rather than being given by Glencore International itself. The commercial objective was, however, the same as previously, and the legal mechanism adopted was designed to achieve the objective of enabling the relevant key employees to have the phantom units as the means by which to enjoy profits in the future. The arrangements continued to require that Mr Blank acquire shares to match the number of phantom units and that the units and shares be held by him until termination of employment. Mr Blank was issued under that arrangement with 100 phantom units shortly after 7 July 2003 with an allocation date of 1 January 2003 and he acquired a further 100 shares in Glencore Holding.
126 The contractual terms governing Mr Blank's entitlements as at the date of his termination of employment in 2007 are to be found in the Incentive Profit Participation Agreement and the Shareholders' Agreement entered into in 2005. The general terms and effect of these were the same as had existed between the parties before their execution in 2005 but their terms need specifically to be considered because his entitlements upon termination, including any which had (or may have) accrued before termination, were governed by the 2005 agreements. The 2005 Shareholders' Agreement applied to and governed all of Mr Blank's shares in Glencore Holding but the terms of the new Shareholders' Agreement were substantially as they had been under the earlier Shareholders' Agreement signed in 1994. It remained a requirement under the 2005 agreements for Mr Blank to purchase shares in connection with the profit participation plan which thereafter was referred to as the Incentive Profit Participation Agreement. Clause A.2 continued to make it a condition for Mr Blank to have issued shares and that he had executed an agreement with Glencore International or Glencore, or both, for profit participation under the earlier arrangements.
127 The primary judge correctly focused upon the terms of the 2005 agreements in considering the effect of Mr Blank's entitlements when he executed the declaration on 15 March 2007 following his termination of employment with Glencore Australia on 31 December 2006. The 2005 Incentive Profit Participation Agreement was intended by the parties to cover, and did cover, any accrued entitlements under the earlier agreements. His Honour set out the relevant provisions of the 2005 Incentive Profit Participation Agreement in detail and noted that it had replaced the earlier 1999 agreement, and that the 2005 Shareholders' Agreement replaced the earlier 1994 Shareholders' Agreement. The 2005 agreements, however, did not create new rights in substitution of rights which may have accrued by 2005 but, rather, provided that accrued rights were to be dealt with under the 2005 agreements. Clause A.3.1 of the 2005 Incentive Profit Participation Agreement authorised Glencore to issue GS but the 2005 agreement recognised, in clause A.3.2, that Glencore had issued GS to Glencore International and that Glencore International had allocated to Mr Blank what was described in the 2005 agreement as the number of "PPU" indicated in annexure B. The reference to PPU was to the term "Profit Participation Units/PPU" which was defined in clause 17 to mean:
… the number of GS actually allocated and participating as of a respective date whether issued by [Glencore] under the Plan and any Incentive Profit Participation Agreement (including this agreement) and held by [Glencore International] in accordance with the terms of the Plan and this Agreement or GS issued by [Glencore International] and held directly by Employees of GI or any of its Subsidiaries pursuant to profit participation agreements.
These provisions contemplated that whatever had previously been granted to Mr Blank before the 2005 agreements continued to exist but that rights in existence before the 2005 agreements were entered into were thereafter governed by the 2005 agreements. Annexure B to the 2005 Incentive Profit Participation agreement listed the PPU which had been allocated to Mr Blank by reference to the dates and numbers of GS issued from 1 January 1993 to 1 January 2003. Mr Blank thus continued to hold the GS and phantom units which had been issued to him and which were treated as the Profit Participation Units/PPU for the purpose of calculating the deferred compensation under the 2005 agreement. It is also significant to note that the arrangements had always required the issue of shares in tandem with the GS, phantom units or PPUs, and that the shares which had previously been issued to Mr Blank continued unaltered except as to the terms under which they were to be dealt with pursuant to the combined effect of the 2005 Incentive Profit Participation Agreement and the 2005 Shareholders' Agreement effective as at the date of termination.
128 Mr Blank terminated his employment with effect from 31 December 2006. On 15 March 2007 Mr Blank executed a Declaration of Assignment and General Release as contemplated by the terms governing his entitlements as at the date of termination of 31 December 2006. His Honour summarised that step at [38]-[40]:
Declaration of Assignment and General Release
38 On 15 March 2007, the applicant executed a Declaration of Assignment and General Release ("Declaration") (see Annex C in the extracts reproduced in [36] above) by which, in consideration for USD160,033,328.25 and CHF80,000, he:
(1) Relinquished "his claim to payments with respect to the PPU and GS allocated in his name together with all preferential and ancillary rights to GI";
(2) assigned "all GS, registered and/or held in his name together with all preferential and ancillary rights, to GI, and irrevocably [authorised] GI to take over the respective certificates"; and
(3) assigned "all his shares of GH, registered and/or held in his name together with all preferential and ancillary rights to GH".
39 The form of the Declaration was prepared by staff of GI and provided to the applicant for him to sign in late February or early March 2007. Owing to a mistaken deletion from the proforma declaration contained in Annex C of the IPPA 2005, the Declaration appears to state that the entire consideration to be received by the applicant was to be paid by GH. In fact only CHF80,000, being the par value of the applicant's shares in GH, was to be paid by GH. The remaining USD160,033,328.25 was to be paid by GI in accordance with the "conditions and limitations" provided in the IPPA 2005 (see cl E of the Declaration).
40 In accordance with the IPPA 2005, the USD160,033,328.25 was payable in 20 instalments over a five year period (together with interest at the six month LIBOR rate for USD on the outstanding balance of the debt), with the final instalment being payable on 31 December 2011.
Between 29 June 2007 and 1 July 2010 Glencore International made 15 instalment payments to Mr Blank, or as directed by him, in accordance with the contractual obligations for amounts to be paid in respect of his entitlements. Those payments were set out in a table at [46] of his Honour's reasons for judgment and need not be reproduced for present purposes. On 15 January 2008 Mr Blank executed an agreement with Glencore International to alter his repayment schedule to enable Glencore International to apply the first four instalments to pay Mr Blank's dividend withholding tax liability to the Swiss Federal Tax Authority. His Honour found, and the parties did not otherwise dispute before him, that nothing turned on the fact that the payments were treated as subject to Swiss dividend withholding tax because the characterisation under Swiss law was not relevant to the characterisation of the payments under Australian tax law. On 31 January 2008 Glencore International paid USD30,806,415.70 (AUD33,938,983.92) to the Swiss Federal Tax Authority in respect of Mr Blank's Swiss dividend withholding tax liability from his entitlements under the arrangements which had been in place since 1994. Mr Blank claimed relief from double taxation on 10 March 2008 pursuant to the Double Taxation Agreement between Switzerland and Australia which limited Swiss withholding tax on dividends to 15%. On 19 May 2008 he received a refund of CHF19,571,879.32 (AUD19,360,846.10) from the Swiss Federal Tax Authority. On 20 November 2008 Glencore International paid a further sum of CHF136,325 (AUD173,464) to the Swiss Federal Tax Authority representing a final adjustment of his Swiss dividend withholding tax liability. AUD14,751,601 was the amount finally paid in Swiss tax on account to Mr Blank's liability in that jurisdiction. In total $145,944,253.55 was paid to Mr Blank (or as directed by him) between 29 June 2007 and 1 July 2010.
129 The Commissioner assessed all of the amounts paid to Mr Blank as deferred compensation as reward for services in the year they were received by Mr Blank, or dealt with as he directed, irrespective of whether any amount paid had been referable to years of income before Mr Blank had any connection with Australia. Mr Blank contended that the entitlements had been derived in the years in which the GS had been allocated to him but that he was assessable for capital gains upon his disposal of those entitlements as taxable assets consequent upon his termination of employment. The trial judge, consistently with the competing claims, analysed the issue to be resolved as requiring the identification of what had been the reward for service. At [98] his Honour said:
The issue here is to be resolved by identifying what is the reward for service. Is it the contractual right to be paid the Amount conferred by the terms of the IPPA 2005 in substitution for GS entitlements conferred under earlier manifestations of the PPPs, or is it the money constituting the Amount either when it falls due, in this case on 15 March 2007, or later as and when it is paid to the applicant that is the reward for service? In Abbott v Philbin [1961] AC 352, the majority of the House of Lords identified the reward or the "perquisite", as it was referred to in r 1 of Sch 9 of the Income Tax Act 1952 (UK), dealing with tax under Schedule E, as the option and held that it was its monetary value (if any) at the date the option was granted which represented "the profit or perquisite" of the office. In doing so, the majority rejected the Crown's contention that the reward ("the profit or perquisite") was the difference between the market value of the shares acquired at the time of the exercise of the option and the exercise price, in the year that the option was exercised. It is trite that the majority concluded that the option was not incapable of being turned into money or of being turned to pecuniary account within the meaning of those phrases in Tennant v Smith [1892] AC 150 merely because the option itself was not assignable (Lord Radcliffe at 378). What is less observed in the cases that have followed and in academic writings is that one of the reasons why the majority decided it was the option which was the reward in the year of grant, and not the profit on exercise in the year of exercise, was because if it was the latter, there may be no relevant relationship between the profit and service in that year or in the year of grant to bring the profit within the charge to tax. The matter was put, perhaps best by Lord Reid, at 372-373:
But if a reward is given in the form of an option and the option is itself the perquisite, it would generally be sufficiently related to the year in which it is given to be properly regarded as a perquisite for that year. If, on the other hand, the option is not the perquisite-if there is no perquisite until the option is exercised and shares are issued, it may be many years later-in what sense would the shares be a perquisite for the year when they were issued. There would be no relation whatever between the service during that year and the giving of the option many years earlier or the exercise of the option during the later year. I do not wish to express any concluded opinion on this point but it does seem to lend support to the conclusion which I have reached on other grounds.
His Honour concluded that the amounts received by Mr Blank represented money derived by him on a receipts basis as and when paid to him or applied on his behalf by Glencore International. His Honour rejected Mr Blank's contrary submission as being predicated on a premise which his Honour found did not accord with the facts. His Honour said at [96]-[97]:
96 But the applicant says that what was provided as a reward for services as an employee were the GS issued to him, not the proceeds of their subsequent realisation following the termination of his employment. According to the applicant, each GS was a benefit which was capable of being turned to pecuniary account and hence was income according to ordinary concepts as a reward for services or, alternatively, was a benefit "allowed, given or granted" to the applicant in respect of, or for, or in relation directly or indirectly to his employment in the year of income in which they were "allowed given or granted" within the meaning of the former s 26(e) of the 1936 Act.
97 The difficulty I have with the applicant's submission is that it is predicated on a premise which does not accord with the facts. Whatever the applicant was granted or issued with under earlier manifestations of the PPPs, the applicant was not granted and did not hold anything in the way of a right or interest in property under the IPPA 2005: see cll A.1.1 and A.1.2 which make it clear that AG issued GS to GI not to the applicant; that the applicant did not have any interest whatsoever in the GS; that the applicant did not acquire by reason of the plan or the IPPA 2005 any right in or title to any assets, funds or property of GI, AG or any other subsidiary whatsoever, including any specific funds or assets (including the GS which AG issued to GI). Indeed, under the IPPA 2005 the applicant was granted, and held, nothing more than a contractual right, if one of certain nominated events occurred and if he executed and submitted to GI the Annex C Declaration before a fixed date, to become a creditor of GI on that fixed date for a sum of money quantified by reference to a formula, which debt was payable, together with interest, by 20 equal quarterly instalments.
Critical to his Honour's conclusion against Mr Blank was his Honour's analysis that Mr Blank "was not granted and did not hold anything in the way of a right or interest in property" under the 2005 Incentive Profit Participation agreement. Mr Blank challenged the conclusion and that analysis on appeal.
130 Mr Blank's entitlement to be paid money upon termination of his employment pursuant to the agreements, whether the 2005 agreements or their predecessors, was one of a bundle of interconnected rights. Whatever entitlements Mr Blank had under the participation agreements, including the 2005 participation agreement, they were only effective pursuant to their terms upon his execution of a Shareholders' Agreement and fulfilling his obligations under the Shareholders' Agreement which, amongst other things, required that Mr Blank subscribe for, pay for, and hold shares. Clause B.1 of the 2005 participation agreement, by way of example, provided:
B. GH Shares
B.1. Execution and Maintenance of Shareholders' Agreement ([Glencore Holding])
This Agreement shall only be effective if Employee has executed the Shareholders' Agreement ([Glencore Holding]) and fulfilled his obligations thereunder, in particular to subscribe and pay the par value for the same number of shares in [Glencore Holding] as the number of PPU the Employee is entitled to have allocated to him hereunder, and for as long as such Shareholders' Agreement ([Glencore Holding]) remains in force.
Mr Blank duly executed a Shareholders' Agreement as required by each of the participation agreements, including the 2005 participation agreement. The combined effect of the participation agreements and the Shareholders' Agreements was to confer upon employees like Mr Blank an entitlement like that of a shareholder except that enjoyment of its fruits was deferred until the termination of his employment. He did not have a bare entitlement to be paid money in the future in consideration for work done or to be done but, rather, an entitlement in the future to share in the profits of an enterprise by reference to his past performance to be calculated by reference to the economic success of the enterprise. His entitlement to receive money upon termination of his employment was specifically linked to his position as a shareholder and his receipt of the money was conditional upon disposing of his shares. The intention of the parties implementing the arrangement was to put employees like Mr Blank in part in the position of shareholder by linking his reward for service with his position as a shareholder for as long as he was also an employee.
131 The method for calculating Mr Blank's entitlements under the various iterations of the plans had the effect, as was intended, of enabling Mr Blank to share in the profits of the enterprise along with shareholders. Clause A.2 in the 1999 agreement, as his Honour found at [21(7)], provided that the amount to which Mr Blank was entitled with effect from 31 December of each year was a portion of the consolidated profits of Glencore International for that year dependent on the number of GS held by him at that time, and that the amounts aggregated over the period in which Mr Blank held the GS to arrive at the total of his profit participation. That mechanism did not change over time and continued in clause A.2 in the 2005 Incentive Profit Participation agreement which provided:
A.2. Calculation
A.2.1 IPP commences as of the Allocation Date. The first Measurement Date is the one following the Allocation Date.
Only such PPU that have been allocated at the Notice Date for more than 24 months from the Allocation Date shall be vested. This vesting period shall not apply in case of death or permanent disability of Employee.
A.2.2 The basis for the calculation of Employee's IPP are the audited consolidated financial statements of [Glencore International] prepared in accordance with IFRS.
A.2.3 Net Income for IPP for a particular period shall be divided by the number of PPU allocated and participating during that period to produce the Period Amount. The number of PPU participating in such period is calculated as the number of PPU participating at the Measurement Date and the PPU repurchased during that period. Where such PPU are not held for the whole calculation period, the calculation shall be performed by applying monthly fractions.
The Period Amount calculation shall be reviewed and reported by [Glencore International]'s independent statutory auditors, as being in accordance with this Agreement.
A.2.4 The Periodical IPP for each allocation of PPU to Employee shall be aggregated over the period the Employee holds such PPU from the Allocation Date to and including the Notice Date. For the purpose of this Agreement, notice of termination of employment shall be valid whether made in writing or made otherwise and independent of any contestations or conditions or requirements of the law governing the employment or other engagement of the Employee.
The last Measurement Date is the date of [Glencore International]'s audited consolidated financial statements following the Notice Date.
A.2.5 If, at the Notice Date, the aggregated Periodical IPP of Employee is negative, such amount shall be deemed to be zero. Such negative amount shall be proportionately allocated to the PPU allocated to Employees at the Measurement Date on or following such Notice Date.
The 2005 agreement carried over the entitlements that had accrued to Mr Blank through the definitions of "allocation date" and "IPP" referred to in clause A.2. The 2005 agreement thus ensured that what Mr Blank would be paid pursuant to the 2005 agreement would include the amounts which Mr Blank had become entitled to be paid upon termination of his employment by reference to earlier periods under the earlier agreements.
132 From 2005 the rights equivalent to the GS were to be issued by Glencore to Glencore International and not to Mr Blank. Section A.1 of the 2005 Incentive Profit Participation agreement provided:
A.1 Grant; No Right to Assets
A.1.1. [Glencore International] grants Employee deferred compensation which will be calculated on the basis of the results of [Glencore International] (IPP). Solely for purposes of calculating the amount of IPP, [Glencore] has issued to [Glencore International] GS pursuant to Section 657 CO which shall serve as PPU for the purpose of calculating Employee's IPP as provided in A.2. below.
A.1.2. The parties to this Agreement acknowledge that the GS issued by [Glencore] and owned and held by [Glencore International] are being issued solely for the purpose of implementing the Plan and calculating the amount of deferred compensation in the form of PPU which shall be allocated to Employee in accordance with the Plan and this Agreement. Employee shall not have nor be deemed to have any interest whatsoever in the GS. Employee shall not acquire by reason of the Plan or this Agreement any right in or title to any assets, funds or property of [Glencore International], [Glencore] or any other Subsidiary whatsoever, including, without limiting the generality of the foregoing, any specific funds or assets (including the GS which [Glencore] has issued to [Glencore International] pursuant to A.l.l).
The effect of these provisions was in part to ensure that Mr Blank did not obtain a proprietary right in the GS which were granted to Glencore International. Mr Blank, however, had already received GS under previous arrangements and those GS had been issued to him personally. Those GS had not been assigned to Glencore or to anyone else. Clause 17 of the 2005 Incentive Profit Participation agreement acknowledged that GS had been issued and were "held directly by employees" and the 2005 Incentive Profit Participation agreement did not seek or purport to effect any change to, or assignment of, the entitlement which Mr Blank had to the GS before the 2005 agreement. The new GS allotted under the 2005 agreement might not have given Mr Blank a right or interest in the GS granted by Glencore to Glencore International but the 2005 agreement did not purport to effect any diminution in whatever proprietary rights Mr Blank may have had before then to the GS that had been issued to him. That he continued to hold proprietary interests in the GS acquired before 2005 is confirmed both by the 2005 agreement as well as the terms of the Declaration of Assignment and General Release which he gave on 15 March 2007 which in terms effected the relinquishment and assigned his rights as holder of GS in his name.
133 One of the bundle of rights which Mr Blank obtained through the various participation agreements was undoubtedly a right which entitled him to be paid money upon termination of his employment, but the entitlement, and its character for fiscal purposes, cannot be divorced from the other terms of the agreement any more than a shareholder's entitlement to receive a dividend can determine the character of the shareholder's rights as against a company. Mr Blank had a chose in action upon the grant of the GS and phantom units under the participation agreements similar to that considered in Abbott v Philbin [1961] AC 352. That case concerned the assessability under Schedule E to the Income Tax Act 1952 (UK) of an option granted to a taxpayer in October 1954. The relevant UK taxing provision at the time charged tax on every person exercising an office or employment in respect of, amongst other things, "perquisites or profits". Mr Abbott had been the secretary of a company when he was granted an option to purchase 2,000 ordinary shares in the company at the price of 68s 6d per share. The price of the option was £20 and was expressed to be non-transferrable and to expire after 10 years or on the earlier of the death or retirement of the holder. Mr Abbott exercised the option in respect of 250 shares in March 1956 at the option price of 68s 6d per share when the price of the shares was 82s. At issue in the case was the date at which Mr Abbott had derived an amount as "perquisites or profits" within the meaning of Schedule E of the Income Tax Act 1952 (UK). The revenue contended, as does the Commissioner in the case of Mr Blank (although the Commissioner's contention is on a fundamentally different basis than was relevant in Abbott v Philbin), that there had been no derivation until the date the options were exercised, whilst Mr Abbott contended, as does Mr Blank in this case, that derivation had occurred when the options were granted. The majority in the House of Lords held that Mr Abbott was assessable under Schedule E when the option was granted because he was then in receipt of an entitlement with monetary value which represented the profit or perquisite of his office. Viscount Symonds explained at 365:
My Lords, I cannot entertain any doubt that, when the company granted the option to the appellant, he acquired something of potential value. I do not think that it matters whether it falls into the category of proprietary or contractual right, or into some dim twilight that divides those juristic conceptions. We are concerned with a taxing statute whose language is to be reconciled with the law of England and Scotland alike, and the chosen words "perquisite or profit whatsoever" are as wide and general as they well could be. I can concede no relevant limitation of their meaning except in the oft cited words of Lord Watson in Tennant v. Smith that they denote "something acquired which the acquirer becomes possessed of and can dispose of to his advantage - in other words, money - or that which can be turned to pecuniary account."
The judgments of Lord Reid and Lord Radcliffe, at 376 and 379 respectively, are to the same effect. One difference between the facts in Abbott v Philbin and those in the present appeal is that Mr Abbott received an option to purchase shares in 1954 whereas the right received by Mr Blank was different by the grant of the GS in each of the years 1993 and 1995 to 2003. Each taxpayer, however, was relevantly a receipts taxpayer and the fact that the right given to Mr Blank was not an option would not prevent derivation by him upon the grant of the GS and phantom units if he received something that was assessable.
134 Another difference is that the taxpayer in Abbott v Philbin was able to exercise the option at any time from the date of the grant, whilst Mr Blank had a restriction upon the rights he acquired. However, a restriction upon the ability to exercise the option in Abbott v Philbin would not have prevented derivation at the time of the grant of the option for Australian tax purposes. In Donaldson v Commissioner of Taxation (Cth) [1974] 1 NSWLR 627 Bowen CJ in Eq said at 643-4:
[…] I find myself in general agreement with the argument advanced by counsel for Donaldson that the Income Tax Assessment Act is dealing with what "comes in" to the taxpayer, and, generally, with what is enjoyed or capable of being enjoyed by the taxpayer in the income year in question. But these are generalizations which do not greatly assist in the resolution of the present case. 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.
Federal Commissioner of Taxation v McArdle (1988) 89 ATC 4051 applied this analysis in another case involving the exploitation of rights, including stock options and stock appreciation rights in return for a monetary amount. The critical question in each case was whether there had been an assessable receipt by a taxpayer who accounted for tax on a receipts basis.
135 The Commissioner sought to distinguish these cases on the basis that they each involved the disposal by the taxpayer of property rather than, as the Commissioner contended in this case, the satisfaction of a contractual right to be paid a sum of money. Mr Blank's contractual right to receive money, however, is not to be isolated from the other rights and entitlements that necessarily accompanied that right. Nor is it accurate to say that Mr Blank simply received money in 2007 in discharge of an earlier entitlement to be paid money in the future. The amounts payable to Mr Blank pursuant to the declaration signed by him on 15 March 2007 were expressed to be payable (consistently with the terms of the participation agreements at all times) upon him (a) relinquishing to Glencore International all of his claim to payment with respect to the PPU and the earlier GS allotted to him in his name, together with all preferential and ancillary rights, (b) assigning all GS registered or held in his name together with all preferential and ancillary rights to Glencore International and irrevocably authorising Glencore International to take over the respective certificates of the GS registered or held in his name, and (c) assigning all of his shares in Glencore Holding which were registered or held in his name together with all preferential and ancillary rights to Glencore Holding and irrevocably authorising Glencore Holding to take over the respective certificates.
136 Mr Blank disposed of the entire bundle of rights he had accrued on 15 March 2007 when he executed the declaration of assignment and general release. The declaration of assignment and general release was in the following terms:
Declaration of Assignment and General Release
by
Vaughan Blank, 4 Pacific Street, Watsons Bay, New South Wales 2030 Australia (Employee)
A. The Employee confirms the termination of his employment or other engagement with AG or one of the Subsidiaries. Notice of termination has been received as of December 31, 2007 6
B. In consideration of the sum of
USD 160'033'328,25 (US Dollars Onehundredsixtymillionthirtythreethousandthreehundredtwentyeight 25/00) [Paid by GI]
and
CHF 80'000 -
(Swiss Francs Eighty thousand 00/00)
to be paid by Glencore Holding AG (GH), the Employee hereby
a) relinquishes his claim to payments with respect to the PPU and GS allocated in his name together with all preferential and ancillary rights to GI;
b) assigns all GS, registered and/or held in his name together with all preferential and ancillary rights to GI, and irrevocably authorizes GI to take over the respective certificates;
c) assigns all his shares of GH, registered and/or held in his name together with all preferential and ancillary rights to GH, and irrevocably authorizes GH to take over the respective certificates.
C. Per A.4. of the Incentive Profit Participation Agreement and B.3.5 of the Profit Participation Agreement, GI is currently required to collect and pay to the Swiss tax authorities the Swiss withholding tax, which is 35% of 55% of the principal amount of Employee's total IPP. This represents 35% of 55% of the USD consideration in B above and will be withheld from each instalment payment or any lump sum payment, as applicable. AG and/or GI may be required by law to collect and pay other amounts, which if applicable, will be withheld from each instalment payment.
D. GI and GH are entitled to set-off against the claim of the Employee as per B. above, any and all claims GH, GI or any of its direct or indirect subsidiaries may have at any time against Employee irrespective of any assignment by Employee of rights and claims under the Incentive Profit Participation Agreement or the Profit Participation Agreement to a holding company, trust, foundation or otherwise.
E. Payment of the total sum indicated under B. above shall be effected after any set-off or withholding in such instalments and on such dates and under such conditions and limitations as provided for in the respective agreement of the Employee with GI, AG and GH, in particular the Incentive Profit Participation Agreement and in the Shareholders' Agreement (GH).
F. With the exception of the payment of the total final consideration referred to in B. above, the Employee herewith explicitly releases and discharges GI, GH and any subsidiaries or affiliates of such companies (hereinafter the Companies) from any and all liabilities and/or responsibilities, both contractual or in tort, in connection with any employment, loan, profit participation or other contractual relationship between the Employee and any of the Companies.
G. If not already terminated by separate notice of termination or for other reasons, the undersigned hereby terminates his Incentive Profit Participation Agreement with GI and his Shareholders' Agreement (GH) with GH, effective at the date hereof.
This or any other termination of the Incentive Profit Participation Agreement does not affect the confidentiality obligations as per C.9 thereof which shall continue to be effective for an undetermined period of time
H. This declaration of assignment and general release shall be governed by and construed and interpreted in accordance with the substantive laws of Switzerland.
Place and date: Signature:
Sydney, 15 March 2007 [Signed]
The Employee
One of the rights within that bundle (as was also the case in Federal Commissioner of Taxation v McNeil (2007) 229 CLR 656) was a right to be paid money.
137 Abbott v Philbin has been cited with approval in Australia, including by the High Court in Federal Commissioner of Taxation v McNeil (2007) 229 CLR 656, 671 [51]. In that case the court accepted, albeit as the common position of both parties, that the taxpayer had derived income upon the grant to her of the right to sell shares. In McNeil the taxpayer had a right to receive money as part of a put option under a scheme to buy back the shares of a company. The taxpayer, Mrs McNeil, had held shares in St George Building Society Limited which had been converted into ordinary shares in St George Bank Ltd in 1992. On 12 January 2001 the bank announced an off-market buy-back of ordinary shares under a scheme giving shareholders, including Mrs McNeil, a put option by which they could require the company to purchase shares at the market price on 19 February 2001. The relevant terms were set out in the joint judgment at [5]:
For every twenty ordinary shares held at the record date and rounded down to the nearest whole number, SGL on 19 February 2001 (the listing date) would issue to St George Custodial Pty Ltd (Custodial) as trustee for the shareholder one "sell-back right". This would yield 272 sell-back rights for the taxpayer. The term "buy-back" was used from the perspective of SGL, while "sell-back" was used from the perspective of shareholders. Each sell-back right was to be a put option to oblige SGL to buy back one share for $16.50.
The majority of the court held that the grant of the sell-back rights to Mrs McNeil on the listing date constituted the derivation of income by her. At [51] in the reasons for judgment of the majority their Honours said:
For the reasons stated earlier in these reasons, the Commissioner's submissions that the majority of the Full Court erred should be accepted. In particular, on the listing date, 19 February 2001, when the taxpayer's sell-back rights were granted by SGL to Custodial "for the absolute benefit" of the taxpayer, as stated in the Sell Back Right Deed Poll, there was a derivation of income by her represented by the market value of her rights of $514. That conclusion makes it unnecessary to consider the income nature of the receipt of the proceeds on 2 April 2001.
The derivation for Australian income tax purposes in McNeil made it unnecessary in that case for the Court to consider the income nature of the receipt of the proceeds received subsequently by her on 2 April 2001.
138 The Commissioner contended that Mr Blank, as a taxpayer accounting on a receipts (as distinct from an accruals) basis, only derived money as income upon its receipt. That may be accepted as a generally accurate statement of principle where money is the reward for service of a receipts taxpayer, but it does not follow from the general principle that the right to receive money as part of a bundle of rights is not part of the bundle derived upon receipt of the bundle rather than only upon the later payment of the money. In that context, the Commissioner relied upon the following passage at [2.15] from Parsons RW, Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (The Law Book Company Ltd, Sydney, 1985):
One aspect of [the distinction between cash accounting and accruals accounting] may be noted here: there is no derivation on a cash basis if the taxpayer merely comes to have a right to receive money. There must be an actual or constructive receipt of the money. Where the taxpayer is on an accruals basis in relation to the item, the arising of a right to receive money may however be a derivation. Generally where there is a right to some benefit or to property other than money there cannot be a derivation, whether the taxpayer is on an accruals or cash, until the benefit or property has come to be vested in the taxpayer.
In Brent v Federal Commissioner of Taxation (1971) 125 CLR 418 the High Court held that the taxpayer had only derived income when she received money paid to her as the reward for her personal services. An accruals taxpayer, in contrast, must bring to account amounts which accrue before receipt: see Henderson v Federal Commissioner of Taxation (1970) 119 CLR 612. The passage from Professor Parsons, however, does not state a general rule that a receipts taxpayer does not derive the monetary component of a bundle of rights (including a future right of payment of money) when the bundle of rights are received. The time of derivation for a receipts taxpayer, such as Mr Blank, depends upon the correct identification of what he received as the reward for his service. Mr Blank's entitlement to be paid money was one of a number of interconnected, and inseparable, rights derived as part of the package of rights and obligations received upon the several grants of GS, phantom units and PPU over the years of employment.
139 The Commissioner also relied upon Tagget v Federal Commissioner of Taxation (2010) 188 FCR 128 in support of the proposition that Mr Blank was assessable at the time of his receipt of the money and not at the earlier time of receipt of the GS, phantom units and PPU. In Tagget, the Full Court considered the time of derivation of the receipt of a parcel of land which had been transferred to the taxpayer in 2005 pursuant to a deed executed in 1998 which was subject to future contingencies. The value of the parcel of land in 1998 was $450,000 but when transferred to him in 2005 it had a value of $1.2 million. The Full Court held that the taxpayer had derived the parcel of land when received in 2005 rather than in 1998. The Court distinguished Abbott and said at [30]-[31]:
The appellant's case is not analogous to Abbott. There, the House of Lords held that the value of the perquisite received by the taxpayer should be taken in the year when the options were granted because it was in that year that the options were income. The options were unconditional, and could be exercised at any time without any further voluntary act of the grantor. In the present case, the exercise of the rights which the appellant received under the deed of November 1998 was conditioned upon certain stages having been reached in the development, and commercial exploitation, of Tanglewood Estate. As pointed out on behalf of the Commissioner, as it happened, the appellant was never in a position unilaterally to call for the transfer of Lot 157. What matters for present purposes is that, in November 1998, he was not in a position to have done so. He was in the position of a person to whom conditional executory promises had been made, under which he would be remunerated for services rendered. Whether he would ever receive the contemplated remuneration was, in 1998, entirely a matter for the future.
At base, there were only two questions which arose before the primary judge: in what year was the relevant item of income derived within the meaning of s 6-5(2) of the 1997 Act, and what was the amount of income so derived. A taxpayer who files returns on a cash receipts basis is assessed on the cash received by him or her in the year of assessment because it is the receipt of the cash which constitutes a derivation of income for the purposes of s 6-5(2) of the 1997 Act: see Federal Commissioner of Taxation v Dunn (1989) 20 ATR 356 at 363 and Barratt at 224-225. In the case of such a taxpayer, it will not be to the point that the right to receive the income accrued in an earlier year. Neither will it make a difference that, in some earlier year, a promise to pay the money may have been made by reference to subsequently occurring events.
The Commissioner emphasised these passages in support of the proposition that Mr Blank, as a taxpayer accounting on a receipts basis, did not derive money until the money was received. However, it should first be noted that what was brought to account in Tagget, on the receipts accounting basis, was not money, but the value of the parcel of land: the taxpayer received land upon the transfer, not money. The case, therefore, is authority for the proposition that a taxpayer derives assessable income upon receipt of a reward for service whether or not the reward was in the form of money. Secondly, however, it was significant that the taxpayer in Tagget had not been in the position to call for the transfer of the lot in 1998. The rights conferred upon Mr Tagget in 1998 had been conditioned upon future events which, unless and until they occurred, would not have entitled him to call for the parcel of land. That circumstance can be distinguished from those of Mr Blank who could have called for payment upon termination of employment at any time he chose. The restriction upon the time he could receive the money was not a restriction bearing upon his derivation of the GS or the phantom units. His enjoyment of the fruits of what he received upon the grant was postponed to an event within his control, but the GS and the phantom units had been derived upon their respective grant to him at the time of the grant. The final 300 GS were in no different position.
140 The Commissioner's alternative submissions to support the assessments as ordinary income are to be rejected for the reasons given by his Honour at first instance. The Commissioner contended that his Honour ought to have concluded that the amounts payable to Mr Blank were ordinary income in accordance with the principles in Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 or as income from property in reliance on Federal Commissioner of Taxation v McNeil (2007) 229 CLR 656. His Honour rejected these grounds for upholding the assessment by saying at [94]:
I do not propose to consider the second and third grounds because, in my view, they have no arguable merit. It is sufficient to dispose of the second ground to say that the applicant was not carrying on any business to which the first, as distinct from the second, strand of reasoning in Myer Emporium might attach (see S P Investments Pty Ltd v Commissioner of Taxation (1993) 41 FCR 282 at 297 per Hill J, with whom Burchett and O'Loughlin JJ agreed). It is sufficient to dispose of the third ground to say that the GH analogy is not only irrelevant, but wrong. The relevant company is GI and the applicant held no interest in that company, if it ever held such an interest, upon execution of the Declaration on 15 March 2007.
The principle to emerge from Myer Emporium may be seen to have two strands. The first is that a receipt from a transaction involving the acquisition of property may be business income from a transaction with a profit making purpose notwithstanding that the transaction is outside of the ordinary business activity of the taxpayer and that the transaction is not an incident of the business. That may be so where a profit making purpose is stamped upon the receipt by the transaction giving rise to the receipt. The receipt in Mr Blank's case, however, was from the disposal of the rights which had accrued through participation in plans from 1994 and not from the carrying out by him of any profit making scheme of the kind within the principles considered in Myer Emporium. The application of the first strand of the reasoning in Myer Emporium is also defeated in this case by the fact that Mr Blank, unlike the taxpayer in Myer Emporium, was not conducting a business. The second strand in Myer Emporium may produce an assessable receipt where there has been an assignment of a right to receive interest without the assignment of the loan debt giving rise to the interest: see S P Investments Pty Ltd v Commissioner of Taxation (1993) 41 FCR 282, 290. That strand has no application to the circumstances of Mr Blank because any receipt by him of income was in consideration for the disposal of the whole of those entitlements through which the right to income arose. His Honour was also correct to reject the application of McNeil for the reason given at [94].
141 The decision of the High Court in McNeil that Mrs McNeil had derived income according to ordinary concepts upon the grant of the sell-back rights (including the entitlement to receive an amount of money) made it unnecessary for the Court to consider the operation of the capital gains tax provisions: see at [17]. A conclusion in this appeal that the payments to Mr Blank were not assessable as ordinary income would, in contrast, call for a consideration of the application of the capital gains tax provisions upon his disposal of the bundle of rights which had accrued to him.
142 Mr Blank held assets which he disposed by the declaration. The parties were in agreement that Mr Blank was assessable upon the disposal of his rights if he were not otherwise assessable upon the receipt of money as deferred payment of income. Section 104-25(1) provides that CGT Event C2 happens if, among other things, a taxpayer's ownership of an intangible CGT asset ends by the asset:
(a) being redeemed or cancelled; or
(b) being released, discharged or satisfied; or
(c) expiring; or
(d) being abandoned, surrendered or forfeited.
The declaration made by Mr Blank in 2007 resulted in his ownership of the choses in action ending and thereby the happening of CGT Event C2. That, in turn, calls for the determination of the cost base.
143 Section 104-25(3) provides that a taxpayer makes a capital gain from the happening of a CGT Event C2 if the capital proceeds from the ending of the asset are more than the asset's cost base. The parties agreed, as noted by his Honour at first instance at [49], that the cost base is the market value of Mr Blank's rights at the time he became an Australian resident on 2 January 2002: 1997 Act, s 855-45(2). The parties, however, adduced conflicting evidence about that value. Mr Blank's expert, Mr Lonergan, assessed the value at AUD$103 million, whilst the Commissioner's expert, Mr Samuel, assessed the value at approximately AUD$20 million. His Honour did not finally determine the market value of Mr Blank's rights at the time he became an Australian resident saying at [107]-[112]:
107 On the view I have reached as to the second head of assessability, the outstanding issue under this fourth head, namely, the market value of the applicant's contractual rights under the PPPs at the time he became a resident of Australia on 2 January 2002, does not arise.
108 However, a considerable part of the hearing was devoted to this issue. The only evidence from either side that was tested by the other side was valuation evidence given by the respective expert valuers. Considerable argument was mounted from both sides on the back of that testing, and in deference to that evidence and argument, in the event that this issue is enlivened on appeal because my view on the second head of assessability is held to be wrong, I think I should express my views as to the merit of the methodologies and conclusions reached by each valuer.
109 I have considerable reservations about the premises of Mr Samuel's methodology which, while it professed to adopt the hypothesis of a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm's length (elaborated by the judgment of Isaacs J in Spencer v The Commonwealth (1907) 5 CLR 418 at 441) departed from that hypothesis by denying, implicitly if not expressly, the ability of such parties to do so on reasonable terms and conditions: see Mordecai v Mordecai (1988) 12 NSWLR 58 at 69 per Hope JA, with whom Samuels and Priestley JJA agreed, including, inter alia, those "which a hypothetical prudent purchaser would entertain, if he desired to purchase it for the most advantageous purpose for which it was adapted" per Isaacs J in Spencer at 440-441. This has more recently been referred to as the "highest and best use" of the asset to be valued: Boland v Yates Property Corporation Pty Ltd (2007) 167 ALR 575 at [271]-[274] per Callinan J.
110 The denial has manifested itself in Mr Samuel's opinion as to the market value of the applicant's contractual entitlements under the PPPs as at 2 January 2002 by valuing the forward looking component of the entitlements at nil, as if the applicant terminated his employment as at that date. Mr Lonergan's valuation predicates that the hypothetical parties would be free to negotiate a price as at 2 January 2002 which would allow for inclusion of a going forward component, and in a series of questions I put to Mr Samuel, he agreed that this could be done on a deferred or rebate basis by reference to the date of termination of employment without creating another asset which might require the hypothetical price to be split between two discrete assets.
111 I prefer Mr Lonergan's methodology for obvious reasons; it not only accords with reality, but is supported by the authorities. However, I prefer the input of Mr Samuel's figures into Mr Lonergan's methodology. Mr Samuel conceded in cross-examination if that were done, his valuation would more likely approximate a maximum of AUD77 million as opposed to Mr Lonergan's AUD103 million.
112 While I have only dealt with this issue on a summary basis in the circumstances of the conclusion I have reached in relation to the second head of assessability, had it been necessary for me to determine the issue, the likelihood is that I would have arrived at a figure closer to Mr Samuel's figure of AUD77 million than Mr Lonergan's figure of AUD103 million.
Mr Blank, on appeal, did not press the higher end of the valuation which Mr Lonergan had made but submitted that the Full Court should conclude that the market value was AUD$77 million being the lower end of the range within which his Honour had expressed a tentative view at [112].
144 The issue which divided the parties at trial, and the main point of difference between the valuers in this respect, was the extent to which a valuation of Mr Blank's contractual rights should assume that the hypothetical purchaser of the rights at 2 January 2002 would secure reasonable terms and conditions to ensure that Mr Blank would continue in employment for some agreed period. Mr Samuel's valuation was based upon the view that such terms could not be implied into the hypothetical transaction whilst Mr Lonergan valued the right upon the hypothesis that such terms would be struck between the hypothetical buyer and the hypothetical seller.
145 In Mordecai v Mordecai (1988) 12 NSWLR 58 Hope JA (with whom Samuels and Priestley JJA agreed) said at 69 in application to the facts in that case of the well-established principle in Spencer v The Commonwealth (1907) 5 CLR 418 that it "would be reasonable and probably necessary for the [hypothetical] vendor of the goodwill of the business to offer appropriate restrictive covenants". In Spencer Isaacs J had said at 441 that the hypothetical prudent purchaser should be assumed to seek to purchase "for the most advantageous purpose for which [the land in that case] was adapted": see also Boland v Yates Property Corporation Pty Ltd (2007) 167 ALR 575, [271]-[274]. In Deputy Commissioner of Taxation v Gold Estates of Australia (1903) Ltd (1934) 51 CLR 509 the High Court accepted the observation which had previously been made by Isaac J saying (at 515) in respect of the valuation of land:
The principle expressed in the definition of "unimproved value," as interpreted by the decisions of this Court, requires the hypothesis that the land is available for sale by a seller who is really willing to sell it, and to do so upon reasonable terms and conditions. The question then to be asked is not whether at a given moment he could actually find some definite buyer at a particular price. The existence of a person desirous of buying the land at a fair price must be assumed. "The all important fact … is the opinion regarding the fair price of the land, which a hypothetical prudent purchaser would entertain" (per Isaacs J., as he then was, Spencer v. The Commonwealth). The supposition must be made that a sale is not forced, and that the owner is willing to sell on reasonable terms, and negotiates with a person willing to buy, that the one is not so anxious to sell and the other to buy, as to disregard the effect of any business consideration, and that each is equipped with knowledge of the existing relevant circumstances. But knowledge does not include any uncommon gift of foresight. The question then is what would such a reasonably prudent buyer be prepared to offer to induce such a bona fide seller to part with the land (cf. Commissioner of Land Tax v. Nathan). It is evident that in times of changing and uncertain conditions the correct use of the criterion may produce an estimate materially different from the application of a method of valuation which looks rather to the availability of buyers than the price which a reasonable seller would demand and the hypothetical buyer would give. In the settled conditions of June 1929, the adoption of the correct method or standard of valuing may have had much less importance.
It follows that the valuation to be undertaken of the contractual rights at 2 January 2002 should assume a sale and purchase on reasonable terms. In this context it was correct to assume that the hypothetical purchaser would secure from the hypothetical vendor, and that the hypothetical vendor would readily grant to the hypothetical purchaser, a term that Mr Blank would continue in employment for some agreed period: a bargain to sell rights dependent upon continued employment could not otherwise be made. His Honour was correct, therefore, to reject Mr Samuel's approach and to accept Mr Lonergan's approach as according "with reality, [and] supported by the authorities". His Honour, however, may fairly be understood to have rejected the opinion of Mr Lonergan of the value of the rights hypothetically purchased in preference to Mr Samuel's valuation based upon that methodology as expressed by Mr Samuel during cross-examination. In those circumstances the evidence of Mr Samuel should be accepted and the figure of AUD$77 million can be taken as the cost base on the evidence before the Court.
146 It becomes unnecessary in my view to consider the Commissioner's challenge to the conclusions of the primary judge concerning the timing of the derivation of two amounts which were payable to Mr Blank in 2007 but which were not paid until 2008. His Honour's conclusions flowed from his findings that Mr Blank was a receipts taxpayer who had derived amounts when paid as deferred income and that he was not taxable upon a capital gain from the receipt of an amount upon the disposal of an asset. An issue which arose on that basis was whether the amount to be taxed included payments which fell due in the 2007 year but which had been withheld from payment by Glencore International to be applied in discharge of Mr Blank's obligations to the Swiss tax authorities. His Honour held that Mr Blank had not derived the amounts which had become payable but which had not been received because, for the unpaid amounts to be assessable, there "must be an agreement, direction or other conduct by the creditor" for there to be a constructive receipt and his Honour found that there was no such agreement, direction or other conduct by Mr Blank in the 2007 year: Blank v Commissioner of Taxation (No 2) [2014] FCA 517, [44]. His Honour was correct in making that finding: see Brent v Federal Commissioner of Taxation (1971) 125 CLR 418, 430-1. Furthermore, the Commissioner accepted that Glencore International did not pay the amounts to the Swiss tax authorities on Mr Blank's behalf until the 2008 income tax year. During the 2007 income tax year there was, therefore, simply the non-payment of an amount due to a taxpayer who for the purposes of this argument is assumed to be a receipts taxpayer. On that basis there would not have been derivation of the amount by Mr Blank as an assessable receipt of income in the 2007 year.
147 It is also unnecessary to consider the issues concerning the application of s 23AG of the 1936 Act. Mr Blank had applied to his Honour for leave to reopen his case to rely upon s 23AG but his Honour refused leave on the sole basis that Mr Blank's reliance upon s 23AG could not succeed: Blank v Commissioner of Taxation (No 2) [2014] FCA 517, [41]. The Commissioner contended on appeal that his Honour was correct in his conclusion in light of his Honour's reasoning on the construction of s 23AG but, significantly, the Commissioner also contended that leave should not have been granted in any event on the grounds (rejected by his Honour) that the Commissioner would have been prejudiced in the conduct of the case if leave had been granted.
148 Much of the debate about the application of s 23AG was about whether it permitted an apportionment or attribution of the income derived by Mr Blank (assuming the amounts to be income rather than a capital gain) as between foreign and non-foreign service. Section 23AG(1) relevantly provided:
Where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service is exempt from tax.
It was contended before his Honour that the section relevantly required the excision from Mr Blank's assessable income of so much of the amounts received by him upon his termination of employment and the making of the declaration as had been derived by him from foreign service. Mr Blank submitted that his Honour found that between 1991 and 2007 Mr Blank had been engaged in service as an employee of companies within the Glencore Group for a total period of 5,511 successive days of which 3,686 successive days involved service in foreign countries and 1,825 days involved service in Australia. Accordingly, it was submitted by Mr Blank, that approximately 66.88 percent of the amounts payable to him upon termination and the making of the declaration and assignment was attributable to, and derived from, foreign service that was effectively exempt under s 23AG(1).
149 His Honour rejected Mr Blank's submission on the basis that the apportionment sought by Mr Blank was "neither appropriate nor possible" on the facts. The question of the correctness of his Honour's view arises upon the assumption that the amount was assessable when received as deferred income by Mr Blank as a taxpayer assessable on a cash receipts basis. In that context, his Honour said at [30]-[40]:
30 Notwithstanding the Commissioner's arguments to the contrary, I am of the view that the Amount qualifies as "foreign earnings", if only on the basis that it represents deferred compensation of the applicant as a reward for his services as an employee (see R [102]) and therefore constitutes "earnings", being one of the classes of income qualifying as "foreign earnings".
31 However, the Amount is not exempt from tax under s 23AG(1) because the Amount is not derived by the applicant from foreign service; the applicant, by his own submissions, seems to accept as much; indeed, it seems to be common ground that the Amount is derived by the applicant from both foreign service and service (in Australia) that is not foreign service, and that is not sufficient to qualify the Amount for exemption from tax under s 23AG(1).
32 The applicant's answer to that is that the Amount can be apportioned as between foreign service and service that is not foreign service and the only issue is the basis upon which that apportionment should be carried out. In the applicant's words:
Apportionment based on the period of foreign service is the natural method of apportionment in a case such as the present where there is an undissected lump sum derived from a combination of an employee's service both in and out of Australia.
33 The applicant further observed that apportionment based on the number of days in foreign service compared to the number of days not in foreign service was previously accepted by the Commissioner in Lopez v Commissioner of Taxation (2005) 143 FCR 574 at [75]. The Full Court did not express any view on the Commissioner's acceptance of an apportionment principle where the earnings in question were for foreign service and for service that is not foreign service. The conclusion it reached that no error of law had infected the reasoning of the primary judge made it unnecessary for the court to do so. At [90] the court said:
The conclusion we have reached makes it unnecessary to consider the arguments addressed to apportionment of the Consultancy and Management Fee in the event that it were held to have been received by the appellant in the capacity of an employee of [the Japanese corporation].
34 In my view, there are a number of difficulties with the applicant's answer.
35 First, as noted above, the operative exemption from tax is created by s 23AG(1); it requires the foreign earnings to be derived from foreign service; this means, in my view, exclusively from foreign service and not from service which is in part foreign service and in part service which is not foreign service.
36 Secondly, the only way in which some portion of the Amount can qualify for exemption is if that portion can be said to be derived exclusively from foreign service. It is not possible to identify any portion of the Amount as being derived exclusively from foreign service because the Amount was not calculated by reference to days of service. The Amount was "calculated on the basis of the results of GI (IPP). Solely for the purpose of calculating the amount of IPP, AG has issued to GI GS pursuant to Section [sic] 657CO which shall serve as PPU for the purpose of calculating the Employee's IPP as provided in A.2. below: Clause A.1.1. of the instrument pursuant to which the IPPA 2005 was constituted - see R [36]. The Amount is a "single, undissected amount" to use the words of the High Court in McLaurin v Federal Commissioner of Taxation (1960-1961) 104 CLR 381 at 391, and its apportionment is not appropriate: "In such a case the amount must be considered as a whole: Du Cros v Ryall (1935) 19 TC 444 at 453".
37 Thirdly, s 23AG(1) does not contain the words "to the extent to which" the foreign earnings are derived from foreign service, such as to accommodate a dissection or apportionment of the kind contemplated by s 51(1) of the 1936 Act, according to some reasonable method: see Ronpibon Tin No Liability v Federal Commissioner of Taxation (1949) 78 CLR 47 at 55.
38 In Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447, Gibbs CJ obviously thought the absence of these words was significant, in relation to the operation of s 44(1)(a) of the 1936 Act, when his Honour observed at 458-459:
There were two possible grounds for holding that the distributions in Federal Commissioner of Taxation v Blakely (1951) 82 CLR 388 and Federal Commissioner of Taxation v Uther (1965) 112 CLR 630 were not assessable income. The first, which appears to have been accepted by Fullagar J. in the earlier case, is that the receipt in the hands of the shareholder was capital in nature, representing as it did, the value of the shareholder's interest in the company. … The second possible ground was that the distribution was not made out of profits … [W]hat appears to be implicit in the judgment of Taylor J. in Federal Commissioner of Taxation v Uther is the suggestion that to come within s 44(l)(a) the distribution must have been made wholly out of profits; it is not enough that there is a distribution of a mass of assets which contains profits. This view may be supported by the fact that the section does not refer to "dividends to the extent to which they were paid to him by the company out of profits", since, in the light of the construction given to s 51 of the Act, the inclusion of the phrase "to the extent to which" would no doubt have allowed a dissection or apportionment to be made of the distribution: cf. Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 55.
39 In Slater Holdings, the relevant question was whether the distribution was made "out of profits"; in the present case, it is whether the foreign earnings are derived "from foreign service". Very different conclusions might be reached if the relevant words were "could reasonably be taken to be attributable to profits derived by the company" or "foreign earnings derived by a person that are reasonably attributable to that foreign service": cf., Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liq) (2005) 225 CLR 488 at [79]-[83].
40 Fourthly, the fact that the Parliament provided for a partial exemption in s 23AG(2) when s 23AG was first inserted into the 1936 Act where the continuous period of foreign service was less than 365 but not less than 91 days, calculated by reference to the proportion of the number of days service as a fraction of 365 multiplied by the foreign earnings, may suggest that if an apportionment of the kind now pressed by the applicant was intended, it would have been provided for in the statute. Tellingly, it was not.
It is plain that to apply s 23AG(1) as if it permitted apportionment is, at best, problematic. The reason his Honour decided against the grant of leave, however, was that his Honour considered the facts of the case to make apportionment "neither appropriate nor possible". At [41] his Honour said:
Unfair as it may seem, I am of the view that apportionment of the Amount into two portions, one being exclusively for foreign service and the other being exclusively for service in Australia, so as to enable the former to trigger the exemption from tax afforded by s 23AG(1), is neither appropriate nor possible
His Honour explained at [36] that the amount received by Mr Blank was a single undissected amount which was not capable of apportionment and there is, with respect, no error in finding that no apportionment was possible where the amount was seen as assessable upon receipt as his Honour held.
150 The Commissioner had also submitted to his Honour, and maintained on appeal, that he would suffer prejudice if Mr Blank were allowed to reopen the case. His Honour had rejected the Commissioner's submission saying at Blank v Commissioner of Taxation (No 2) [2014] FCA 517, [21]:
Seventhly, no relevant prejudice will be occasioned to the Commissioner if the court permits further argument other than costs, which can be assuaged by appropriate costs orders: see De L v Director-General at 217; although the Commissioner disputes this. The Commissioner, unlike other litigants, has no personal interest in the outcome of the litigation. He serves the public interest by seeking to properly administer the tax law (cf., s 8 of the 1936 Act). He suffers no prejudice from the mere fact that the grant of leave may result in the taxpayer being able to claim a benefit to which he is entitled (cf., Brown v Federal Commissioner of Taxation (1999) 99 ATC 4516 at [51] per Hill J (no prejudice to Commissioner from extension of time to object unless the effluxion of time adversely affects the Commissioner's ability to defend the assessment) (affirmed on appeal in Federal Commissioner of Taxation v Brown (1999) 99 ATC 4852); Trustees of Post Office Staff Superannuation Scheme v Commissioner of Taxation (1999) 94 FCR 268 at [28] per Hill J (quantum of deduction irrelevant to extension of time application)). In contrast to ordinary inter partes litigation, the interests of justice are best served by allowing, in an appropriate case, a taxpayer to re-open his case to correct an inadvertent omission which, if refused, would result in the incorrect application of the tax law to the facts of the case. Indeed, similar considerations apply where it is the Commissioner rather than the taxpayer who wishes to amend his case due to inadvertent error. See, for example, Federal Commissioner of Taxation v American Express Wholesale Currency Services Pty Ltd (2010) 187 FCR 398 at [128], [186]-[197].
The Commissioner submitted on appeal that the prejudice that would be occasioned by Mr Blank being given leave was of a different kind from that considered, and rejected, by his Honour. The Commissioner's submission to his Honour was not that he would suffer prejudice of the kind that a private litigant might suffer in like circumstances but that the conduct of the case, and therefore its correct outcome, would be compromised by allowing Mr Blank to re-open his case to rely upon s 23AG and the facts upon which that section depended.
151 The Commissioner maintained the submission on appeal that the case would have been conducted differently before his Honour had the issues concerning s 23AG been raised at trial and pointed to matters about which Mr Blank would have been cross-examined and other evidence that may have been led if the issue had been raised at trial. The way the case had been conducted at trial did not call for any factual investigation going to the apportionment or attribution of any part of the amount received by Mr Blank to his foreign service either before or after 2 January 2002, and that there was, similarly, no exploration about the facts necessary to enliven the exemption in s 23AG(2) had s 23AG(1) been relied upon by Mr Blank from the outset. Sub-section 23AG(2) also raised for consideration the extent to which payments to Mr Blank were exempt from tax in Switzerland and that was not a topic explored either by cross-examination or by direct evidence. The submission by Senior Counsel for the Commissioner about prejudice to the Commissioner's case if Mr Blank had been granted leave, therefore, has substance and, therefore, I would refuse leave on that basis had it been necessary.
152 Accordingly, I would allow the appeal to remit the objection decision for Mr Blank to be assessed upon a capital gain.
I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Pagone.