Fowler v Commissioner of Taxation

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

JUDGE: KENNY J DATE: 21 september 2012 PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 This is a tax appeal brought by Michael Patrick Fowler against a decision of the Commissioner of Taxation ("the Commissioner") to disallow Mr Fowler's objection to an amended assessment for the year of income ended 30 June 2007 ("2007 income year"). The objection was to an amended assessment of income tax and the imposition of an administrative penalty. For the following reasons, I would dismiss Mr Fowler's tax appeal made by his application to this court. For the reasons stated, Mr Fowler did not acquire a right for the purposes of Division 13A until 30 November 2006. It was open to the Commissioner to impose an administrative penalty at the determined rate. 2 In the 2007 income year, Mr Fowler, through Tess Aust Pty Ltd ("Tess Aust"), acquired 742,500 options ("the options" or "the 742,500 options") in Nexus Energy Limited ("Nexus") in respect of his services as a non-executive director of the company. Division 13A of the Income Tax Assessment Act 1936 (Cth) ("the ITAA 1936") concerned with "employee share schemes" was thereby attracted. 3 This tax appeal is primarily concerned with the date on which Mr Fowler acquired a relevant right with respect to the options for the purposes of s 139G of the ITAA 1936. This date determines the amount to be included in Mr Fowler's assessable income for the 2007 income year under s 139B(2) or s 139D(2) of the ITAA 1936, because the amount to be included in assessable income is calculated by reference to market value at the date of acquisition of the right in accordance with s 139CC(2) of the ITAA 1936. The Commissioner considered that the relevant date was 30 November 2006, whereas Mr Fowler maintained that this date was 14 September 2006 or, alternatively, 29 September 2006. 4 When lodging his return, Mr Fowler did not include any amount in respect of the options in his assessable income for the 2007 income year; and he did not make an election in respect of the options for the purposes of s 139E of the ITAA 1936. On the basis of this return, the Commissioner issued a notice of assessment for the 2007 income year in May 2008. 5 Following an audit in 2009, Mr Fowler was issued with a notice of amended assessment, which included an additional $415,800 in his assessable income for the 2007 income year and an administrative penalty. 6 The Commissioner determined that the market value of the options as at 30 November 2006 was $0.56 using the methodology for unlisted rights set out in s 139FC (see below). On this basis, the Commissioner included $415,800 for the 742,500 options issued by Nexus to Tess Aust in Mr Fowler's assessable income for the 2007 year of income under s 139D(2) of the ITAA 1936. It was not in dispute that the amount of $415,800 was correctly included in Mr Fowler's assessable income for that income year if the date of acquisition was correctly regarded as 30 November 2006. 7 The options had less value in September 2006. In a report of 9 May 2011, exhibited to his affidavit of 7 July 2011, Mr Lom, a forensic accountant, assessed that, as at 14 September 2006, the options were worth $31,928, with a value of $0.0430 per option. As at 29 September 2006, the options were worth $75,661, with a value of $0.1019 per option. Mr Lom's evidence was unchallenged. The date of acquisition of relevant rights for the purpose of Division 13A therefore had significant tax consequences for Mr Fowler. 8 Mr Fowler lodged an objection to the amended assessment of primary tax and the penalty. The Commissioner later issued a notice of objection decision disallowing Mr Fowler's objection as to both primary tax and penalty. 9 This is a tax appeal under s 14ZZ of the Taxation Administration Act 1953 (Cth) ("the TAA") against the Commissioner's objection decision. In such proceedings, Mr Fowler has the burden of proving that the assessment is excessive: s 14ZZO. 10 The applicant relied on his own affidavit sworn on 13 May 2011. He also relied on the affidavits of: Neil Robertson Philip sworn on 6 May 2011, Alistair William Haydock sworn on 6 May 2011, Robert Anthony Boyson sworn on 6 May 2011, Ian Zacharia Tchacos sworn on 6 May 2011, Edward Christopher John Munks sworn on 10 May 2010, Paul Lom sworn on 7 July 2011 and Richard Francis Egerton Warburton sworn on 27 July 2011, with their respective exhibits. Save for Mr Lom, all were subject to cross-examination. 11 The two main issues before the Court concerned the identification of the date on which Mr Fowler acquired relevant rights for the purposes of Division 13A (which has since been repealed) and, assuming that 30 November 2006 was the correct date, the rate of the administrative penalty imposed on Mr Fowler.

THE FACTS GIVING RISE TO THE APPEALS 12 Nexus - previously called eNTITy1 Limited - was a public company under s 9 of the Corporations Act 2001 (Cth) ("Corporations Act") and was first listed for quotation on the Australian Securities Exchange ("ASX") on 8 September 2000. When still known as eNTITy1 Limited, the company adopted a constitution ("the constitution"). 13 Mr Fowler was appointed a non-executive director of Nexus on 11 April 2000 and continued as such until 16 November 2007, when he was appointed the non-executive chairman of the board. Shortly after Mr Fowler's appointment to the board in April 2000, Nexus commenced to conduct the business of oil and gas exploration and production. It was conducting that business in 2006 when the issue of directors' options first arose, although at that time the company had not yet engaged in the commercial production of oil and gas. 14 At all material times, Tess Aust, an incorporated company and a resident of Australia for the purposes of the ITAA 1936, was the trustee of the Fowler Family Trust. The Fowler Family Trust was a trust established by deed and a tax resident of Australia for the purposes of the ITAA 1936. At all material times, Mr Fowler was an associate of Tess Aust within the meaning of s 139GE of the ITAA 1936. 15 Nexus instituted an employee share option plan in November 2003. At an annual general meeting on 27 November 2003, the shareholders of Nexus passed an ordinary resolution to approve the issue of options under the Nexus Energy Employee Share Option Plan ("ESOP"). The ESOP was governed by the ESOP Rules ("the Rules"). The resolution was in the following terms: That for the purpose of Exception 9(b) in ASX Listing Rule 7.2 and for all other purposes, the shareholders of Nexus approve the issue of Options under the Employee Share Option Plan as detailed in the Explanatory Memorandum which accompanies and forms part of the Notice. 16 About three years later, the issue of the grant of directors' options in lieu of cash fees arose. There was a board meeting on 26 July 2006, the minutes of which recorded that, at that meeting, the board passed a resolution in the following terms: Accordingly, IT WAS RESOLVED to increase base director's fees to $60,000 per annum and the chairman's fees to $120,000 per annum effective immediately. It was also resolved that directors would be entitled to take part or all of their remuneration in the form of options priced on the same basis as under the ESOP scheme and subject to any shareholder and other approvals required. Directors were to notify the chairman of their preferred mix of remuneration. 17 The company's managing director, Mr Tchacos, subsequently prepared a paper, which was entitled "2006 Employee Share Scheme and Board Options Recommendation" and dated 9 September 2006. The paper recommended the issue of options to employees under the ESOP and the issue of options to members of the board in lieu of cash remuneration. 18 There was a further board meeting on 14 September 2006. According to the minutes of this meeting, when the board met that day, the directors resolved that: [T]he minutes of the meeting held on 26 July 2006, were accepted and the Chairman be authorised to sign as a correct record. 19 Further, the minutes recorded that: The chairman presented a recommendation from the remuneration committee based upon a recommendation to the board from IZT [Mr Tchacos] dated 9th September in which the company's employees and directors remuneration and incentives were outlined. Following discussion on the remuneration philosophy for the company the following board resolutions were agreed to: … IT WAS RESOLVED that the following options be issued to the directors of the company [on] the same terms and conditions as the company's employees share option plan and that shareholder approval be obtained prior to being issued. Directors name Number of options Exercise Price Expiry date Neil Philip 742,500 87 cents 31 October 2007 Robert Boyson 742,500 87 cents 31 October 2007 Michael Fowler 742,500 87 cents 31 October 2007 Alastair Haydock 742,500 87 cents 31 October 2007 Total 2,970,000 20 Also amongst the minuted board resolutions for 14 September 2006 were resolutions approving the issue of options to employees. 21 Subsequently, by a letter dated 26 September 2006 from Mr Tchacos, pursuant to the Rules the Nexus directors invited employees to participate in the ESOP and offered to grant options on the terms indicated in the letter. The letter stated that the offer closed at 5 pm on 29 September 2006 and could be accepted before that time by returning the acceptance form enclosed with the letter. 22 The Rules relevantly provided that: (a) "[a] Participant in the ESOP may only accept an Offer by delivering the duly completed Application Form to the Company at its registered office by 5:00 pm on the Acceptance Date" (clause 4.5); (b) "[a] Participant may accept an Offer in his or her name, or in that of a nominated Associate" (clause 4.7); and (c) "Following receipt by the Company of the completed Application Form the Company shall grant the Options and issue an Option certificate for such Options" (clause 4.8). 23 It was common ground that Mr Fowler did not receive a letter in like terms to the 26 September 2006 letter sent to employees and did not provide Nexus with an acceptance form as referred to in clause 4.5 of the Rules to accept the offer of the options. 24 Nexus announced to the ASX on 29 September 2006 that the company had issued 6,624,300 options at an exercise price of 87 cents per share to eligible Nexus employees pursuant to the ESOP. The announcement also foreshadowed: In addition and subject to shareholder approval at the next Annual General Meeting, a further 4,770,000 million [sic] options are intended to be issued to the Managing Director and the non-executive directors. These options will also have an exercise price of 87 cents per share and will also expire on the [sic] 31 October 2007. 25 At a board meeting on 29 November 2006, the board approved the minutes of the 14 September 2006 meeting subject to minor and non-material amendments. 26 The Notice of Annual General Meeting ("the Notice") that was given to Nexus shareholders for the purpose of the annual general meeting to be held on 30 November 2006 included the following item: 9. Approval for Issue of Options to Michael Fowler To consider and, if thought fit, to pass with or without amendment, the following resolution as an ordinary resolution: "That for the purposes of Listing Rules 7.1 and 10.11 and Chapter 2E of the Corporations Act and for all other purposes, approval is given for the Company to allot and issue 742,500 Options exercisable at $0.87 each on or before 31 October 2007 to acquire ordinary fully paid Shares in the capital of the Company to Michael Fowler on the terms and conditions set out in the Explanatory Statement accompanying this notice with a vesting date of 30 November 2006, subject to resolution 9 being passed." 27 Item 8 of the Explanatory Memorandum accompanying the Notice stated that: Resolution 8 [sic] seeks Shareholder approval for the Company to grant 742,500 Options to Michael Fowler a Director of the Company. Shareholder approval for the grant of the Options the subject of Resolution 8 is sought for the purposes of: • Division 3 of Part 2E.1 of the Corporations Act - which governs the giving of financial benefits to "related parties", e.g. directors of a company; • Listing Rule 7.1 - which generally prohibits a company from issuing more than 15% of its capital within a 12 month period without shareholder approval; and • Listing Rule 10.11 - which requires the grant of securities to a director of a company be approved by shareholders. As part of the annual performance remuneration review of all employees and directors for the year ending 30 June 2006, the Directors recommended the grant of 742,500 Options to Michael Fowler. The exercise price of the Options is 87 cents and will expire on 31 October 2007. The policy for pricing these[] Options was set by the board in May 2005 and is determined by taking a minimum 40% premium to the Volume Weighted Average Price (VWAP) of the Nexus Shares traded on the Australian Stock Exchange in June and July 2006. The price and terms of the Options are the same as those granted to other employees for the same review period. The pricing of the options was then ratified at a board meeting held on 14 September 2006. The purpose of the proposed grant of Options is to honour remuneration agreements and to provide Michael Fowler with added incentive in lieu of salary whilst enabling the Company to preserve its cash reserves for expenditure on its existing business. The number of Options proposed to be granted to Michael Fowler has been determined on the basis that it is reasonable relative to the number of Options offered under the Company's Share Option Plan to other employees of the Company, having regard to their respective levels of seniority in the Company. The Options are being granted for no consideration. Consequently no funds will be raised as a result of the grant of the Options. A total of $645,975 in additional Share capital would be raised if the Options were exercised in full. Subject to Shareholder approval, the Options will be granted on the terms and conditions set out below in this Explanatory Statement. … The proposed grant of Options to Michael Fowler involves the provision of a financial benefit to a related party of the Company and, therefore, requires prior Shareholder approval. … (Emphasis added) 28 The shareholders passed the resolution set out in item 9 of the Notice at the annual general meeting on 30 November 2006. 29 On 8 December 2006, in accordance with rule 3.19A of the ASX Listing Rules, Nexus submitted an Appendix 3Y form, "Change of Director's Interest Notice", to the ASX advising that Mr Fowler's indirect interest in Nexus had changed on 30 November 2006 in that Mr Fowler had acquired a further 742,500 options, with an exercise price of $0.87 and an expiry date of 31 October 2007, through Tess Aust. 30 In its annual report for the year ended 30 June 2007, Nexus stated that it had granted the 742,500 options to Mr Fowler on 30 November 2006; and that the 742,500 options had vested, with a "fair value per option at grant date" of $0.5552. 31 Mr Fowler could not recall when he nominated Tess Aust to acquire the options on his behalf, but in his affidavit he stated that he thought that it was around the time of the board meeting in September 2006. In cross-examination, however, he stated that he thought he made this nomination around December 2006 before Christmas.

RELEVANT LEGISLATION 32 Broadly speaking, under Division 13A of the ITAA 1936, where there was a discount on a share or right acquired in relation to the employment of a taxpayer or services provided by the taxpayer, then s 139B operated to include the discount in the taxpayer's assessable income. Alternatively, where a taxpayer acquired the share or right in relation to the employment of an associate of the taxpayer, or services provided by that associate, then s 139D operated to include the discount in the associate's assessable income. Save for some presently irrelevant exceptions, the discount was included in the year of income in which the share or right was acquired: see ss 139B(2) and 139D(2). Under s 139CC, the discount was the market value of the share or right at the time when it was acquired by the taxpayer less any consideration paid or given by the taxpayer as consideration for the acquisition of the share or right. 33 Again, broadly speaking, a taxpayer acquired a right under an employee share scheme for the purposes of Division 13A where the right was: (1) a right for the purposes of Division 13A; (2) acquired within the meaning of s 139G; (3) acquired in respect of employment or services provided by the taxpayer for the purposes of s 139C; and (4) acquired for less than market value as set out in s 139C(3). 34 Section 139B provided: (1) If a taxpayer has acquired a share or right under an employee share scheme, the assessable income of the taxpayer includes the discount given in relation to the share or right. Note: Employee share scheme is defined in section 139C. … When the discount is to be included (2) Unless subsection (2A) or (3) applies, the discount is included in the taxpayer's assessable income of the year of income in which the share or right is acquired. … (3) If the share or right is a qualifying share or right and the taxpayer has not made an election under section 139E covering the share or right, the discount is included in the taxpayer's assessable income of the year of income in which the cessation time (see sections 139CA and 139CB) occurs. 35 Section 139CC(2) provided: If subsection 139B(2) … applies to the discount, the discount is the market value of the share or right at the time when it was acquired by the taxpayer less any consideration paid or given by the taxpayer as consideration for the acquisition of the share or right. 36 Section 139C defined "employee share scheme": 139C(1) A taxpayer acquires a share or right under an employee share scheme if the share or right is acquired by the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of the taxpayer or an associate of the taxpayer. (2) A taxpayer acquires a share or right under an employee share scheme if the share or right is acquired by the taxpayer in respect of, or for or in relation directly or indirectly to, any services provided by the taxpayer or an associate of the taxpayer. (3) The taxpayer does not acquire a share or right under an employee share scheme if the consideration for the acquisition is equal to, or more than, the market value of the share or right at the time that it is acquired. (4) The taxpayer does not (except for the purposes of Subdivision DA) acquire a share under an employee share scheme if the taxpayer acquires the share as the result of exercising a right that the taxpayer acquired under an employee share scheme. (5) The taxpayer does not acquire a share or right under an employee share scheme if the taxpayer is the trustee of a trust whose sole activities are obtaining shares, or rights to acquire shares, and providing those shares or rights to employees of a company or to associates of those employees. 37 It was common ground that the rights with which this appeal was concerned were acquired under an employee share scheme within the meaning of s 139C and that neither Mr Fowler nor Tess Aust gave any consideration for the purposes of s 139CC(2) (or, presumably, s 139C(3)). Mr Fowler did not contend that his agreement to forego remuneration gave rise to consideration for the purposes of s 139CC. Thus, the discount was equal to the market value of the right at the time it was acquired. 38 Section 139CD defined "qualifying shares" and "qualifying rights": (1) For the purposes of this Division: (a) a share in a company is a qualifying share if: (i) the 6 conditions below are satisfied; and (ii) in the case of a share that a taxpayer has acquired while engaged in foreign service - section 139CDA applies to the share; and (b) a right to acquire a share in a company is a qualifying right if: (i) the first, second, third, fifth and sixth of the 6 conditions below are satisfied; and (ii) in the case of a right that a taxpayer has acquired while engaged in foreign service - section 139CDA applies to that right. Note: Section 139DF excludes certain shares from being qualifying shares. Note: Foreign service is defined in section 139GBA. (2) The first condition is that the share or right is acquired by a taxpayer under an employee share scheme. (3) The second condition is that the company is the employer of the taxpayer or a holding company of the employer of the taxpayer. (4) The third condition is that all the shares available for acquisition under the scheme are ordinary shares and all the rights available for acquisition under the scheme are rights to acquire ordinary shares. (5) The fourth condition is that, at the time the share was acquired, at least 75% of the permanent employees of the employer were, or at some earlier time had been, entitled to acquire: (a) shares or rights under the scheme; or (b) shares or rights in the employer, or a holding company of the employer, under another employee share scheme. (6) The fifth condition is that, immediately after the acquisition of the share or right, the taxpayer does not hold a legal or beneficial interest in more than 5% of the shares in the company. (7) The sixth condition is that, immediately after the acquisition of the share or right, the taxpayer is not in a position to cast, or control the casting of, more than 5% of the maximum number of votes that might be cast at a general meeting of the company. (8) The Commissioner may determine that the fourth condition (see subsection (5)) is taken to have been satisfied in relation to a share if the Commissioner considers that the employer has done everything reasonably practicable to ensure that the condition was satisfied. 39 Section 139DD provided: (1) For the purposes of this Division, a right to acquire a share in a company is never acquired by a taxpayer if the following 2 requirements are satisfied. (2) The first requirement is that the taxpayer loses the right without having exercised it. … (3) The second requirement is that the company was, at the time the right was acquired, the employer of the taxpayer or a holding company of the employer of the taxpayer. … (4) Section 170 does not prevent the amendment of an assessment at any time for the purpose of giving effect to this section. 40 Division 13A made specific provision for calculating market value. In the case of unlisted rights, s 139FC provided: (1) If the right is not quoted on an approved stock exchange on that day, the market value is the greater of: (a) the market value, on the particular day, of the share that may be acquired by exercising the right, less the lowest amount that must be paid to exercise the right to acquire the share; and whichever of the following applies: (b) if the right can not be exercised more than 10 years after the day when the right was acquired - subject to section 139FE, the value determined in accordance with regulations for the purpose of this paragraph or, if no such regulations are in force, the value determined in accordance with sections 139FJ to 139FN; (c) if the right can be exercised more than 10 years after the day when the right was acquired - the greater of: (i) the arm's length value of the right as specified in a written report, in a form approved by the Commissioner, given to the person from whom the taxpayer acquires the right by a suitably qualified valuer; and (ii) the value that would have been determined under paragraph (b) if the right could be exercised 10 years after the particular day. (2) In calculating, for the purpose of subsection (1), the market value of the share that may be acquired by exercising the right, subsection 139FAA(1) applies as if the share were acquired on the particular day. 41 Section 139FF provided that: To avoid doubt, if a person acquires either the beneficial interest or the legal interest in a share or right, the value that is applicable for the purposes of this Division is the value of the share or right, not the value of the interest in the share or right. Notes: 1. It is the value of the share or right that is relevant because the taxpayer is taken to have acquired the share or right - see section 139G. 2. Double taxation is avoided by section 139DA. 42 As already noted, s 139G set out the events that give rise to an acquisition or provision of a share or right for the purposes of Division 13A. Section 139G stated: 139G A person acquires a share or right if: (a) another person transfers the share or right to that person (other than, in the case of a share, by issuing the share to that person); or (b) in the case of a share - another person allots the share to that person; or (c) in the case of a right - another person creates the right in that person; or (d) the person otherwise acquires a legal interest in the share or right from another person; or (e) the person acquires a beneficial interest in the share or right from another person. In those circumstances, the other person provides the share or right. Nothing in this appeal was said to turn on whether Nexus issued the options directly to Tess Aust or to Mr Fowler, who then assigned them to Tess Aust.

THE PARTIES' SUBMISSIONS 43 In written submissions filed before the hearing, the applicant formulated the issue for resolution as "whether the Options were created pursuant to a contract made on or about 14 September 2006 or, alternatively, on or about 29 September 2006 satisfying the terms of ss 139G(c), (d) or (e)". In these submissions, Mr Fowler's primary argument was that the options were acquired pursuant to s 139G(d) and (e) when he entered into a contract with Nexus to acquire them on 14 September 2006. In the alternative, Mr Fowler submitted that the options were created for the purposes of s 139G(c) on 14 September 2006. On either case, the discount determined under s 139CC(2) was nil. Mr Fowler also advanced these arguments at the hearing. 44 In written submissions, Mr Fowler advanced a secondary argument that the options were acquired under s 139G(c), (d) and/or (e) when he entered into a contract with Nexus to acquire them on 29 September 2006 in accordance with the offer made to eligible employees of Nexus. In this event, the discount determined under s 139CC(2) was $26,485. 45 In his written submissions, the applicant argued that a contract was formed in relation to the options "without the need for shareholder approval or ratification". The applicant submitted that: (1) "[t]he evidence of those making and accepting offers is that there was no such condition and the relevant minutes are contradictory"; and (2) "such a contract was not void on account of potential or actual breaches of general corporate law rules". Alternatively, the applicant argued that, if there was any condition requiring shareholder consent for the grant of the options to him, it was a condition precedent to performance of the company's obligations under a contract in existence from the date of the communication of acceptance of the offer. On this basis, the applicant submitted that "from either 14 or 29 September 2006 a contract subsisted entitling [him] or his nominee to the Options". According to the applicant, ss 139G(c), (d) and/or (e) were satisfied at this point. 46 In relation to penalty, Mr Fowler's case was that: (1) since there was no shortfall amount under s 284-80 of Schedule 1 of the TAA, there could be no penalty under s 284-75 of Schedule 1 of the TAA; or (2) if there was a shortfall amount, nonetheless his position was reasonably arguable, as defined in 284-15 of Schedule 1 of the TAA, thereby demonstrating that he took reasonable care in submitting his tax return for the 2007 income year; and it was appropriate to remit all penalties. 47 In written submissions, the Commissioner formulated the issue as one concerning "the date on which the applicant or the applicant's associate acquired, in respect of [the] options, either a right to shares or a beneficial interest in a right to shares for the purposes of Division 13A … having regard to the definition of 'acquires' in section 139G of that Act". The Commissioner contended that the options were acquired on 30 November 2006, when the Nexus shareholders approved the grant of the options in an annual general meeting and the options were formally granted to Mr Fowler. The Commissioner maintained that no right or beneficial interest to which Division 13A applied was acquired before that date. 48 The Commissioner maintained that the offer made by Nexus to Mr Fowler in respect of the options was conditional on obtaining the shareholders' approval, with the effect that, as the Commissioner put it in written submissions: a. the condition operated as a condition precedent to formation, such that there was no contract in existence before 30 November 2006 and the offer could be withdrawn at any time until shareholder approval was given; b. alternatively, the condition operated as a condition precedent to performance (a condition subsequent), such that the applicant had no proprietary right or beneficial interest in the options that was capable of being protected or enforced in law or equity until the condition was satisfied; c. further and alternatively, any contractual right that existed before the condition was satisfied was not capable of being a 'right to shares' to which Division 13A of the 1936 Act applied. 49 The Commissioner sought to support the submission that there was no legally enforceable contract before 30 November 2006 by reference to three propositions, namely: (1) the board had no power to grant the options; (2) the express prohibitions on the power of the board to grant the options without shareholder approval indicated that the board did not intend to create legal relations but intended the words "subject to shareholder approval" to operate as a condition precedent to the formation of a contract; and (3) the evidence is unclear as to "if and when [Mr Fowler] accepted the purported offer made by Nexus". 50 As to penalty, the Commissioner's fundamental propositions were that: (1) Mr Fowler had a shortfall amount within the meaning of s 284-80 of Schedule 1 to the TAA as a result of a false and misleading statement in his return for the 2007 income year; (2) having regard to Mr Fowler's position as a company director and the size and nature of the options transaction, it would have been reasonable to expect him to have made enquiries about the tax treatment of options; and (3) since Mr Fowler made no enquiries and failed to keep records of important matters connected with the transaction, a penalty for failure to take reasonable care was justified. On this basis, Mr Fowler was liable to pay an amount of administrative penalty of $48,336.75 for the 2007 income year pursuant to s 284-75 of Schedule 1 to the TAA.

Division 13A rights 51 Division 13A of the ITAA 1936 is concerned with the acquisition of a share or a right under an employee share scheme, as defined in s 139C set out above. There is no statutory definition of the "right" with which the Division is concerned. The nature of this right must be discerned from the text of Division 13A: see Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) (2009) 239 CLR 27 at 46-47 [47]. The legislative history of Division 13A is also indicative. 52 The text of Division 13A indicates that the "right" to which its provisions refer is a "right to acquire a share in a company". Thus, it is only possible for a taxpayer to make an election under s 193E if the rights acquired by the taxpayer satisfy the necessary conditions for "qualifying rights". Section 139CD(1)(b) indicates that, for there to be a qualifying right, there must first be a right to acquire a share in a company as well as the satisfaction of the relevant specified conditions in that section. Various other provisions of Division 13A support this construction of the intended meaning of the word "right" in the Division: see, for example, ss 139DD, 139FC(1), 139F, 139FE, 139FF, 139G. Further, the predecessor provision to Division 13A, s 26AAC of the ITAA 1936, specifically referred to a "right to acquire a share in a company". 53 An immediate and unconditional option to acquire shares constitutes a right to acquire shares for the purposes of Division 13A. In this circumstance, in the ordinary case, when an option over unissued shares is granted, s 139G(c) will be satisfied. This conclusion follows from the nature of an option of this kind and is in accordance with authority: see Commissioner of Taxation v McWilliam [2012] FCAFC 105 ("McWilliam").

Options conditional on third party approval 54 An option over unissued shares is a contract made by a company that, if certain conditions are met, it will issue or allot the shares, if and when the option-holder exercises the option. The option-holder is free to decide whether to require the issue or allotment at a future time. See, for example, Green v Crusader Oil NL (1985) 10 ACLR 120 ("Green v Crusader Oil") at 124; Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57 ("Laybutt") at 76; and Hilder v Dexter [1902] AC 474 at 482-483. If the option-holder decides to exercise the option, then the option-holder is contractually obliged to pay for the shares at the exercise price. The essential terms of an option include: (1) the exercise price; (2) the identification of the subject matter of the option; and (3) the exercise period. It is only when the option-holder is in fact able to exercise the contractual right inherent in an option to acquire the shares that the option-holder can be said to have acquired the option. This cannot occur until the option is granted or "vested". 55 When an option is granted, property is created by the grant in the form of a chose in action, namely, the right of the option-holder to exercise the option: see, for example, Green v Crusader Oil at 125; Kingston v Keprose Pty Ltd (1987) 11 NSWLR 404 at 412 (Hope JA with whom Priestly JA agreed). From grant until the option is exercised, the option-holder acquires an equitable interest in the property the subject of the option, measured by the relief equity will accord to prevent the company acting inconsistently with the grant: see Commissioner of Taxes (Qld) v Camphin (1937) 57 CLR 127 at 132-134; O'Neill v O'Connell (1946) 72 CLR 101 at 129; and Adamson v Hayes (1973) 130 CLR 276 at 303. Thus, the holder of an option to purchase land has, prior to its exercise, a sufficient equitable interest to support a caveat: see, for example, Laybutt at 75; Re Henderson's Caveat [1998] 1 Qd R 632; and Forder v Cemcorp Pty Ltd (2001) 51 NSWLR 486. Until the company grants the option, however, a person cannot "acquir[e] a title to the option" in the sense of "becoming registered as the option holder[] in the company's book": see Green v Crusader Oil at 125. 56 In keeping with the nature of options outlined above, ss 168 and 170 of the Corporations Act require companies to keep a register of holders of options to take up unissued shares, which states, amongst other things, the date of grant of the options, as well as the date on which the option-holder's name was entered in the register. Part 6D.2 of the Corporations Act and, in the case of a listed company, the ASX Listing Rules, stipulate disclosure requirements regarding the grant of options. Furthermore, s 300(1)(d) of the Corporations Act requires the annual directors' report to disclose details about options over unissued shares, including options granted over unissued shares during or since the end of the year to any of the directors or any of the company's five most highly remunerated officers as part of their remuneration. 57 The position is different where the grant of an option is subject to the consent or approval of a third party. In this case, there is a question as to whether the contractual right is a right for the purposes of Division 13A. 58 A contractual promise to grant an option subject to a condition to secure the approval of a third party requires the putative grantor to do all such things - in the language of some authorities - "as might be necessary" to obtain the approval of a third party; alternatively - in the language of other authorities - "as is reasonable" to secure such approval. For "necessary", see McWilliam v McWilliam's Wines Pty Ltd (1964) 114 CLR 656 ("McWilliam's Wines") at 661 and Brown v Heffer (1967) 116 CLR 344 ("Brown v Heffer") at 350. For "reasonable", see Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 ("Perri v Coolangatta") at 541, 553, 557, 566; Butts v O'Dwyer (1952) 87 CLR 267 at 279-280; and Kennedy v Vercoe (1960) 105 CLR 521 at 526, 529. 59 In such a case, where the grant of an option is subject to the approval of a third party, the option-holder has an equitable right or rights arising from the grant of the option, as measured by the relief that equity would accord in the appropriate circumstances. The nature of the equitable right and the quality of any equitable interest that may accompany it depends on the nature of the available equitable relief: see Legione v Hateley (1983) 152 CLR 406 at 446, cited in KLDE Pty Ltd v Commissioner of Stamp Duties (Qld) (1984) 155 CLR 288 ("KLDE") at 297. In conformity with this, the majority in KLDE at 297 (Gibbs CJ, Mason, Wilson and Dawson JJ) went on to say that a purchaser under a contract for the sale of land which is specifically enforceable has a beneficial interest in the land though conditional on the purchaser paying the price. Similarly, in the particular circumstances in Baden Pacific Ltd v Portreeve Pty Ltd (1988) 14 ACLR 677, it was held (at 681) that a purchaser under an executed agreement for the purchase of shares acquired an equitable interest in the shares though the sale was subject to approval in general meeting. As Gzell J noted, however, in Affinity Health Ltd v Chief Commissioner of State Revenue (NSW) (2005) 60 ATR 1 at 5; [2005] NSWSC 663 at [26]: The authorities … which speak in terms of an equitable interest arising upon execution of a conditional contract for sale are based upon the premise that equity intervenes because it would be unconscionable to allow the other party to act inconsistently with its obligations under the contract for sale. Equity acts in personam against the vendor to prevent unconscionable conduct. It goes no further. 60 In the context of a grant of options conditional on third party approval, injunctive relief would likely be available in appropriate circumstances to compel the grantor to fulfil its implied promise to take all reasonable steps to secure the third party's approval: see Hill End Gold Ltd v First Tiffany Resource Corporation [2010] NSWSC 375 ("Hill End Gold") at [18]; GPT RE Ltd v Lend Lease Real Estate Investments Ltd [2005] NSWSC 964 ("GPT RE Ltd") at [56], affmd in Lend Lease Real Estate Investments Ltd v GPT RE Ltd [2006] NSWCA 207. Alternatively, it may be possible to obtain an order for specific performance: see Perri v Coolangatta at 566 (Brennan J). 61 Notwithstanding that the putative option-holder may have equitable rights, where the approval of a third party is required and that approval cannot be compelled, the option-holder has no immediate equitable interest in the property the subject of the grant: see Hill End Gold at [18]; McWilliam's Wines at 660-661; Brown v Heffer at 350-352; Dekala Pty Ltd (in liq) v Perth Land & Leisure Ltd (1987) 17 NSWLR 664 at 666. This may be contrasted with KLDE where the purchaser had it within power to complete the sale. Where the approval of a third party is required and that approval cannot be compelled, the option-holder may be said to have a "contingent equitable interest" - approval being the contingency on which the acquisition of the immediate equitable interest depends: see GPT RE Ltd at [57]; and compare Australian Securities and Investments Commission v Carey (No 6) ("ASIC v Carey") (2006) 153 FCR 509 at 519-520 [34]. On obtaining approval, the option-holder is in the same or a similar position to the holder of an option not subject to condition. 62 Between the exercise of the option and, ultimately, entry in the share register in respect of the shares over which the option was exercised, the option-holder acquires different equitable interests measured by the availability of specific performance: see Bahr v Nicolay [No 2] (1988) 164 CLR 604 at 619-623 and, generally, Handbury Holdings Pty Ltd v Federal Commissioner of Taxation (2008) 74 ATR 560 at 577-578; [2008] FCA 1787 at [73]-[74]; affmd (2009) 179 FCR 569.

Factual findings on the acquisition of the options and related rights in this case 63 The evidence was that Nexus granted the 742,500 options to Mr Fowler on 30 November 2006. Pursuant to s 176 of the Corporations Act, in the absence of evidence to the contrary, the register of option-holders is proof of the matters in the register. The register of option-holders for Nexus was not, however, in evidence. As Young J said, however, in Green v Crusader Oil at 122-123, as a general rule, where the only evidence before the court is evidence that is inherently probable and not contradicted by other evidence, then the court is bound to accept it. Applying this principle, 30 November 2006 must be accepted as the date of the grant of the options. The Appendix 3Y form submitted by Nexus to the ASX on 8 December 2006, in accordance with the ASX Listing Rules, advised that Mr Fowler had acquired the options on 30 November 2006. The 2007 annual directors' report, required by the Corporations Act, also stated that Mr Fowler's options were granted on 30 November 2006. 64 Further, the unequivocal statements in these documents are entirely consistent with the conduct and other statements of the company on 30 November 2006 and preceding this date. The ordinary resolution passed by the company's shareholders on 30 November 2006 gave approval for the grant of the options to Mr Fowler "with a vesting date of 30 November 2006". This accorded with the Notice and the Explanatory Memorandum sent to shareholders for the 30 November 2006 annual general meeting. As noted above, the Explanatory Memorandum had advised the shareholders that the "proposed grant … requires prior Shareholder approval". 65 The company's announcement to the ASX on 29 September 2006 advised not only that the company had issued options to its eligible employees but also that "subject to shareholder approval at the next Annual General Meeting" the company "intended" to issue options to the non-executive directors and managing director. The evidence was that the company considered that this announcement was important: in the words of Mr Boyson, "it was essential that the market was informed that these options were in play"; and, although drafted by the company secretary, Mr Munks, the announcement was reviewed by the chair, Mr Philip, and the managing director, Mr Tchacos, before being sent to the ASX. Mr Munks gave evidence that he included the reference to shareholders' approval, "based on [his] understanding that shareholders were required to approve the options". 66 The applicant's argument that, notwithstanding this evidence, for the purposes of ss 139G(c), (d) or (e), he acquired the options on either 14 September 2006 or 29 September 2006 depended on two separate propositions. 67 The submission that 29 September 2006 was the appropriate date depended on the proposition that the non-executive directors' options were granted under the ESOP. This proposition was contrary to the evidence, and the applicant's submission as to 29 September 2006 must be rejected. Mr Fowler did not receive a letter like that sent to employees. He was not required to accept any offer of options by returning the requisite ESOP acceptance form in the same way as employees and did not do so. Further, Mr Tchacos stated (and I accept) that it was not intended that the directors' rights be governed directly by the ESOP, but that the terms as to exercise price and expiry date be the same for both the company's directors and employees. 68 The submission that 14 September 2006 was the relevant date depended on the proposition that there was a contract created on 14 September 2006 and that this contract gave rise to a right, or beneficial or legal interest, satisfying ss 139G(c), (d) or (e). The contract was said to be evidenced in part by the board's resolution of 14 September 2006. 69 Whether or not a contract was formed on 14 September 2006 or thereabouts depends on the evidence about intention to contract. The nature of the evidence that may be considered on this issue is perhaps wider than that available to construe the meaning and effect of contractual terms, although today the difference is much less than in the past. This is because nowadays, under Australian law, the rights and liabilities of parties to a contract are determined according to "the principle of objectivity", that is, by reference to the words and conduct of the parties, the text, the surrounding circumstances known to the parties, and the purpose and object of the transaction: see Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 176 [40]. See also, for example, Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 528-529, citing McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589 [22]; and Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461-462 [22]. These factors also bear on the issue of contractual intention: see the earlier discussion in Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd [1985] 2 NSWLR 309 ("Air Great Lakes") at 334 (Mahoney JA) and 337-338 (McHugh JA). 70 The evidence as to the parties' words and conduct, the surrounding circumstances, and the purpose and object of the transaction considered as a whole, supports the finding that a contract was in fact made between the company and Mr Fowler with respect to the grant of options on 14 September 2006. 71 The surrounding circumstances known to the parties include the fact that, in 2006, the company was engaged in oil and gas exploration rather than commercial production; and the conservation of its cash reserves were critical for its continued daily operations. Mr Haydock, a non-executive director and a member of the company's remuneration committee in 2006, gave unchallenged evidence that, with this in mind, the committee discussed the remuneration packages for the company's employees and directors around May/June that year, including the suitability of options as part of these packages. For the same reason, around this time too, Mr Tchacos made a recommendation to the remuneration committee to utilise options as part of the company's remuneration packages. 72 The company's directors - at that time, Mr Philip (chair), Mr Haydock, Mr Boyson, Mr Fowler and Mr Tchacos (managing director) - discussed the company's cash resources at board meetings. All were present at the board meeting on 26 July 2006, when the board discussed increasing the quantum of the directors' remuneration and remunerating them with the issue of options in lieu of cash. As a result of this discussion, the board passed the resolution (see [16] above) that "directors would be entitled to take part or all of their remuneration in the form of options priced on the same basis as under the ESOP scheme and subject to any shareholder and other approvals required". Directors were to let Mr Philip know of their "preferred mix of remuneration". The evidence established that, in effect, at the 26 July 2006 meeting, the directors agreed in principle to forego the payment of part or all of their fees in cash, in return for options in unissued Nexus shares. This in-principle agreement was subject to a report to be made by Mr Tchacos about the terms and pricing of the options. 73 In conformity with the resolution of 26 July 2006, between that date and the following board meeting on 14 September 2006, Mr Fowler informed Mr Philip that he would forego 100% of his cash remuneration in exchange for options. 74 As noted earlier (at [17]), the paper subsequently prepared by Mr Tchacos and circulated to board members prior to 14 September 2006 recommended both the issue of options to employees under the ESOP and the issue of options to members of the board in lieu of cash remuneration. There was also a recommendation concerning the managing director's option package. The paper observed: Several of the directors of the Company have requested the opportunity to sacrifice board fees in exchange for options. Providing the opportunity for board members to be remunerated via options is recommended because it aligns the board with the interest of the shareholders. 75 As to value, the paper stated that: The equivalent cash value of the options being discussed in this recommendation is shown in Appendix 1. The value of options is based on a 40% premium to the June and July 2006 Volume Weighted Average Price and a 13 month option term. It is proposed that the same basis is used for the calculation of the option value in the case of employees, management and board. 76 In relation to the process to be adopted to grant the options, the paper distinguished between options for the employees and options for the board. The paper stated that options issued to "the staff and management team" could be issued immediately after board approval. In the case of the board and the managing director, however, the paper noted that: [T]he issue of options is subject to shareholder approval hence issue of options can only occur after the AGM. It is imperative however that the options package is announced as soon as practically possible to avoid shareholder dissention in the event that the share price escalates substantially prior to the AGM. (Emphasis added.) 77 There was evidence of discussions between board members prior to the following 14 September board meeting. For example, between 9 and 14 September 2006, Mr Fowler had a discussion with Mr Philip about the proposed issue of options to Mr Philip. 78 All directors attended the board meeting on 14 September 2006, at which matters addressed in Mr Tchacos' paper were discussed and the board resolved that "options be issued to the directors of the company [on] the same terms and conditions as the company's employees share option plan and that shareholder approval be obtained prior to being issued". These options included the 742,500 options to Mr Fowler, with an exercise price of 87 cents and an expiry date of 31 October 2007: see [19] above. 79 The directors' salary sacrifice came into effect immediately after the 14 September 2006 meeting. I accept that, as the applicant submitted, this is indicative of the fact that a contract was made at that meeting, pursuant to which Mr Fowler (and each director) agreed to forego payment of fees in cash in return for the 742,500 options in unissued shares on the terms recorded in the minutes for that meeting. The resolution recorded in the minutes set out the essential terms of the options, namely, the grantee, the number of options, the time within which the options might be exercised (in this case, prior to 31 October 2007) and the exercise price (87 cents per option). 80 Mr Philip explained that the exercise price was fixed as at 14 September 2006, rather than as at the date the options were to be granted, in order to expose the directors to the same risks that the shareholders faced from this date and to ensure that there was a premium between the exercise price of the options and the then market value of the company's shares. Mr Philip's evidence (which I accept) was corroborated by the evidence of Mr Tchacos and that of the other non-executive directors at that time. The position of Mr Philip was probably a little different from the other non-executive directors but this difference is not relevant here. 81 The fact that the company entered into such a contract with Mr Fowler on 14 September 2006 is corroborated by the explanatory memorandum that accompanied the Notice to shareholders regarding the November 2006 annual general meeting. As set out above, the explanatory memorandum in fact stated that "[t]he purpose of the proposed grant of Options is to honour remuneration agreements and to provide Michael Fowler with added incentive in lieu of salary whilst enabling the Company to preserve its cash reserves for expenditure on its existing business". 82 Further, whilst I would treat the directors' evidence as to their state of mind most cautiously, in so far as this evidence had any relevance (see, for example, Air Great Lakes at 319, 330-331, 333-334, 337) it was supportive of the fact that each director entered into a binding agreement with the company with respect to the grant of the options at the meeting of 14 September 2006. 83 Having regard to the text of the board's resolution of 14 September 2006, it is plain enough that the issue of the options to Mr Fowler was subject to the shareholders' approval being obtained. The inclusion of this condition was consistent with the distinction between employees' options and directors' options made in the board paper prepared by Mr Tchacos, which was the basis of the board's discussion and resolutions. Indeed, the need for the shareholders' approval had been foreshadowed in the earlier resolution of 26 July 2006. 84 Furthermore, the existence of the condition as to shareholder approval was entirely consistent with the company's subsequent conduct in seeking such approval on 30 November 2006. It was also consistent with the terms of the company's announcement to the ASX on 29 September 2006, and the Notice and the explanatory memorandum provided to shareholders in anticipation of the 30 November 2006 annual general meeting. Finally, it was borne out by the terms of the shareholders' resolution at that meeting; and the fact that the company's documents did not record the grant until after the shareholders had given their approval. 85 In so far as it is relevant, the existence of the shareholders' approval condition is also corroborated by the evidence of Mr Philip, Mr Tchacos and Mr Munks that they believed that the law required that the shareholders' approval be obtained before the options could lawfully issue. As well, the evidence of some other members of the board indicated that they shared this assumption. 86 At various points in his submissions, the applicant challenged the accuracy of the board minutes in so far as they referred to the need for the shareholders' approval. For the following reasons, I would reject that challenge. 87 First, it must be borne in mind that minutes of directors' meetings recorded in accordance with s 251A(1) of the Corporations Act and signed as required by s 251A(2) are evidence of the resolution to which it relates unless the contrary is proved: see s 251A(6). Broadly, the evidence established that the company's board meeting minutes were recorded and signed in accordance with s 251A(1) and (2). 88 Mr Munks, as the company secretary from 16 July 2002 until 13 October 2006, attended the board meetings on 26 July 2006 and 14 September 2006 and subsequently prepared the minutes. His evidence was that at the relevant time his practice was to type the notes of the board meeting on his laptop whilst the meeting was in progress and, after the meeting, to review the notes and turn them into draft minutes to be sent to Mr Philip and Mr Tchacos for review and comment. In the case of the 14 September 2006 board meeting, Mr Munks said that he reviewed his notes "soon after" that meeting and "made alterations and amendments where I thought necessary to give effect to the discussion and resolutions". 89 Mr Philip and Mr Tchacos said that, once they received the draft minutes from Mr Munks, they would review them and propose any change they thought necessary to reflect the meeting. Thereafter, according to Mr Philip, the draft minutes were circulated to the other board members for review and comment. The draft minutes, as amended, would be considered by the board at the following board meeting when, after any further correction, the minutes would be adopted as correct, signed by the chair, and entered into the company's books. 90 Unsurprisingly, none of the relevant witnesses could recall any specific discussion at the relevant board meetings. None of them could recall whether or not the board had in fact discussed the issue of shareholders' approval. Mr Philip's evidence was that the minutes of 26 July 2006 and 14 September 2006 "matched" or were "consistent with" his recollection of board discussions of directors' remuneration and options. Mr Tchacos also stated that, whilst he could not specifically recall the discussions at the board meetings of 26 July 2006 and 14 September 2006, the minutes were consistent with his recollection. 91 Since the witnesses' recollections of the meetings were poor, I would attach little, if any, weight to the claims of Mr Haydock and Mr Fowler that the matter of shareholders' approval was not discussed at the board meetings on 26 July 2006 or 14 September 2006. Indeed, in cross-examination, Mr Fowler ultimately agreed that it was "certainly possible" that the need for shareholder approval was discussed at the 14 September 2006 board meeting. 92 Having regard to the numerous opportunities afforded board members to review and correct the minutes before they were approved, there is little reason to suppose that the minutes, as approved and signed, were other than accurate. The evidence at the hearing was insufficient to establish that the minutes were inaccurate with respect to the issue of the shareholders' approval and, assuming it was applicable, to overcome the presumption in s 251A(6) of the Corporations Act. I do not consider the absence of a reference to shareholder approval in the 14 September 2006 resolution concerning Mr Tchacos justifies a different conclusion. 93 In any event, in so far as it was relevant to the terms of the contract with Mr Fowler as recorded in the minutes of 26 September 2006, Mr Philip's evidence was that, whether or not the issue was discussed, he believed in 2006 that, by law, Nexus was required to obtain the shareholders' approval before the company could issue the options to the directors. Mr Tchacos and Mr Munks gave evidence to the same effect. There was also some evidence that this was the understanding of most, if not all, the non-executive directors. In re-examination, Mr Fowler agreed that he was "always aware of any transactions ultimately having to be sanctioned by shareholders relating to specifically related parties like options". 94 The condition as to the shareholders' approval was not a condition precedent to the formation of the contract between the company and Mr Fowler, as the Commissioner at one point argued. This possibility is not supported by the evidence to which I have referred, including that the directors commenced to "salary sacrifice" from 14 September 2006. Rather, the performance of the contract on the company's part by the grant of the options required the fulfilment of a contingency, namely, the obtaining of the shareholders' approval. This conclusion is supported by the observations of Mason J in a much-quoted passage in Perri v Coolangatta at 552. Describing the prevailing position with respect to conditions of this kind, his Honour said as follows: Generally speaking the court will tend to favour that construction which leads to the conclusion that a particular stipulation is a condition precedent to performance as against that which leads to the conclusion that the stipulation is a condition precedent to the formation or existence of a contract. In most cases it is artificial to say, in the face of the details settled upon by the parties, that there is no binding contract unless the event in question happens. Instead, it is appropriate in conformity with the mutual intention of the parties to say that there is a binding contract which makes the stipulated event a condition precedent to the duty of one party, or perhaps of both parties, to perform. Furthermore, it gives the courts greater scope in determining and adjusting the rights of the parties. For these reasons the condition will not be construed as a condition precedent to the formation of a contract unless the contract read as a whole plainly compels this conclusion. See also Perri v Coolangatta at 541, 545 (Gibbs CJ). 95 In summary, the company granted the 742,500 options to Mr Fowler on 30 November 2006, pursuant to a contract made by the company with him on 14 September 2006. This contract was subject to a condition precedent to performance - that the shareholders' approval first be obtained before the options were granted. Mr Fowler was unable to exercise any right to acquire the shares the subject of the option prior to 30 November 2006; and he did not have an immediate equitable interest in the shares prior to that date. Pursuant to the contract, however, the company was obliged to take all reasonable steps to obtain the shareholders' approval; and Mr Fowler had such equitable rights as equity would afford, by way of specific performance or injunction, to ensure that the company took these steps.

The scope of Division 13A rights 96 The critical question is whether any equitable right to ensure that the company took all reasonable steps to obtain the shareholders' approval, or his contingent equitable interest in the shares the subject of the options, was sufficient for the purposes of Division 13A and, in particular, s 139G(c) and (e). Mr Fowler argued that Division 13A and, in particular, s 139G(c) and (e) were not limited to unconditional rights (or, I would add, immediate equitable interests). For the reasons I am about to state, I do not consider that Mr Fowler acquired a right or interest that was sufficient for Division 13A. Having regard to the foregoing discussion, it is clear enough that s 139(d) cannot further assist Mr Fowler's case: see [106] below. 97 In McWilliam, delivered whilst judgment in this matter was reserved, the Full Court indicated that Division 13A of the ITAA 1936 was not limited to a right which of itself conferred an entitlement to the acquisition of shares. The parties drew my attention to McWilliam but indicated that they did not wish to make further submissions with respect to that case. 98 Like this case, McWilliam concerned the question whether, for the purposes of Division 13A, the taxpayer had adopted the wrong date as the date of acquisition of options to purchase shares. The Full Court's decision turned on the Tribunal's unchallenged finding of fact that the taxpayer had acquired the options as at 1 July 2003, as the taxpayer alleged. 99 Notwithstanding this, the Full Court also considered and rejected the Commissioner's submission that "anything less than a right which confers an immediate entitlement on the taxpayer to the acquisition of shares upon the exercise of the right is not a relevant right for the purpose of Division 13A": see McWilliam at [70]. The Court, in obiter dictum, held that a contractual right arising from the taxpayer's contract of employment, "which was not conditional on future events", to require the taxpayer's employer to grant options to acquire shares was a relevant right for the purposes of the Division: see McWilliam at [76]. 100 The Court explained (at [71]-[73]): It is difficult, indeed impossible, to discern from the text of Division 13A (see Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27 at [47]) any legislative policy manifest in a construction which includes as rights options to acquire shares, but excludes contractual rights to acquire such options, particularly where such contractual rights are, as here, fully executed by the respondent's performance of the contract. The Commissioner accepted that the word "right" in Division 13A carried the same meaning as the expression "right to acquire a share in a company" in s 26AAC of the ITAA, the precursor to Div 13A. When s 26AAC was inserted into the ITAA in 1974 to remove the taxation of such benefits from the ambit of s 26(e), the difficulties of application of which had been recently illustrated in the decision of the Supreme Court of NSW (Bowen CJ in Eq) in Donaldson v Federal Commissioner of Taxation [1974] 1 NSWLR 627; (1974) 74 ATC 4192, the Treasurer of the day (the Hon. Frank Crean MP) said: The new provision will apply to options or other rights acquired after 17 September 1974 and to shares acquired after that date unless acquired as a result of the exercise or operation of rights acquired on or before that date. (Emphasis added.) In other words, the concept of "right to acquire a share in a company" extended to rights, other than options, which operated to give rise to an acquisition of shares, rather than being confined to the acquisition of shares by the exercise of options. 101 The Court continued (at [78]-[84]): Section 139G does not support the Commissioner's position. It is artificial to read s 139G as establishing mutually exclusive categories. … The fact that legal or beneficial interests were expressly dealt with in s 139G(d) and s 139G(e) in the context of acquisition from another person, in contrast to the creation of such rights, does not support reading s 139G(c) more narrowly than its language suggests. The fact that "right" itself is not a defined term supports this conclusion. This construction is supported by the reasoning in Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 592 at [30] that the assumption that the law of property requires the location at all times and in all circumstances of distinct legal and beneficial ownership was exploded by Commissioner of Stamp Duties (Q) v Livingston (1964) 112 CLR 12. … Thus, in our view, s 139G(c) applied to the creation of a legal or beneficial interest in the right and ss 139G(d) and (e) did not deal exclusively with a legal interest in the right or with the beneficial interest in the right, respectively. The Commissioner accepted in argument that on 1 July 2003 Mr McWilliam had a contractual right to have the options issued to him. Once the construction of s 139G is rejected that the legal interest or the beneficial interest has to separately exist in the person creating the right before that right can be acquired by, in this case, Mr McWilliam, it must in our view follow that that right was created in Mr McWilliam by Seven Network Limited and, by virtue of s 139G(c), Mr McWilliam acquired that right, on 1 July 2003. Although it is true to say, as the Commissioner submitted, that Division 13A did not define the word "right", it did by s 139G nevertheless define the meaning of a person acquiring a right and a person providing a right, that provision being in Subdivision G, headed "Definitions". On the present alternative, Mr McWilliam, as at 1 July 2003, had at least a beneficial interest in the relevant right, being the right to acquire shares. The interest was vested in Mr McWilliam by his contract of employment. The fact that the source of Mr McWilliam's interest in the right was vested by his contract of employment is immaterial. Nothing in the statutory scheme supports the Commissioner's contrary proposition that something more "immediate", "formal", "concluded" or "coalesced" is required. Our emphasis has been on s 139G rather than on s 139C because, in our view, the latter section was addressed to the nature of the relationship between the right and the employment rather than to the nature of the right itself. The statutory language does not support the Commissioner's distinction between an interest in the relevant right (the right to acquire shares) and an interest in an anterior right (the right to require the employer to provide the shares). No uncertainty as to the taxing point thereby arises. No difficulty with valuation arises: see s 139FF. Nor does any policy consideration assist the Commissioner. By virtue of s 139C(4) no double liability arises because a taxpayer does not acquire a share under an employee share scheme if the taxpayer acquired the share as the result of exercising a right the taxpayer acquired under such a scheme. 102 Plainly enough, however, as the Court in McWilliam acknowledged (at [74]), not all entitlements which may lead to an acquisition of shares were "rights" for the purpose of Division 13A. The Court accepted that in this regard Fraunschiel v Federal Commissioner of Taxation (1989) 20 ATR 955 ("Fraunschiel") at 975 was correct, saying (at [74]): For example, a right to accept an offer will not be such a right (see Fraunschiel v Federal Commissioner of Taxation [1989] FCA 236; (1989) 89 ATC 4616; (1989) 20 ATR 955 per Lee J) nor, if it be different, will a pre-emptive right to be offered shares to buy if the prospective vendor is desirous of selling. More difficult issues arguably arise in the case of conditional rights such as those that arose under the "Savoy Clause" in ACP Publishing Pty Ltd v Commissioner of Taxation (2005) 142 FCR 533, but the present case is a long way from that factual context. 103 Whilst a right to acquire shares and, as McWilliam showed, a right to a right to acquire shares were enforceable rights to shares within Division 13A, a right to accept an offer was not because, as Lee J said in Fraunschiel at 975: [T]he right to accept an offer has no enforceable quality attached to it. The offer may be withdrawn or revoked and the right to accept vanishes with the destruction of the offer. The fact that the property may be acquired by the acceptance of the offer does not make the right to accept a right to acquire. 104 Whilst the present case is different from Fraunschiel, it is also different from McWilliam in that, as at 14 September 2006, the only right that Mr Fowler had obtained was a right to options conditional on a future event - namely, the approval of the shareholders. In this circumstance, as previously noted, Mr Fowler had an equitable right to compel the company to fulfil its implied promise to take all reasonable steps to secure the shareholders' approval and a contingent equitable interest, in the sense described by French J in ASIC v Carey at 519 [34]. As his Honour there observed, "[a] contingent interest may be described broadly as the possibility that a right of a proprietary character will come into existence at a future time if some event occurs". In the present case, the relevant event or contingency was the obtaining of the shareholders' approval. 105 The present case is not one in which it is within the right-holder's own power directly or indirectly to acquire a right to shares, as was the case considered in McWilliam (or as in the case of an unconditional option over unissued shares). Mr Fowler could not call on the company to grant him the 742,500 options until the shareholders gave their approval to the grant. As in Fraunschiel, in the present case, as at 14 September 2006, Mr Fowler's contingent right to the grant of options might never have vested since it was open to the shareholders to deny approval. Had they done so, then Mr Fowler's contingent equitable interest in the shares the subject of the options would have been defeated. In contrast to McWilliam and like Fraunschiel, Mr Fowler's ultimate right to shares in the company was dependent on the actions of third parties, which were outside his control. 106 Since it cannot be said that, as at 14 September 2006, Mr Fowler had an enforceable right directly or indirectly to acquire shares in the company, it cannot be said that he had a right within the meaning of Division 13A. It follows that, at that date, it cannot be said that the company had created a right in Mr Fowler within the meaning of s 139G(c) and, in consequence, that Mr Fowler had acquired a right by virtue of this provision, for the purposes of Division 13A. Since, as at 14 September 2006, Mr Fowler had not acquired a legal interest in a share or right to acquire a share from another person, s 139G(d) had no application. Finally, as at 14 September 2006, since it cannot be said that Mr Fowler had a beneficial interest in a share or right to acquire a share from another person, s 139(e) can have no application. As indicated above, Mr Fowler's beneficial interest in a right to acquire a share did not arise until the contingency as to the shareholders' approval was satisfied. 107 It follows from this that the Commissioner's submission should be accepted that, in Mr Fowler's case, the date of acquisition of rights for Division 13A purposes was 30 November 2006. 108 Even if the directors were confident that they would obtain the shareholders' approval, their confidence would not alter this conclusion. There was some limited evidence that some of the directors considered that there would be no difficulty in fulfilling the condition. Mr Philip, who was an honest and reliable witness, said in cross-examination that "presumably, we were confident that the shareholders would grant approval at the AGM" (emphasis added). Mr Philip did not purport actually to recollect his state of mind. In cross-examination, Mr Boyson, a non-executive director, testified that: We knew that the AGM was going to back that particular proposal, because we were actually doing what the shareholders had asked us to do, and we were physically locked in because the option had actually commenced in … September. According to Mr Boyson, "there were enough shareholders with enough votes that the actual approval at the November AGM would have been a foregone conclusion". 109 Whilst, for the reasons stated, I accept Mr Philip's evidence so far as it went, it must be borne in mind that possibly two witnesses besides Mr Fowler had an interest in the outcome of the litigation. The evidence must be critically assessed for this and other reasons. See, in this regard, Pascoe v Federal Commissioner of Taxation (1956) 30 ALJR 402 at 403 and Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149 at 176. I am not persuaded that the directors' supposed confidence was any more than the confidence that would ordinarily be entertained by a board that believed that it was acting reasonably and in conformity with what it understood generally to be the shareholders' wishes. Confidence of this kind may, however, ultimately prove to be misplaced for a variety of reasons, including that the directors have misconceived the shareholders' wishes or on account of a material change in circumstances before the shareholders' approval is sought. Accordingly, if such evidence as to the board's confidence were of any relevance (which I doubt), I would accord this evidence little weight. 110 Even if the directors were confident on 14 September 2006 that they would secure the approval of the shareholders at the annual general meeting later that year, the fact remained that the shareholders' determination as to whether or not to approve the options was a matter solely for the shareholders at the time of the meeting. The shareholders' giving or withholding of approval lay outside the control of the directors. 111 Mr Fowler argued that he had assumed an "equity risk associated with an issue of shares or rights" from the time he entered into the contract with respect to his remuneration on 14 September 2006 and that "that time is consistent with the evident policy concerning when to tax participants in employee share schemes". The applicant's argument was that "[c]onsistent with this policy, if there were inchoate rights before shareholder approval, upon that approval those rights ought to be regarded as having been fully formed from the date the contract was entered into … such that upon that approval being obtained the taxing point arises at the time the directors were on risk [sic]". 112 Mr Fowler's argument had two aspects to it - policy and law. The argument depended in part on a proposition advanced at the hearing that, once the shareholder's approval was obtained, the approval had "a kind of retroactive effect", with the result that the parties were to be taken to have entered an unconditional contract as from the time they entered the contract, namely, 14 September 2006. Support for this argument was said to lie in the reasons for judgment of Windeyer J in Brown v Heffer at 351-352 and of Brereton J in Hill End Gold at [18], citing Brown v Heffer. Neither case supports the applicant's argument. 113 In Brown v Heffer at 351-352, Windeyer J was concerned with a different issue to that which concerned Mr Fowler, namely, the effect of the giving or withholding of ministerial consent for a land dealing to which the Closer Settlement Acts (NSW) was applicable. Windeyer J held (at 351-352) that where consent was refused, the transaction was at an end; and where consent was given, the instrument between the parties operated according to its terms. It was in this sense that his Honour's observation "that the giving of the consent had a kind of retroactive effect making the instrument effective as from its date" was to be understood. 114 The applicant's reliance on this part of his Honour's judgment illustrates the danger of failing to have regard to the context in which a remark is made. Having regard to this context, it is plain enough that, in addressing the effect of consent, his Honour's intended meaning was that once consent was given, the parties' rights and liabilities ceased to be conditional. The phrase "as from its date" did not, however, signify that the contract was treated from its inception as being what it was not - an unconditional contract. Indeed, this was the very point upon which the case turned, as Windeyer J's discussion in the ultimate paragraph of his reasons for judgment shows. In this last paragraph Windeyer J stated his agreement with the plurality judgment's holding (at 350) that the devise to the respondent was not adeemed by the contract of sale because the relevant contracts of sale, "though absolute in so far as they bound the parties to do what was necessary for obtaining the Minister's consent, were inchoate in so far as they provided for sale and transfer" prior to the testator's death because the consent had not yet been obtained. The result would, as Windeyer J noted at 352, have been different had the consent been forthcoming before the testator's death. 115 It is clear from the passage in Hill End Gold at [18], to which the applicant referred, that Brereton J was merely intending to follow Brown v Heffer and the other authorities to which his Honour referred, some of which have also been mentioned in the above discussion. 116 As to the matter of policy, the application of Division 13A depends on the text or terms of its provisions, in this case, particularly s 139G of the ITAA 1936. For the reasons stated, under s 139G, Mr Fowler acquired the relevant right - being the right to acquire shares - on 30 November 2006. The text of Division 13A does not, for the reasons stated, permit of a different conclusion. 117 In the circumstances as found, it is unnecessary to consider the Commissioner's submission that the grant of the options without shareholders' approval would have entailed a breach of Rule 10.11 of the ASX Listing Rules and a consequential breach of the company's constitution. Equally, it is unnecessary to consider whether, as the Commissioner said, the grant of options without shareholder's approval would have involved a breach of s 208 of the Corporations Act and the applicant's response that, having regard to Mr Warburton's evidence, the grant fell within the exception in s 211 of the Corporations Act. It is unnecessary to deal with these submissions because I have found that obtaining shareholders' approval was a condition precedent to the grant of the options to Mr Fowler and that the shareholders' approval was in fact given.

Penalty 118 As noted at the outset of these reasons, Mr Fowler did not return any amount as assessable income under either ss 139B(2) or 139D(2) of the ITAA 1936 in respect of the 742,500 options in the 2007 income year. Since I have found that, as the Commissioner argued, the date of acquisition of the options was 30 November 2006, then, as set out at [6] above, their market value (as determined under s 139FC of the ITAA 1936) was more than nil, and the assessable discount for the purposes of s 139CC(2) of the ITAA 1936 was more than nil ($0.56 in respect of each option). The result was that the Commissioner determined that Mr Fowler had a shortfall amount within the meaning of item 1 of s 284-80(1) of Schedule 1 of the TAA of $193,347 in respect of the 2007 income year. In consequence, the Commissioner assessed Mr Fowler as liable to an administrative penalty under s 284-75(1) of Schedule 1 of the TAA. Section 284-75(1) relevantly provides that a taxpayer is liable for an administrative penalty if: (1) a taxpayer or the taxpayer's agent makes a statement to the Commissioner; (2) the statement is false or misleading in a material particular; and (3) the taxpayer has a shortfall amount as a result of the statement. 119 Mr Fowler made a statement that was false or misleading in a material particular when he lodged his income tax return for the 2007 income year without including any amount in assessable income in respect of the options. Whether or not Mr Fowler believed that he was required to include an amount in his assessable income under Division 13A of the ITAA 1936 in respect of the options in the 2007 income year was not material: see Revlon Manufacturing Ltd v Commissioner of Taxation (1995) 63 FCR 535 at 561-562 (Wilcox J, with whom Tamberlin J agreed). Thus, it was open to the Commissioner to find that Mr Fowler's shortfall amount arose as a result of the false or misleading statement made to the Commissioner and that Mr Fowler was liable to an administrative penalty. Mr Fowler's submission to the contrary must be rejected. 120 The Commissioner assessed Mr Fowler as liable to pay a penalty of 25% of his shortfall amount in accordance with s 284-85 of Schedule 1 of the TAA on the basis of lack of reasonable care. Accordingly, Mr Fowler was assessed as liable to pay an administrative penalty of $48,336.75 in respect of the 2007 income year. Mr Fowler challenged the Commissioner's determination to assess him as liable to pay a penalty calculated at 25% of the shortfall amount. Mr Fowler submitted that it was appropriate to remit all penalties. 121 For the reasons stated below, I would reject Mr Fowler's submission as to administrative penalty. 122 At the relevant time, s 284-90 of Schedule 1 of the TAA made provision for various base penalty amounts worked out according to a table that was part of the provision. Relevantly, for this appeal, item 3 in the table in s 284-90(1) provided for a base penalty amount of 25% of the taxpayer's shortfall amount in the following situation: Your *shortfall amount or part of it resulted from a failure by you or your agent to take reasonable care to comply with a *taxation law. 123 Item 1 in the table in s 284-90(1) concerned a shortfall amount resulting from intentional disregard of a taxation law and item 2, with recklessness. In the former case, the base penalty amount was 75% of the shortfall amount and in the latter case, 50% of the shortfall amount. The items are relevant to the reasoning in Commissioner of Taxation v Traviati [2012] FCA 546 ("Traviati"), discussed below. 124 At the same time, item 4 in the table in s 284-90(1) also provided for a base penalty amount of 25% of the taxpayer's shortfall amount in the following situation: Your *shortfall amount or part of it resulted from you or your agent treating an *income tax law as applying to a matter or identical matters in a particular way that was not *reasonably arguable, and that amount is more than the greater of $10,000 or 1% of the income tax payable by you for the income year, worked out on the basis of your *income tax return. The reasonably arguable test was not, however, the test that the Commissioner purported to apply in Mr Fowler's case. 125 The reasonable care test in item 3 of s 284-90(1) of Schedule 1 of the TAA, which the Commissioner in fact applied, "calls upon a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer in fulfilling the taxpayer's tax obligations": see Aurora Developments Pty Ltd v Federal Commissioner of Taxation (No 2) (2011) 196 FCR 457 ("Aurora") at 465 [38]. In Aurora, Greenwood J went on to say (at 465 [38]): The test looks to whether such a person would have foreseen, as a reasonable probability or reasonable likelihood, the prospect that the action or step or the failure to act or take an affirmative step would result in a shortfall amount and in determining that question, a relevant factual enquiry is whether the taxpayer made the reasonable attempts a person in the position of the taxpayer ought to have taken so as to comply with the provisions of a taxation law. In Aurora, his Honour found that the taxpayer had failed to exercise reasonable care upon the basis of the advice relied on by the taxpayer, which demonstrated that the taxpayer had failed to communicate material matters to the taxpayer's tax adviser: see Aurora at 476 [108]. 126 Mr Fowler's evidence in cross-examination was that he had a tax agent at the relevant time and the company had a tax advisor. In this evidence, after referring to difficulties in recalling events "long ago", he said: I would have spoken to people like Brendan Brown, who was advising the company. But in my personal circumstances I had an account, obviously, with my tax agent. So all tax matters I would discuss, at some point, with them. 127 When asked why did he decide not to include an amount in respect of the options in his assessable income, Mr Fowler said: On the basis of the view of mine at the time, which forms a basis of the case, I guess … in that I agreed to salary sacrifice from 1 July. 128 Plainly enough, this evidence was general, limited and vague. Further, as the Commissioner noted in written submissions, a taxpayer's use of a tax agent to lodge an income tax return does not of itself indicate that reasonable care has been taken. 129 There was no actual evidence that Mr Fowler had ever directed his mind to the tax consequences of the grant of the options so far as his own income tax liability was concerned. There was no evidence of any specific enquiries made by Mr Fowler about these tax consequences or of any relevant advice that he may have received. Mr Fowler was apparently unable to produce any records of his own concerning his nomination of Tess Aust or the date of any acceptance of the options. There was, moreover, no evidence about any enquiries that Mr Fowler's tax agent may have made on his behalf concerning the tax treatment of the options. 130 Having regard to Mr Fowler's position as a company director and the nature of agreement pursuant to which the options were granted, a reasonable person in the circumstances of Mr Fowler would be expected to have made some reasonable enquiries concerning the tax treatment of the options under the relevant tax law - here Division 13A of the ITAA 1936 Act. Indeed, given that Mr Fowler had agreed to forego cash fees that were undeniably in the nature of assessable income in his hands, a reasonable person in his position would have expected his agreement to forego cash for options in lieu would have some income tax consequences. Such a person would have foreseen, as reasonably likely, that the failure to include in his assessable income an amount in respect of the options would result in a shortfall amount. The lack of cogent evidence that Mr Fowler made any relevant enquiries and his failure to keep basic records relating to the grant of the options justified the imposition of administrative penalty for failure to take reasonable care. 131 Mr Fowler's main submission was that his position was reasonably arguable, as defined in s 284-15 of Schedule 1 of the TAA, and that this demonstrated that he took reasonable care in submitting his tax return for the 2007 income year. Section 284-15(1) stated that a matter was reasonably arguable "if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect". 132 The Commissioner responded that whether or not Mr Fowler's position was reasonably arguable was not determinative of whether he had taken reasonable care to comply with Division 13A, for the purposes of item 3 of s 284-90(1) of Schedule 1 of the TAA. Having regard to Traviati (delivered whilst judgment was reserved), the Commissioner's submission must be accepted. 133 Whilst Traviati concerned the administrative penalty provisions of the ITAA 1936 and not those now in Schedule 1 to the TAA, the scheme for the imposition of administrative penalties is relevantly the same. In effect, Middleton J held in Traviati that the provisions dealing with reasonable care and with a reasonably arguable position are concerned with different standards. After considering the principal authorities, including Walstern Pty Ltd v Commissioner of Taxation (2003) 138 FCR 1, North Ryde RSL Community Club Ltd v Commissioner of Taxation (2002) 121 FCR 1 and MLC Ltd v Commissioner of Taxation (2002) 126 FCR 37, his Honour said (at [70]-[71]): The language of the two provisions reveals two independent standards. Section 226G was concerned with the taxpayer, or their registered agent, taking reasonable care. Reasonable care is a concept familiar to the law, and whilst an objective standard, it considers the subjective circumstances of the individual in question. Likewise, ss 226H and 226J refer to the concepts of "intentional disregard" and "recklessness". These, again, are familiar concepts to the law, and are objective standards with subjective elements. Whether or not a taxpayer has a reasonably arguable position for the purposes of s 226K, however, is a purely objective test. That is clear from the words that the legislature has used to describe the standard that the taxpayer must meet to avoid a penalty. Put another way, ss 226G, 226H and 226J all examined the means (or process) that the taxpayer had utilised in complying with the Act. Section 226K only examined whether, as an end, the taxpayer had a reasonably arguable position. 134 As noted already, the legislative scheme for administrative penalties applicable in this case is materially the same as that considered by Middleton J in Traviati. As his Honour noted (at [72]), his conclusion was also consistent with that of Murphy J in Sent v Commissioner of Taxation [2012] FCA 382 at [219]. Furthermore, as the Commissioner noted, in Aurora Greenwood J did not treat the reasonably arguable position of the taxpayer as a substitute for the reasonable care test. 135 With respect to the administrative penalty provisions relevant here, I would respectfully adopt the reasoning of Middleton J in Traviati and conclude that item 3 and item 4 of the table in s 284-90(1) of Schedule 1 of the TAA provide for two different and independent standards. Although an objective standard, reasonable care takes into account the subjective circumstances of the individual in question, whereas whether a taxpayer has a reasonably arguable position is solely an objective test. 136 Whether or not Mr Fowler's position was reasonably arguable, he failed to take reasonable care that he complied with Division 13A of the ITAA 1936. On this basis, there is no error shown in the Commissioner's determination that Mr Fowler was liable to pay an amount of administrative penalty of $48,336.75 for the 2007 income year of income pursuant to s 284-75 of Schedule 1 to the TAA. 137 In view of the above conclusions, it is unnecessary to consider Mr Fowler's submissions with respect to the Commissioner's position in relation to Mr Tchacos. In any case, for the reasons outlined by the Commissioner in written submissions on penalty, this matter did not bear on Mr Fowler's administrative penalty liability.

DISPOSITION 138 For the foregoing reasons, the application should be dismissed. The Commissioner will have seven days to file any draft form of further orders for further consideration. The parties will both have seven days to file written submissions on costs. If no submissions on costs are filed within this time, I would order that the applicant pay the respondent's costs of and incidental to the application. I certify that the preceding one hundred and thirty-eight (138) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny.