Davies v Deputy Commissioner of Taxation

Federal Court of Australia|2015-07-31|Before: Perram J

Introduction 1 At issue in this taxation appeal is the correct tax treatment of shares and options issued to Mr Davies' company, Dalara Investments Pty Ltd ('Dalara'), in the listed entity, Whitehaven Coal Ltd ('Whitehaven'), on the following dates: Date Security Number Issue Price 14 December 2009 Shares 2,500,000 $1.55 14 December 2009 Options 1,666,666 $1.70 31 October 2010 Options 1,666,667 $1.70 31 October 2011 Options 1,666,667 $1.70

2 The shares and options were issued to Dalara as the remuneration paid to Mr Davies for serving as an executive director of Whitehaven. Throughout the period 2009-2011 the share price of Whitehaven escalated. 3 Dalara acquired the right to have these shares and options issued to it on 27 April 2009 under the terms of a deed although, as will be obvious from [1] above, the actual allotments took place later. 4 When an employee or director acquires shares or options under what is generally called an employee share scheme they are required to return as assessable income the amount of any discount to the market value at which the shares or options have been issued. Where, as here, the income was made by an entity (Dalara) other than the employee or director (Mr Davies) but the employee or director (Mr Davies) was an associate of the employer (Dalara), s 139D(2) of the Income Tax Assessment Act 1936 (Cth) ('the 1936 Act') attributed the income to the employee or director (Mr Davies). Consequently, whilst the transactions in this case concern Dalara, s 139D(2) imposed the tax obligations which existed on Mr Davies. Whilst those provisions of the 1936 Act were repealed on 14 December 2009, provisions with a similar effect now exist in the Income Tax Assessment Act 1997 (Cth) ('the 1997 Act') in Div 83A: see ss 83A-25 and 83A-305. 5 The question which arises in this case is the time at which the discount on the value of the shares and the options is to be calculated. Is it to occur at the date of the deed (27 April 2009), when the Whitehaven shares were trading at a low price, or is it to happen as at the vesting dates under the deed (14 December 2009, 31 October 2010 and 31 October 2011) when the higher Whitehaven share price will result in a larger discount spread over three years? 6 In his income tax returns Mr Davies took the former view. He therefore returned the discounts as income in the 2008-2009 income year on the basis that the valuation was to take place on 27 April 2009, the date of the deed. In issuing amended assessments the Deputy Commissioner took the latter view, resulting in amended assessments which included shortfall interest and penalties as follows: Income year Additional Income Tax shortfall Penalty SIC 2009 ($620,624) Nil Nil Nil 2010 $11,042,465 $4,908,670.12 $1,227,167.50 $727,050.79 2011 $8,483,933 $3,945,028.85 $986,257.20 $275,678.16 2012 $7,003,756 Nil Nil Nil

7 The issues which arise between the parties are as follows: (a) are the options issued to Dalara to be brought to tax under Div 13A of the 1936 Act as applied by s 83A-15(2) of the Income Tax (Transitional Provisions) Act 1997 (Cth) ('the Transitional Act'); (b) if not, are they to be brought to tax under Div 13A of the 1936 Act as it stood on 30 June 2009 because the deed of 27 April 2009 gave Dalara a right to acquire shares even if that right was contingent; and (c) if 'no' to (a) and (b), should Mr Davies be charged shortfall penalty. Here the question turns on whether the arguments underlying (a) and (b) were reasonably arguable. 8 For the reasons which follow I accept that Mr Davies is correct about (a) but incorrect about (b). Consequently, the issue in (c) does not arise. I will hear the parties on costs, after which I will make formal orders allowing Mr Davies' appeal.

Facts 9 Mr Davies is an experienced mining engineer who has worked in the mining industry since 1973 for a number of well-known outfits including BP Coal, Agipcoal, Rio Tinto, Excel, XLX and, more recently, Whitehaven. Because it is relevant to his claim based upon estoppel it is useful to know that as a result of his long experience in the industry, Mr Davies became personally acquainted with several men who had, by the time of the events giving rise to this litigation, become directors of Whitehaven. 10 These were Mr Haggarty whom Mr Davies met in around 1984, Mr Plummer whom he met sometime around 1994, Mr Conde whom he met in around 2004 and Messrs Mende and Kundrun whom he met in Venezuela sometime around 2000-2006. The nature of these relationships was both professional and cordial, a matter of some significance. 11 By 2007, all but Mr Davies had become involved in the management of Whitehaven which was then unlisted. It had been originally incorporated in 1999 to develop the Canyon opencut coal mine near Gunnedah. Significant production at that mine started in around 2000. By 2007 Whitehaven had acquired a 70% interest in the Tarrawonga opencut mine and a 40% interest in the Werris Creek opencut mine. Most of the coal which was mined was sent via Newcastle to major steel mills and power utilities in Asia. In addition to these operating mines, Whitehaven also held interests in several exploration licences and was about to commence production at three other mines. As at June 2007, Whitehaven contemplated that these projects would be producing around 21 million metric tonnes per annum by the 2011 financial year. In short, Whitehaven was well positioned in 2007 to take advantage of what was to be a good time for Australian coal miners. 12 By a prospectus dated 3 May 2007, Whitehaven offered to the public 1.9 million shares at $1 per share. This was not, by any means, its first substantial allotment. Indeed, following this modest float, Whitehaven had 323 million shares on issue. According to that prospectus, 86% of those shares were issued to management at earlier times. 13 As at 3 May 2007, the directors of Whitehaven and their related shareholdings were reported to be as follows: Director Registered Holder Shares Options John Conde Trelawney Waters Pty Ltd as trustee of the Trelawney Super Fund 250,000 - Keith Ross Keith Ross 7,292,227 - Keith Ross and Alison Ross as trustees of the Ross Family Trust 6,923,000 - Alison Ross 20,000 - Tony Haggarty HFTT Pty Ltd as trustee of the Haggarty Family Trust 15,000,000 6 (exercisable over a maximum of 22,020,657 shares) Tony Haggarty 160,000 Andy Plummer Ranamok Pty Ltd as trustee of the Ranamok Family Trust 15,000,000 6 (exercisable over a maximum of 22,020,657 shares) Hans Mende Hans Mende & Ingrid Mende as trustees of the Mende Family Trust 21,428,333 - Fritz Kundrun as trustee of the Kundrun Family Trust 21,428,333 - AMCI International AG 53,951,500 - Neil Chatfield Neil Chatfield 250,000 - Alex Krueger FRC Whitehaven Holdings BV 131,650,000 -

14 It will be noted that Mr Davies was well acquainted with these directors apart from Mr Krueger. 15 Mr Davies became aware of Whitehaven's plans to list shares on the ASX and, in due course, subscribed for 125,000 shares as part of a pre-float issue. His initial involvement with Whitehaven was thereafter a modest one. However, in 2008 Whitehaven approached him to provide assistance to it in relation to its operations, operations strategy and the recruitment of key operational personnel. He entered into an advisory agreement with Whitehaven in around April 2008 via Dalara. 16 Mr Davies is the sole director of Dalara and its only employee. It appears that Dalara is the trustee of the Davies Family Trust. Mr Davies' appeal statement suggests that Dalara was the trustee of the AJ and LM Davies Family Trust, a discretionary trust of which Mr Davies was one of the objects. I am not able to account for this difference between these two trusts, if any, but whatever they are they are not material to any issue in this case. 17 In any event, Mr Davies' consultancy role for Whitehaven continued for a number of years until 2013 and was certainly in place in 2009 when the central events in this case took place. 18 As at October 2008, there was a view within the Whitehaven board that the company should let go its managing director. Mr Haggarty spoke with Mr Davies and suggested that he, Mr Haggarty, would become the managing director and that Mr Plummer, then a non-executive director, would become an executive director. Mr Haggarty had said 'We want to put the old team back together.' This was a reference to their prior professional relations. 19 Up until now Mr Davies' consultancy role had occupied 1-2 days per week of his time. But in October of 2008 the managing director was, indeed, removed and Mr Davies then found himself working 3-4 days per week. It was shortly after this time that Mr Haggarty suggested to Mr Davies that he should take up a role as an executive director. The principal reason for this change in Mr Davies' role from consultant to executive director was, it appears, to enhance Mr Davies' authority within Whitehaven and to bring about the changes within Whitehaven that Mr Haggarty believed were necessary. 20 The matter of his directorship was raised again in early 2009 when Mr Haggarty reported to Mr Davies the other directors' enthusiasm for his appointment. The issue of remuneration was raised and Mr Davies indicated that if he were to serve on the board he wished to have some 'skin in the game'. He suggested that a share and option package similar to Mr Haggarty's, except with perhaps only 10 million options, might be suitable. 21 In January 2009, Mr Haggarty informed Mr Davies that the other directors were content to offer a package which would see him subscribe for 2.5 million shares at market price and the granting of an option to purchase 5 million shares at the market price as at the date of the grant of the options (most likely some time in 2009). Mr Davies indicated that he agreed that this would be acceptable. 22 The board then met on 29 January 2009 at which time it was agreed in principle that Mr Davies should become an executive director. Not long after that, Mr Haggarty obtained a volume weighted average price ('VWAP') for Whitehaven stock over periods of 1, 5, 30 and 60 days. As a result of this exercise, he suggested to Mr Conde that the strike price for the options should be $1.70, being a 'small premium to market and 30 day VWAP, but a substantial premium to 60 day VWAP' which was then $1.24 per share. With this Mr Conde agreed. 23 To this point the proposal under discussion involved a single one-off allotment of five million options. Mr Haggarty then suggested to Mr Davies that the vesting dates should instead be spread over three years with two million vesting immediately, two million one year later and the final one million in two years. Mr Davies was content with this. 24 In the period leading up to 12 February 2009 there were discussions within the board about Mr Davies' appointment and the terms of the option package. Ultimately, these resulted in a proposal within Whitehaven to offer the executive directorship to Mr Davies as set out above but with three equal tranches of approximately 1,666,666 options over three years rather than three tranches of 2,000,000, 2,000,000 and 1,000,000 over the same period. 25 On 12 February 2009 Mr Conde sent Mr Davies an email which set out what the board was now willing to grant Mr Davies. The email was as follows: 'Dear Allan, May we speak please, when convenient, about the vesting arrangements for the options? After discussion this morning within the Board, we noted that option arrangements within the company vested in equal instalments over three years and, in some cases, had hurdle prices associated with the different years. The vesting dates normally start 12 months after the award date. We feel that the circumstances surrounding your joining the Board are different, but, being mindful of the option arrangements put in place for others, we are wanting to propose the following as a revised vesting schedule (bearing in mind that you have been involved with Whitehaven since October 2008): • 5 million options in three equal tranches of 1.667 million with a strike price of $1.70 • First tranche of 1.667 million options to vest 31 October 2009 • Second tranche of 1.667 million options to vest 31 October 2010 • Third tranche of 1.667 million options to vest 31 October 2011 • All options to expire on 31 October 2013 if not exercised • All options to be preserved in the event of a change of circumstances of Whitehaven Coal e.g. capital reconstruction The proposal as regards you initial purchase of shares is confirmed - Whitehaven will issue 2.5 million new shares to you at the 5-day VWAP (~$4 million). Regards John.' 26 This email was sent on Thursday 12 February 2009 after a board meeting. Mr Davies was not, it is fair to say, altogether happy with the proposal. He spoke with Mr Conde on Friday 13 February 2009 about this topic, who then spoke with Mr Haggarty. Mr Haggarty sent Mr Davies an email on Saturday 14 February 2009 in which he stressed the soundness of the proposal communicated on Thursday 12 February 2009 and his regard for Mr Davies, both at a personal and business level. On the Sunday Mr Davies changed his mind and formed the view that the proposal was reasonable and this he communicated to Mr Haggarty that day by way of email. 27 In all of these discussions and emails Mr Haggarty and Mr Conde made statements about what the board thought or would accept. When Mr Conde sent the email of Thursday 12 February 2009 it is apparent that the Board had approved him making the offer. The effect of Mr Davies signifying his agreement on Sunday 15 February 2009 was that he and Whitehaven had agreed that if it appointed him as an executive director it would allot him shares and options in accordance with Mr Conde's email. It is likely that a contract between Mr Davies and Whitehaven came into existence at that time. This agreement would subsequently be superseded, as will be seen, by a written agreement involving Dalara. 28 I accept that Mr Haggarty and Mr Conde expressed to Mr Davies, throughout the negotiations, that they personally were very supportive of Mr Davies' joining the board as an executive director. When, for example, Mr Davies was considering the offer over the weekend, Mr Haggarty said to him by email: 'In any case, I value working with you greatly on both a business and personal level and I hope that we can sort this out satisfactorily.' 29 Mr Haggarty also conveyed his understanding of what the rest of the board thought: 'From an analytical point of view, I think the proposal that the Board has agreed to is reasonable, based on the analysis of market benchmarks etc. I think there is a view that it is quite a generous deal (e.g. John and Neil don't have any options) and I would not be confident of them being willing to improve it. I think they feel in a dilemma because from a personal point of view, John and Neil are very keen to have you on the Board as are Andy and I and, while Alex and Hans don't know you very well, they have also expressed very positive sentiments.' 30 A meeting of the directors was called for Thursday 19 February 2009. In anticipation of being appointed a director, Mr Davies attended the meeting. At the meeting a signed copy of his consent to act as a director, dated 19 February 2009, was tabled. The board unanimously resolved to appoint Mr Davies as a director. 31 Neither at the meeting, nor during the antecedent negotiations, was any mention made by Mr Davies, Mr Conde or Mr Haggarty of the fact that, as was the case, Whitehaven could not issue the shares or options to Mr Davies in the manner contemplated without first obtaining the approval of the company in general meeting. This flowed from the fact that once he was a director, the prohibition in s 208 of the Corporations Act 2001 (Cth) on a public company conferring a financial benefit on a 'related party' without, in effect, the consent of the company in general meeting would apply (see also ASX Listing Rule 10.11 to similar, and parallel, effect). 32 Despite the fact that shareholder approval does not appear explicitly to have been mentioned during the negotiations, it is apparent that it was nevertheless a matter of which the parties were aware. Mr Davies says that prior to the directors' meeting held on Thursday 19 February 2009 he had been shown a draft of a deed (which Dalara would later execute in April 2009) and that this draft referred to the need for approval of the arrangement by the company in general meeting. 33 Mr Davies says, and I accept, that he was aware of this requirement before that meeting. I infer that the board was also cognisant of this legal requirement. Mr Davies says that, nevertheless, he was unconcerned about the possibility that the share and option package might be rejected by a general meeting. This was because of his relationship with the directors and his belief that between them they controlled more than 50% of the shares in Whitehaven. In consequence, Mr Davies believed the share and option package was a 'done deal'. His negotiations with Mr Haggarty and Mr Conde, which had resulted in Mr Conde's email of 12 February 2009, had not, it is worth noting, contemplated any remuneration for his services as an executive director beyond the share and option package itself. This had the consequence that if the arrangement had not been approved then Mr Davies would have been obliged to work as an executive director but without remuneration, at least in terms of the strict legal content of the arrangement he had with Whitehaven. 34 He was willing to run that risk, I infer, because he believed it to be, in effect, non-existent. The deal had been done, most of the directors were his friends, all had signed off on the arrangement and Mr Davies believed that between them they controlled enough shares to guarantee the share and option package would be approved at any general meeting. 35 Mr Davies contended in this Court that, as a result of the directors' meeting on Thursday 19 February 2009, he had not only a contractual right, albeit a contingent one, against Whitehaven but also enforceable rights, by way of an equitable estoppel, against the directors themselves to require them to use their voting rights to ensure that any such resolution would be passed. How could such an estoppel arise? Here the answer was that the conduct of the directors themselves was such as reasonably to give rise to a belief in Mr Davies that they had bound themselves in an enforceable way to vote in his favour. 36 Whilst I accept that Mr Davies genuinely believed that the directors would ensure that the share and options package would pass at a general meeting, I do not think that the directors, in fact, did or said anything that could reasonably have been understood by Mr Davies as signifying that they were binding themselves to act in a particular way. In part, this is because of the absence of any statement to that effect alleged to have been made by any of them. More significantly, it is because the real motivation for Mr Davies' belief that they would vote appropriately at a general meeting was that he knew these men and believed they would honour Whitehaven's obligations. Thus whilst Mr Davies did indeed regard the risk that the directors would not vote as he expected as non-existent, this was not because he believed that they had bound themselves to him in some legal sense but because he trusted them. 37 As will be seen below, this trust was entirely well-placed. 38 On 27 April 2009, Mr Davies signed a deed on behalf of Dalara entitled 'Share Subscription and Option Deed'. Although it is likely that contractual relations came into existence as a result of Mr Davies' email of Sunday 15 February 2009, this deed supplanted and formalised that agreement with a new one involving Dalara. In any event, it was not suggested that any consequences flowed from the difference in the dates of these two agreements. Both occurred in the 2008-2009 income tax year. 39 On the same day that Mr Davies joined the board, Whitehaven entered into a merger implementation deed under which Whitehaven and another entity, Gloucester Coal, would be merged. This had potential implications for Mr Davies' agreement although, because it did not ultimately proceed, they did not eventuate and may be passed over. More relevant is the press release issued by Whitehaven on the same day because it can only have solidified Mr Davies' pre-existing understanding that the directors could control a majority of the shares in a general meeting. The statement was as follows: 'Directors of both companies are strongly supportive of the proposed merger and Whitehaven Directors have resolved unanimously to recommend that shareholders accept Gloucester's offer in the absence of a superior proposal. Whitehaven Directors have also indicated that they intend to accept the Gloucester offer in respect of their own shareholdings (which collectively represent 74% of Whitehaven shares) in the absence of a superior proposal.' 40 Here, then, was a public statement by the directors that they controlled 74% of the shares in Whitehaven. However, it is unlikely that Mr Davies' belief as to this matter persisted much beyond 25 March 2009. On that day, Whitehaven announced to the ASX that its previous statement that the directors controlled 74% of the shares had been incorrect and that the true figure was 33.67%. The press release explained that Mr Krueger did not have a relevant interest in shares which had formerly been attributed to him and a similar, although not identical, situation obtained in relation to the shares which had been formerly attributed to Mr Mende. In any event, it was clear from 25 March 2009 that the fact that Whitehaven's board did not have majority control of the company was publicly available information. 41 I think it difficult to conclude that Mr Davies can have been ignorant of this development. He was a director of Whitehaven and it formally notified the ASX of the change. It would be most unlikely that such a communication could have happened without the board being aware of it, particularly since it was, in terms, about the board itself. I conclude that, on 25 March 2009, Mr Davies knew that the board could not guarantee the approval of the shares and options package. 42 Whatever the position was when Mr Davies was appointed as a director on 19 February 2009, he cannot, therefore, have believed in April 2009 that the directors could guarantee the outcome he desired. This matters because, as already explained, it was not until 27 April 2009 that the deed between Dalara and Whitehaven was executed. 43 The relevant provisions of this deed were as follows: '2.1 Agreement to subscribe and issue new shares Subject to clause 4.1(a), on the Completion Date: (a) Dalara agrees to pay the Subscription Amount and to subscribe for the New Shares; and (b) Whitehaven agrees to issue the New Shares to Dalara, on the terms of this document. … 3.1 Grant Subject to clause 4.1(b), Whitehaven grants to Dalara, the Options to purchase the Option Shares for the Exercise Price during the Exercise Period on the terms set out in this document. … 4.1 Conditions precedent to performance (a) Clause 2.1 is conditional upon Whitehaven obtaining the Share Approvals; and (b) Clause 3.1 is conditional on Whitehaven obtaining the Option Approvals, (Conditions Precedent). 4.2 Termination if Conditions Precedent not fulfilled If the Conditions Precedent are not satisfied by 31 December 2009 or another date the parties agree in writing: (a) the Options are cancelled; (b) Whitehaven is not required to issue the New Shares and Dalara is not required to pay Whitehaven the Subscription Amount; and (c) this document terminates and it is of no further effect.' 44 Capitalised terms were defined in cl 1.1, relevantly: (a) 'Completion' means completion of the subscription and issue of the New Shares under clause 2; (b) 'Completion Date' means the day that is two Business Days after satisfaction of the Conditions Precedent (as defined in clause 4.1); (c) 'Exercise Price' means $1.70 (as adjusted); (d) 'Expiry Date' means 31 October 2013; (e) 'New Shares' means 2.5 million fully paid ordinary shares in Whitehaven (subject to adjustment); (f) 'Options' means the options to acquire the shares in Whitehaven to the extent set out in Schedule 2 of the deed; (g) 'Option Approvals' and 'Share Approvals' mean, respectively, approval of the grant of options and the issue of shares in general meeting; and (h) 'Subscription Amount' means $1.55 per share. 45 Naturally enough, Mr Davies was anxious to ensure that a general meeting was convened as soon as possible to approve the share and options package. Attempts to convene an extraordinary general meeting before the end of the 2008-2009 financial year were unsuccessful. Delays were encountered when the merger with Gloucester Coal failed to proceed. 46 Various statements were made to Mr Davies during this period that he need not fret and that the general meeting was a mere rubber stamp. These statements were made by people such as Whitehaven's chief financial officer. I do not think they are of any particular moment as they all post-date the deed of 27 April 2009. 47 The annual general meeting was eventually held on 17 November 2009 and the share and options package for Mr Davies was approved by around 86% of the voting rights cast. In accordance with the resolution: (a) Dalara subscribed for 2.5 million shares at $1.55 per share on or around 14 December 2009 (being the 5-day VWAP as at 19 February 2009); and (b) the options were allotted in 3 tranches on 14 December 2009, 31 October 2010 and 31 October 2011. 48 As I have already indicated, Mr Davies prepared his return for the 2008-2009 financial year on the basis that the discount on the shares and options was to be calculated as at the date of the deed, 27 April 2009. 49 The Deputy Commissioner, on the other hand, has approached the matter on the basis that the discount on the shares and options should be brought to tax as at the dates that they vested.

The Application of the Transitional Act 50 Section 83A-15 of the Transitional Act provides: '83A-15 Indeterminate rights (1) This section applies if: (a) you acquired a beneficial interest in a right before 1 July 2009; and (b) on or after 1 July 2009, the right becomes a right to acquire a beneficial interest in a share. (2) Division 13A of the Income Tax Assessment Act 1936 is taken to have applied as if the right had always been a right to acquire the beneficial interest in the share. Amendment of assessments (3) Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment at any time for the purpose of giving effect to subsection (2) of this section.' 51 It is not in dispute that if subs (1) is engaged the effect of subs (2) will be that Mr Davies was correct to return the shares and options in his return for the 2008-2009 financial year. This is because it is accepted that if Dalara had a right to acquire a beneficial interest in the shares in Whitehaven (as subs (2) will, on this hypothesis, deem there to be), then the undisputed operation of Div 13A will be to bring the discount on the options to tax on 27 April 2009. 52 The short question which subs (1) throws up, therefore, is whether Dalara acquired a beneficial interest in a right before 1 July 2009, which after 1 July 2009 became a right to acquire a beneficial interest in a share. No issue was taken by the Deputy Commissioner about the expression 'beneficial interest'. In some contexts, those words might suggest that what was required was that a taxpayer had the right as a beneficiary of some other trust. Mr Davies submitted, and the Deputy Commissioner did not gainsay, that in the case of s 83A-15(1)(a) the words were directed at identifying the property being acquired rather than the capacity in which a taxpayer acquired it. I propose to proceed on the assumption that this is correct. 53 For myself, it appears obvious that the answer to the question posed by s 83A-15(1) is 'yes'. On 27 April 2009 Dalara had a right to have the shares and options issued to it, subject to the contingency of this being approved by a general meeting. This was expressly conferred by cll 2.1, 3.1 and 4.1 of the deed on 27 April 2009. Subparagraph (1)(a) was, therefore, satisfied. 54 Dalara's rights were rights to have allotted to it: (a) the 2.5 million shares, subject to the contingency of shareholder approval; and (b) the 5 million shares the subject of the option agreement, subject to two contingencies: (i) shareholder approval of the agreement; and (ii) the exercise by Dalara of the options. 55 When the general meeting was held on 17 November 2009 and the package was approved the first contingency was satisfied, and Mr Davies then had a right to have the shares and options issued to him. When the options, having then been issued, were later exercised the second contingency was also satisfied. 56 In the case of both the shares and the options, each started life on 27 April 2009 as a contingent right to receive shares. Both became rights to acquire shares after the meeting on 17 November 2009 (in the case of the share package) and on the date of the relevant options' exercise (in the case of the options). This appears to fall directly within s 83A-15(1). 57 The Deputy Commissioner nevertheless submitted that this was not so and that s 83A-15(1) could apply only to rights which were rights to receive property subject only to some uncertainty as to their precise extent or nature. That kind of right could not include rights which were merely contingent. This was because on the happening of the contingency a new right would come into existence. Since the right which then existed would be new it would not be possible to say that the earlier contingent right had 'become' the new right because the word 'become' involved, at the least, a concept of continuity. 58 Support for this construction was said to come from two sources. The first was the Full Court's decision in Fowler v Federal Commissioner of Taxation (2013) 212 FCR 149 ('Fowler') and the second the explanatory memorandum accompanying the introduction of the bill which resulted in the eventual passage of s 83A-15(1). 59 As to Fowler, the Deputy Commissioner submitted that it was direct authority for the proposition that once the shareholders' resolution was passed a new right arose which did not exist before that moment. The facts in Fowler were not materially different to those in this case. The legal question arose under the earlier terms of Div 13A of the 1936 Act. Paradoxically, although s 83A-15(2) purports to apply Div 13A, the effect of the provision, if enlivened, is that its actual terms ensure that Div 13A is applied in a transitional situation in a way in which it did not apply under its former terms. 60 To understand this, one needs to know a little about Div 13A. The provisions with which the Full Court was concerned in Fowler were s 139B(1) and s 139G(1)(c) which were as follows: '139B Discount to be included in assessable income (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. … 139G Meaning of acquiring or providing a share or right A person acquires a share or right if: … (c) in the case of a right - another person creates the right in that person; or …' 61 Both the trial judge and the Full Court were of the view that the surrounding statutory context of Div 13A meant that the right being discussed in s 139B(1) could only be a right to acquire a share: see Fowler at 162-163 [64] per Besanko J (with whom Dodds-Streeton J agreed at 183 [163]); see also at 182 [159]-[160] per Gordon J. The Court's conclusion was that a contingent right to acquire a share (of the kind that both Mr Fowler and Mr Davies had at the time their contractual rights were granted) was not itself a right to acquire a share. The critical passage was at [94] in the reasons of Besanko J: '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.' 62 Gordon J put it this way: '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].' (Emphasis in original) 63 The Deputy Commissioner emphasised the statement of Besanko J that Mr Fowler's rights were to have the matter put to a general meeting for shareholder approval and 'went no further than that'. This was said in the context of an argument that Mr Fowler could have obtained equitable relief against the company. Besanko J was considering the scope of the relief which could have been granted at the time of the antecedent agreement but prior to the grant of approval by the shareholders. What his Honour was saying was that the best Mr Fowler could have done at that time was to obtain an order that the resolution be put to the company in general meeting. It is not obvious that his Honour had any need to consider, or was considering, what Mr Fowler's rights would have been if the resolution had been passed or where those rights came from. 64 The Deputy Commissioner also submitted that the Full Court had concluded that Mr Fowler's right to acquire shares did not exist until the approval at the general meeting was forthcoming. What this showed was the fundamentally new nature of the right which came into existence at the moment of the approval of the resolution. 65 To underscore that aspect of the right in question, Mr Thomas of counsel, who with Ms Bathurst, appeared for the Deputy Commissioner, observed that following the moment at which the company put the resolution to the annual general meeting and until the moment at which the resolution was ultimately passed there was a period of time in which Mr Davies had no rights. This hiatus pointedly showed, so it was said, that the right to have the shares and options issued was a new right. Being new and distinct it could not be said that the earlier contingent right had 'become' the later right. 66 As for the explanatory memorandum, it is necessary first to observe that s 83A-15 is almost identical to one of the provisions introduced into the 1997 Act in Div 83A (which replaced Div 13A of the 1936 Act on 14 December 2009 and in respect of which s 83A-15 is the transitional arrangement). This provision is s 83A-340 and it is as follows: '83A‑340 Application of Division to indeterminate rights (1) This section applies if: (a) you acquire a beneficial interest in a right; and (b) the right later becomes a right to acquire a beneficial interest in a *share. Example 1: You acquire a right to acquire, at a future time: (a) shares with a specified total value, rather than a specified number of shares; or (b) an indeterminate number of shares. Example 2: You acquire a right under which the provider must provide you with either ESS interests or cash, whichever the provider chooses. (2) This Division applies as if the right had always been a right to acquire the beneficial interest in the *share.' 67 The explanatory memorandum dealt with this provision, insofar as it is relevant, as follows: 'Employment benefits that later become ESS interests 1.367 At the time of acquisition it may be unclear whether a right to an employment benefit will result in the receipt of an ESS interest, or it may be unascertainable how many ESS interests will be received. In such circumstances, that right will be considered to have been an ESS interest from the time that the original right to an employment benefit was acquired, if and when it becomes clear that the right to the employment benefit will result in the receipt of a definite number of ESS interests. [Schedule 1, item 1, section 83A-340] 1.368 This is to ensure that employment benefits provided in the form of discounted shares or rights to shares are taxed consistently and appropriately under the employee share scheme rules. 1.369 This provision will apply, for example, to an employment benefit that is a right to an indeterminate number of shares, or to a benefit that may be received in shares, in cash, or in some other form.' 68 Later the explanatory memorandum gave this example: 'Example 1.52: Simple example Faiza is granted rights to an indeterminate number of shares in her employer, Dishwasher Co. She will receive rights to a number of shares in two years' time, calculated on a one-for-one basis with the number of dishwashers she sells over that period. Over the two years Faiza sells 437 dishwashers, and as a result, receives rights to 437 shares in Dishwasher Co. She will work out whether she would be taxed upfront or defer tax under the employee share scheme rules, as though she had received rights to 437 Dishwasher Co shares two years earlier, at the time she received the original right.' 69 The terms of the portion of the explanatory memorandum dealing with the transitional provisions are, perhaps unsurprisingly, very nearly the same. There are complexities with the transitional provisions relating to the moving of the taxing point which have no present relevance. Omitting those portions, the relevant parts are thus: 'Employment benefits that later become ESS interests 1.410 Sometimes it is unclear at the time of acquisition of a right whether [it] will be received in the form of an ESS interest, or it may [be] unclear how many ESS interests will be received as a result of its exercise. If it becomes clear that the right will be received in a definite number of ESS interests, it is taxed under the employee share rules as though it were always clearly as [sic] ESS interest. See paragraphs 1.367 to 1.372 for further discussion of these types of benefits. 1.411 This provision would apply, for example, to an employment benefit that is a right to an indeterminate number of shares, or to a benefit that may be received in shares, in cash, or in some other form. The provision ensures that employment benefits provided in the form of discounted shares or rights to shares are taxed consistently. 1.412 When the nature of the right to an employment benefit as an ESS interest becomes clear, the Commissioner may amend an employee's income tax assessment for the income year in which the taxing point for the ESS interest occurred (based on the treatment of the right as an ESS interest from the time of its acquisition). The Commissioner can amend an assessment relating to an employee share scheme at anytime, for the purpose of a taxing [of] an employment benefit which becomes an ESS interest. 1.413 Rights acquired prior to 1 July 2009, which only clearly become ESS interests after 1 July 2009 (by operation of this rule) will be subject to the current employee share scheme rules. If the operation of the current rules would have them defer tax over 1 July 2009, they will be transitioned into the new rules, consistent with other transitional rights or shares. [Schedule 1, item 83, section 83A-15 of the IT(TP)A 1997]' 70 This was accompanied by the following example (omitting presently irrelevant aspects): 'Example 1.64: Employment benefits that later become ESS interests may be transitioned to the new rules. Lyra is granted a non-transferable right to 4,000 shares in her employer, Waterworks Co, as a part of her total employment remuneration package. Lyra receives this right in January 2008. Lyra will forfeit the right is [sic] she ceases employment with Waterworks Co within five years of acquiring the right. However, Waterworks management reserves the right to grant Lyra the cash value of the shares rather than actual Waterworks Co shares. As it is uncertain whether Lyra will receive shares or cash, Lyra does not have "rights to shares". As such, Lyra's right cannot be characterised as an ESS interest, or as a right to shares under Division 13A of the ITAA 1936, when it is acquired. Lyra remains employed with Waterworks for the five-year period, and receives rights to 4,000 Waterworks shares in January 2013, as Waterworks management decides not to exercise their discretion to provide the benefit in cash instead. She is now considered to have acquired her ESS interests in January 2008. In January 2008 her shares would have been subject to the current employee share scheme rules (Division 13A of the ITAA 1936). Lyra now needs to work out when the taxing point for her rights occurred or will occur under the current employee share scheme rules. …' 71 The Deputy Commissioner submitted that this showed that his construction of the word 'become' was correct. In each case it was, on this view, clear that there was a presently existing right to property and all that remained to be done was to determine some largely adjectival issue such as form or number. The right which ensued was capable, therefore, of being seen as having arisen directly from the earlier right. In that sense, the first right 'became' the second. 72 I do not accept this argument for four reasons. Briefly, these are: first, it is not what s 83A-15 says; secondly, Fowler says nothing on the issue; thirdly, established and binding authority requires the conclusion that the satisfaction of the contingency on 17 November 2009 did not create a new right but merely completed a right which already existed; and, finally, the explanatory memorandum does not contain the implication for which the Deputy Commissioner contends and, even if it did, it would be contrary to authority to crimp the meaning of s 83A-15 by reference to the examples given in it.

(a) The meaning of s 83A-15(1) 73 As to the meaning of s 83A-15(1), what it requires is a right which becomes a right to acquire shares. Unlike the situation in Div 13A itself, it is evident that 'right' in this context cannot be a right to acquire shares; otherwise the provision would be circular. Thus the requirements of subs (1) are three: (a) a right, which is not a right to acquire shares, existing before 1 July 2009; (b) which right becomes another right after 1 July 2009; (c) that latter right being a right to acquire shares. 74 Subject to the Deputy Commissioner's argument about continuity, I can conceive of no reason why a contingent right to acquire shares does not fall squarely within this rubric. The contingent right to acquire shares is not itself a right to acquire shares. That is the ratio decidendi of Fowler. On satisfaction of the condition precedent the nature of that right changes so that it becomes a right to acquire shares. This is what s 83A-15(1)(b) requires. At least in that regard the provision is not ambiguous. This view of the operation of the provision is consistent with the High Court's approach to the operation of conditional contracts in Brown v Heffer (1967) 116 CLR 344 at 350. 75 Of course, that is not an answer to the Deputy Commissioner's argument based on the proposition that the provision cannot apply unless the first right seamlessly becomes the second right without any temporal cessation. I do not, however, think that that issue arises because I do not accept that there was any such cessation. This requires an examination of Fowler.

(b) Fowler 76 The Deputy Commissioner's argument in this regard was based on para [94] of the reasons of Besanko J in Fowler where his Honour said '…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.' (my emphasis). 77 In making that remark, Besanko J was addressing the question of whether the right originally granted to Mr Fowler was, at the date of its grant, a right to acquire shares. His Honour was seeking to identify just what a Court of Equity would then have ordered. There was no occasion for him to consider, and I do not think that he was considering, whether Mr Fowler's right to acquire shares after the resolution approving the allotment was passed was a right which had an antecedent existence. This is so for two reasons. First, it is apparent from para [100] of his Honour's reasons that he was not intending his description of Mr Fowler's rights to be exhaustive but rather as inclusive only and directed at the specific question he was considering: '…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.' (my emphasis) 78 Secondly, the Deputy Commissioner's argument would result in his Honour having drawn the somewhat unusual conclusion that Mr Fowler did not have, at least, the right to have the options issued to him if the contingency was met. If the statement at para [94] is truly to be read as the only right which Mr Fowler had then the Deputy Commissioner's argument encounters the significant, indeed in my view insurmountable, conceptual problem of explaining whence came the obligation on the company to issue the shares once the resolution was passed.

(c) Conditions Precedent 79 Mr Thomas did not shy away from addressing this problem. He confronted it head on at para 30 of his written submissions: '30. Once the members in general meeting passed the resolution put by Whitehaven, a new right arose in favour of Dalara - namely, a right to have issued to it Shares and Options in the terms set out in the Deed. As both the Full Court and Kenny J recognised in Fowler, that right did not exist prior to the resolution being passed.' 80 The first sentence commits the Deputy Commissioner to the position that the right in question was 'set out in the deed' dated 27 April 2009 but did not exist until the passage of the resolution in general meeting on 17 November 2009. It would appear to follow, therefore, that the Deputy Commissioner is committed to the position that throughout the period between 27 April 2009 and 17 November 2009 the right did exist (in the sense that it was set out in the deed dated 27 April 2009) but did not exist (in the sense that there was no right until the contingency was satisfied). 81 I should think it a very unsatisfactory state of affairs if I were required to accede to this contention and to find that Mr Davies' rights exhibited behaviour normally only observed in quantum mechanics. Fortunately, this is not necessary. Conditions precedent can be read either as conditions which must be satisfied before a contract comes into existence at all or as not affecting the existence of the contract but instead conditioning only performance of the obligations already arising under it. Generally, there is a preference for construing such conditions in the second way, that is to say, as going to performance rather than formation: Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 552 ('…unless the contract as a whole plainly compels this conclusion' [that it goes to formation]; see also 541 and 545) ('Perri'). 82 In Fowler both the trial judge and the Full Court proceeded on the basis that Mr Fowler's agreement was one in which the condition went to performance rather than formation. The same is true here. The agreement between Dalara and Whitehaven came into existence on 27 April 2009. The performance of Whitehaven's obligation to issue the shares was conditional on shareholder approval (and in the case of the options, their exercise) but the contract creating that obligation existed from 27 April 2009. 83 For the Deputy Commissioner's contention to be correct, it would be necessary to say that the contractual obligation to issue the shares and options only came into existence on 17 November 2009 (in the case of the shares) and the date of the exercise of the options (in the case of the options). In essence this would require one to conclude that shareholder approval (and, additionally, in the case of the options, exercise) was a condition precedent to the formation of that contractual obligation. But this is what the Court suggested in Perri should not generally be the case. And such a construction would be contrary to that adopted by the Full Court in Fowler in not relevantly different circumstances. 84 The application of Perri in this case can, therefore, only have the outcome that on the formation of the agreement on 27 April 2009, Whitehaven had an obligation to issue Dalara the shares and options, the performance of which obligation was conditional on shareholder approval. Whatever else can be said, Perri says that this obligation, although contingent, existed on 27 April 2009. The Deputy Commissioner's submission that it did not exist prior to 17 November 2009 when shareholder approval was forthcoming is contrary to Perri. 85 Given that Besanko J had embraced the Perri analysis, I am unable to read para [94] of his Honour's reasons as a departure from those principles. Indeed, at para [114] his Honour quoted from the High Court's decision in Federal Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 at 537 [40], which is as follows: '40. The Full Court, [Kiwi Brands Pty Ltd v Commissioner of Taxation (1998) 90 FCR 64 at 72-74] 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.' (my emphasis) 86 His Honour went on at para [116] to say that '[i]n 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'. Accordingly, I do not accept that Fowler is authority for the proposition that the obligation to issue the shares and options only came into existence on 17 November 2009. There may appear to be a tension between that conclusion and the Full Court's conclusion in Fowler that there was no right to acquire shares until the contingency was satisfied. That tension is mediated, however, by the observation that the Court was merely saying that, for the purposes of the section, a contingent right was not sufficient. 87 In those circumstances, the Deputy Commissioner's argument that s 83A-15(1) is not engaged because there is a hiatus between the time at which the resolution was put to the general meeting and the time at which it was passed cannot be accepted. There was no such hiatus, a single right existed across the whole period.

(d) The Explanatory Memorandum 88 Nor do I think the explanatory memorandum affects this conclusion. Paragraph [1.367] says that '[a]t the time of acquisition it may be unclear whether a right to an employment benefit will result in the receipt of an [employee share scheme] interest…'. The word 'unclear' is apt to cover the situation where the right in question is a contingent one. It is true that para [1.367] is speaking of s 83A-340 (the new substantive provision to apply to indeterminate rights after 30 June 2009) but it is not relevantly different to the corresponding transitional provision, s 83A-15. The portion of the explanatory memorandum dealing with s 83A-15 is para [1.410] (above). It is subtly different only in its first sentence: 'Sometimes it is unclear at the time of acquisition of a right whether it will be received in the form of an [employee share scheme] interest…'. Viewed in isolation this might provide some basis for accepting that the right must be more than merely contingent. But that view is dispelled by the fact that the paragraph cross-references para [1.367]: 'See paragraphs 1.367 to 1.372 for further discussion of these types of benefits.'. I am unable to accept that the authors of the explanatory memorandum believed that s 83A-15 and s 83A-340 operated differently. Nor am I able to accept, by reason of para [1.367], that a contingent right was not intended to be included. 89 It is not strictly necessary, therefore, to consider the argument based on the examples proffered in the explanatory memorandum. However, whatever the examples say I do not think that they could change the meaning of para [1.367]. Even if they did, it would be inappropriate to read down the language of s 83A-15 by reference to some theme observed in the examples in the explanatory memorandum: Woodside Energy Ltd v Federal Commissioner of Taxation (2009) 174 FCR 91 at 101 [24] (FC). 90 In those circumstances, I accept that s 83A-15(1) was satisfied in this case. It follows that the appeal must be allowed, the relevant objection decisions set aside and the matter remitted to the Deputy Commissioner for redetermination in accordance with these reasons. I will hear the parties on costs, noting that they have indicated that separate argument on costs will be necessary. 91 This makes it strictly unnecessary to consider the alternative argument. In the interests of completeness, however, I will briefly indicate my conclusions, lest the matter go further.

The Application of Division 13A 92 On the assumption that the transitional provision, s 83A-15, does not apply the question would then be what the outcome would be if the original form of Div 13A were applied. 93 Here there were two arguments. The first was formal only and was that Mr Davies did receive a right to acquire a share under Div 13A on 27 April 2009 when the deed was executed. This submission is contrary to the holding in Fowler and I am bound, as Mr Richmond SC (who appeared with Mr Peadon for Mr Davies) accepted, to reject it. Whether Fowler is consistent with what Perri actually holds or the observations in Sara Lee are not matters with which I need concern myself. 94 The second was an argument that Fowler could be distinguished because Mr Davies had an enforceable right to have the directors vote in his favour at the general meeting and, since they held the vast majority of the shares in Whitehaven, Dalara was to be seen as having an enforceable right from 27 April 2009 to acquire shares. On this view, Mr Davies could have sued Whitehaven to have the resolution put to the members and he could have sued the directors to compel them to vote in his favour. Those two suits would have resulted, so the argument went, in Mr Davies receiving the shares and options. This was to be seen as a feature which distinguished Mr Davies' case from Fowler. 95 Regardless of whether having an enforceable right in that sense would be sufficient to take the matter outside Fowler, the argument cannot, in this case, succeed. This is so for two reasons. First, the evidence does not establish that the directors, in fact, controlled more than 33% of the shares. Thus, even assuming that Mr Davies could have compelled the directors to vote in his favour, the passage of the resolution was not assured. It simply cannot be said, therefore, that after 27 April 2009 he had an enforceable right to compel the allotment of the shares and options. Whilst he initially believed that he had such a right, that belief was incorrect. 96 Secondly, the means by which Mr Davies contended that he had a legally enforceable right against the directors was by means of a promissory estoppel used as a sword. No such claim could have succeeded because: (a) nothing was ever said or done by the directors which could reasonably have given Mr Davies the perception that they were promising that a legally binding state of affairs would come into existence; and (b) Mr Davies believed (correctly) that the directors would support the resolution but his belief was based on his assessment of them as honourable and not on a surmise that they had promised him that they would agree to be legally bound: cf DHJPM Pty Ltd v Blackthorn Resources Ltd (2011) 83 NSWLR 728 at 740-743 per Meagher JA. 97 In those circumstances, the foundations for this argument are not laid.

Conclusion 98 Mr Davies is entitled to succeed. After I have determined the issue of costs I will make orders disposing of the entire matter. In the meantime I will make the following directions: (1) The applicant file and serve any affidavits and submissions on the question of costs together with a draft order substantively disposing of the proceeding within seven days hereof. (2) The respondent file and serve any affidavits and submissions in response together with any competing minute of order within a further seven days. (3) Stand over to 21 August 2015 for the making of final orders if not agreed. 99 I would propose to resolve these issues on the papers unless some substantive reason is presented for requiring an oral hearing. I certify that the preceding ninety-nine (99) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.

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