Watsford v Commissioner of Taxation

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: RICHARD WATSFORD

JUDGE: MORTIMER J DATE OF ORDER: 20 DECEMBER 2013 WHERE MADE: MELBOURNE

1. The appeal be dismissed.
2. The applicant pay the respondent's costs of this appeal. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 1096 of 2012

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: RICHARD WATSFORD

JUDGE: MORTIMER J DATE: 20 DECEMBER 2013 PLACE: MELBOURNE

Introduction AND SUMMARY 1 By a Notice of Appeal dated 18 December 2012, and amended with leave on 13 August 2013, Mr Watsford appeals on questions of law from a decision of the Administrative Appeals Tribunal. The Tribunal affirmed the Commissioner's decision in respect of an increase in Mr Watsford's assessable income for the 2007 tax year of $525,600 and the imposition of a shortfall penalty in the sum of $61,101, by reason of his acquisition of share options under the CBH Employees Option Plan. The appeal concerns Div 13A of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), which has now been repealed, but which dealt with employee share schemes. 2 The arguments raised before the Tribunal and this Court centre on the year in which Mr Watsford's tax liability arose. On the Commissioner's argument (which the Tribunal upheld), the share options were issued in May 2006 and, by reason of the application of s 139B(3) of the ITAA 1936, read with the applicable definition of "cessation time" in s 139CB(1)(b), the "cessation time" was 27 April 2007, when Mr Watsford's employment was terminated. Accordingly there was, the Commissioner contended, a tax liability in the year ended 30 June 2007. Mr Watsford did not declare the options in his return for that year. On Mr Watsford's argument, the share options were new options granted to him in Deed of Release in October 2007, in relation to the termination of his employment, and so should be included in his assessable income for the year ended 30 June 2008. 3 I am not persuaded that the questions raised in the amended Notice of Appeal should be answered in favour of the applicant. Principally, that is because only one question in the amended Notice of Appeal constitutes a question of law, and that question should be answered adversely to the applicant. If, contrary to that view, any or all of the other questions in the amended Notice of Appeal should be considered to raise questions of law, then all of them should in their terms also be answered adversely to the applicant. Accordingly, there will be orders dismissing the appeal.

RELEVANT FACTS 4 Mr Watsford commenced employment with CBH Resources Ltd (CBH) on 1 May 2006, and his terms and conditions of employment were set out in a letter from CBH dated 24 March 2006, which was in evidence before the Tribunal. Included in his terms and conditions was an entitlement to employee share options under CBH's employee share scheme. The CBH letter relevantly stated : The following options will be issued as part of your package subject to your continued employment with respect to the vesting dates. • 3 million 5 year CBH options; the option price to be the average price for CBH the three (3) months prior to your commencement date with the option vested as follows: 6 months from commencement - 1,000,000 CBH 12 months from commencement - 1,000,000 CBH 18 months from commencement - 1,000,000 CBH 5 The effect of this term was to entitle Mr Watsford to exercise his right to acquire each set of shares on 1 November 2006, 1 May 2007 and 1 November 2007 respectively. 6 The letter also dealt with termination of Mr Watsford's employment, giving each party the right to terminate the employment contract on three months' notice, in writing or by CBH paying salary in lieu of such notice. There was also a summary dismissal term. 7 The employee share scheme was governed by rules made and approved by CBH shareholders in 2003, entitled Rules of the Consolidated Broken Hill Ltd Employee Option Plan (the CBH Rules). These Rules made general provision for the grant of employee options by CBH. Rule 5.1 of the Rules provided that CBH may "offer Options to any Eligible Person at such times and on such terms as the Board considers appropriate". The Tribunal proceeded on the basis of Mr Watsford's evidence that he had received a document entitled "Terms and Conditions of employee options expiring 1 May 2011" (Options Terms and Conditions), which appeared to be made pursuant to Rule 5.1. There was no dispute between the parties that the Options Terms and Conditions formed part of Mr Watsford's terms and conditions of employment. 8 Mr Watsford did not exercise his right to acquire the first set of 1,000,000 shares on 1 November 2006. On 27 April 2007, and before his entitlement to the second set of shares vested, CBH terminated Mr Watsford's employment. The termination was effected by a letter dated 27 April 2007, in which CBH set out the reasons for the termination, referring to an earlier discussion about Mr Watsford's performance in April 2007. CBH paid him three months' salary in lieu of notice. 9 A dispute ensued between Mr Watsford and CBH about the termination of his employment. In May 2007, Mr Watsford wrote to CBH purporting to exercise the rights attached to the first set of 1,000,000 shares. He sent an employee share application to CBH, accompanied by a cheque for $330,000. CBH retained, but did not bank, the cheque. By email dated 30 May 2007, CBH refused to process the application. 10 The Tribunal found that an exchange of emails in late May and June 2007 between Mr Watsford and Mr Lonergan (CBH's General Counsel and Company Secretary and its principal witness before the Tribunal) disclosed that Mr Watsford was of the view that he had exercised his rights under the share options in accordance with his employment contract. In turn, the Tribunal found, CBH considered the exercise by Mr Watsford of his employee share options could be a useful bargaining tool in resolving the employment dispute. 11 The Tribunal found that, after protracted negotiations, the parties settled the employment dispute and entered into a Deed of Release dated 12 October 2007. The Deed contained the following provisions relevant to the issues before the Tribunal and this Court: 1.2 Definitions … (e) Options means options each over a share in the Company with an exercise price of 33 cents granted to the Employee in 2006. (f) Termination Date means 27 April 2007. 2. TERMS 2.1 Payments … (c) The Company will process (subject to the receipt of cleared funds in the amount of the aggregate exercise price) within 5 days of receiving a copy of this Deed duly executed by the Employee, the application for the exercise of 1,000,000 options for which a cheque has been forwarded by the Employee to the Company. (d) The Company agrees that 1,000,000 Options may be exercised by the Employee before 30 November 2007 and any application to be processed (subject to the receipt of cleared funds in the amount of the aggregate exercise price) within 5 days of that application. 12 The Tribunal found that Mr Watsford did not disclose the exercise of the 2,000,000 CBH options in his income tax return for the 2007 income year. The Commissioner undertook a number of inquiries and Mr Watsford's accountants made various responses and submissions, which are recorded in the Tribunal's reasons and not presently material, but which continued into 2010. On 27 May 2010, the Commissioner issued a Notice of Amended Assessment in relation to Mr Watsford's income tax assessment for the year ended 30 June 2007. On 28 May 2010, the Commissioner issued a Notice of Assessment of Shortfall Penalty, assessing Mr Watsford for a 25% shortfall penalty of $61,101 for failure to exercise reasonable care. The Amended Assessment gave effect to the position taken by the Commissioner that Mr Watsford was required to include in his assessable income for the 2007 income year the discount from market value he received in relation to the exercise of the 2,000,000 CBH share options. 13 On 20 July 2010, Mr Watsford's solicitors lodged a Notice of Objection against the assessment and shortfall penalty, which was disallowed by the Commissioner on 14 April 2011. The Commissioner also maintained the imposition of a 25% penalty was correct and declined to exercise his discretion to remit all or part of the shortfall interest charge. 14 On 17 June 2011, Mr Watsford lodged an application for review with the Tribunal, in respect of both the assessment and the administrative penalty decision. 15 On 20 November 2012, the Tribunal affirmed the decision under review in respect of both the assessment and the shortfall penalty.

The terms of the CBH Rules 16 The manner and process by which employees could be offered options was set out in Rule 5.1 of the CBH Rules: 5.1 Subject to these Rules and the Listing Rules, the Company (acting through the Board) may offer Options to any Eligible Person at such times and on such terms as the Board considered appropriate. Each offer must state: (a) That the Eligible Person to whom it is addressed may accept the whole or any lesser number of Options offered. The offer may stipulate a minimum number of Options and any multiple of such minimum or any other number which may be accepted; (b) The period within which the offer may be accepted, and the period or periods during which the Options or any of them may be exercised and the Expiry Date; (c) The method of calculation of the Exercise Price; and (d) Any other matters which the Board may determine. … 17 "Eligible person" is defined in Rule 1.1 of the CBH Rules in the following terms: "Eligible Person" means at any time a person who then is a director or an employee (whether full-time or part-time) of a Group Company. 18 The exercise by an employee of options granted is dealt with in Rule 11 of the CBH Rules. Rule 11.1 provides: 11.1 Subject to these Rules and the terms of the Options, Options may be exercised at any time during the period commencing on the Issue Date and ending on the Expiry Date. 19 "Expiry Date", another critical term for the applicant's argument, is defined in Rule 1.1 as follows: "Expiry Date" means, in relation to an Option, the date determined by the Board prior to the offer of the relevant Options, subject to any restriction in the Australian Corporations Legislation from time to time but in any event no longer than 5 years from the date of grant of the Option. 20 Rule 11.3, on which the applicant placed considerable emphasis in argument about the first issue, provides: 11.3 Options not exercised on or before the Expiry Date will automatically lapse. 21 Finally, Rule 13 deals with when a person ceases to be an eligible person. The applicant placed some emphasis on Rule 13.1 as the operative provision in respect of Mr Watsford, but also on Rule 13.2 for the purposes of advancing his construction argument. Those clauses provide: 13.1 Unless otherwise determined by the Board, if at any time prior to the earliest date any Options in a Series are exercisable, an Eligible Person ceases to be an Eligible Person for any reason other than Retirement, Permanent Disability, Redundancy or death, all Options in that Series held by such Eligible Person, or if appropriate, his or her Permitted Nominee, will automatically lapse. 13.2 For the avoidance of doubt, if at any time after the earliest date any Options in a Series are exercisable and prior to the Expiry Date of those Options an Eligible Person ceases to be an Eligible Person by reason of Retirement, Permanent Disability, Redundancy or death, such Eligible Person, or if appropriate, his or her Permitted Nominee, may exercise any or all of the Options in that Series held by him or her within 3 months of the date of Retirement, Redundancy or death or of the date of the Board's determination of Permanent Disability, or such longer period as the Board determines.

The Options Terms and Conditions 22 There is some overlap between the content of the CBH Rules and the specific Options Terms and Conditions applicable to the grant of options to Mr Watsford. The two documents must be read together. For example, the CBH Rules provide, in Rule 10, that options are not transferable, subject to Rule 13.4 which deals with transfer in circumstances where the option holder has died prior to the expiry date. Although the Options Terms and Conditions also state the options are not transferable, they do not refer to the exception in Rule 13.4. However, it is not to be supposed that the exception is rendered inapplicable: see Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133 at 144 per Isaacs J; Chapman v Chapman [1983] 2 NSWLR 420 at 434 per Priestley JA. 23 Term A of the Options Terms and Conditions is critical to the first issue raised by the applicant: The Options will expire on the earlier of the fifth anniversary of the option holder's date of commencement and the date the option holder ceases to be an employee of the Company ("Termination Date") or such date following the Termination Date as the Directors may determine ("Expiry Date"). 24 Term C sets out when each set of options vests, as well as when they lapse: The following numbers of Options shall become exercisable only after the following dates (a) 1,000,000 Options after 1 November 2006. (b) 1,000,000 Options after 1 May 2007 (c) 1,000,000 Options after 1 November 2007 Options not exercised before the Expiry Date will lapse on the Expiry Date. 25 Term G provides the method by which options are to be exercised: Options shall be exercisable by the delivery to the registered office of the Company of a notice in writing stating the intention of the option holder to: (i) exercise all or a specified number of Options; and (ii) pay the Exercise Price in respect of each of those Options. 26 In this case, that was the method relied on by Mr Watsford in May 2007, which CBH rejected. The Tribunal found that Mr Watsford was told by CBH that after the termination of his employment he had no right to exercise the options and, by reason of the Tribunal's construction of the employment contract, it found CBH's position to be correct. The Tribunal found that, after the termination of Mr Watsford's employment, there needed to be a decision by the directors to determine the expiry date for the options before there was a right to exercise them.

THE RELEVANT PROVISIONS OF THE ITAA 1936 27 Division 13A of the ITAA 1936, as it applied at the time of the Tribunal's decision, contained the following relevant provisions: 139B Discount to be included in assessable income (1) If a taxpayer has acquired a share or right under an employee share scheme, the assessable income of the taxpayer includes the discount given in relation to the share or right 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. 139C Employee share schemes (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. 139CB Cessation time - rights (1) The cessation time for a right is the earliest of the following: … (b) the time when the employment in respect of which the right was acquired ceases; … 139CC Calculation of discount (1) This section sets out how to calculate the discount given in relation to a share or right. … Case 3 - discount covered by subsection 139B(3) - share or right not disposed of at arm's length within 30 days (4) If subsection 139B(3) applies to the discount, and the share or right (or any share acquired as a result of the exercise of the right) is not disposed of by the taxpayer in an arm's length transaction at the cessation time or within 30 days after the cessation time, the discount is: (a) the market value of the share or right (or the share acquired as a result of the exercise of the right) at the cessation time; reduced by: (b) the amount of any consideration paid or given by the taxpayer as consideration for the acquisition of the share or right; and (c) for a right that has been exercised - the amount of any consideration paid or given by the taxpayer to exercise the right. Note: Section 139DS can affect the amount of consideration that the taxpayer is treated as having paid or given. 139DD No benefit where rights lost (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. (2A) To avoid doubt: (a) the taxpayer does not lose the right if, because of section 139DQ, another right is treated, for the purposes of this Division, as if it were a continuation of that right; but (b) the taxpayer loses the right if the taxpayer loses the other 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. 139G Meaning of acquiring or providing a share or right 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.

The Tribunal's findings 28 The terms of the Tribunal's decision make it apparent that there was little real dispute between the parties about the applicable statutory provisions or their interpretation. The real dispute concerned the characterisation of the options acquired by Mr Watsford. The Tribunal identified the essential issue in dispute between the parties (at [33]) as: whether the options exercised by Mr Watsford on 12 October 2007 and 19 November 2007 were those options which he acquired while he was an employee of CBH or, as Mr Watsford claims, those options had lapsed due to the termination of his employment and the subsequent options which he acquired were new options issued by CBH in the course of settling his employment dispute. 29 In this proceeding, the applicant did not take issue with the Tribunal's identification of the essential issue in dispute. 30 Relying on s 176 of the Corporations Act 2001 (Cth) (Corporations Act), the Tribunal found that the registers kept by CBH pursuant to s 170 of the Corporations Act, the CBH share register and the reports by CBH to the Australian Stock Exchange (ASX) under the ASX Listing Rules all provided evidence of the conversion of 2,000,000 existing employee options to ordinary shares in CBH and the lapse of a further 1,000,000 such options. Against this, the Tribunal noted Mr Watsford's own evidence that the options he exercised in October and November 2007 were new options and not those acquired under his contract of employment with CBH. 31 The Tribunal then considered whether the CBH options had lapsed prior to them being exercised. It examined closely the Options Terms and Conditions, and CBH's refusal of Mr Watsford's application in May 2007. The Tribunal concluded (at [60], [63]): Term A does not restrict the directors of CBH to making a determination about the expiry date following the termination of employment to the period of time prior to the termination of employment. In other words, Term A provides that the expiry date of the options can be extended beyond the termination of employment of the employee concerned even after the termination has occurred. Had it been intended otherwise, I have no doubt that Term A would have expressly stated such a restriction. … While Term A of the Terms and Conditions clearly provides that the options expire on the date the option holder ceases to be an employee of the company, it leaves open the possibility of an extension by the directors of the expiry date. Therefore, until such time as the directors made a determination, or indicated expressly and clearly that all of the options had expired on the termination of Mr Watsford's employment, the possibility remained open that the time for termination of those options would be extended. Therefore, Mr Lonergan's e-mail in May 2007 that Mr Watsford did not have the right to exercise those options at that time was plainly correct and was subject to the directors making a determination about extending the expiry time. 32 The Tribunal then considered the terms of the Deed of Release, in particular its definition of "Options", which I have extracted at [11] above. The Tribunal found (at [67]): … the Deed then provided that CBH would process Mr Watsford's application for the exercise of the first tranche of 1,000,000 options following receipt of cleared funds and that the right to exercise a second 1,000,000 tranche of options could be exercised before 30 November 2007. Having regard to the definition of Options in the Deed of Release, it is not possible to conclude otherwise than the parties agreed to the extension of time for the exercise of 2,000,000 of the 3,000,000 options granted to Mr Watsford on commencement of employment with CBH in 2006. They did not agree to the extension of time for the third tranche of 1,000,000 options and that tranche was cancelled. The Deed of Release also has a term stating that the Deed constitutes the entire agreement of the parties relating to its subject matter and supersedes all prior understandings, negotiations, agreements, written or oral, express or implied, in relation thereto. The options register was subsequently amended in accordance with the Deed of Release and notices given to the ASX. CBH did not lodge with the ASX a notice indicating the issue of new options. (Original emphasis.) 33 The Tribunal found the applicant's submission to be contrary to the definition of "options" set out in the Deed, and contrary to the parties' conduct, including the conduct of CBH with respect to the notices given to the ASX. It rejected the applicant's submission that the "determination" of which Term A in the Options Terms and Conditions document speaks required a formal determination by the directors of CBH. 34 It found, in substance, in entering into the Deed (the Deed having been signed by the Managing Director), CBH had made a determination of the "expiry date" for the purposes of Term A of the Options Terms and Conditions. The Tribunal expressed its conclusion thus (at [71]): In those circumstances, I find that the date on which the employee options issued to Mr Watsford expired was extended in accordance with the terms of the Deed of Release executed on 12 October 2007. The 2,000,000 options which Mr Watsford exercised in October and November 2007 were options which he acquired under the CBH ESS. They were not new options as was claimed by Mr Watsford. There is nothing in the Deed of Release to suggest they were new options and in fact, the very definition of Options in the Deed makes it clear they were not. 35 Although it had spent some time in its reasons considering the financial statements of CBH, the Tribunal made it clear (at [72] of its reasons) that it did not rely on those statements for anything other than evidence which was consistent with the findings it had made based on its construction of the Options Terms and Conditions and the Deed of Release. 36 Those findings by the Tribunal led it to conclude that s 139DD of the ITAA 1936 had no application to the circumstances before it. It held that Mr Watsford: did not lose the right in the form of the options without having exercised it. He subsequently exercised the right provided by the options in relation to the first two tranches of options which he acquired at the commencement of his employment in 2006. He did lose the right to exercise the third tranche of options. 37 The Tribunal then found that the "cessation time" for the purposes of s 139CB(1)(b) of the ITAA 1936 was the time when Mr Watsford's employment ceased, namely 27 April 2007, which in turn meant the discount sum of $525,600 was required to be included in his assessable income for the 2007 income year. 38 On the Commissioner's penalty decision, which was calculated by reference to Item 3 of s 284-90 of the Taxation Administration Act 1953 (Cth) (TA Act) on the basis that Mr Watsford or his agent failed to take reasonable care to comply with a taxation law, the Tribunal found the Commissioner's assessment on penalty was correct. 39 The Tribunal's reasons record that the Commissioner had imposed a penalty on the applicant pursuant to s 284-75(1) of the TA Act, which relevantly provides: (1) You are liable to an administrative penalty if: (a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law; and (b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and (c) you have a shortfall amount as a result of the statement. 40 The Tribunal's reasons also record that the calculation of the base penalty was undertaken pursuant to s 284-90, in particular Item 3 of the table in s 284-90(1). This meant the base penalty was said to be 25% of the shortfall amount, as defined in s 284-80. To fall within Item 3 of the table in s 284-90(1), the shortfall amount must have resulted from a failure by the taxpayer or the taxpayer's agent "to take reasonable care to comply with a taxation law". 41 The reviewable decision of the Commissioner relied on both ss 284-75(1) and 284-75(2) of the TA Act. Section 284-75(2) provides: (2) You are liable to an administrative penalty if: (a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under an income tax law; and (b) in the statement, you or your agent treated an income tax law as applying to a matter or identical matters in a particular way that was not reasonably arguable; and (c) you have a shortfall amount as a result of the statement; and (d) item 4, 5 or 6 of the table in subsection 284-90(1) applies to you. 42 On the hearing of the application in this Court, there was some debate about what might be drawn from the fact that the Tribunal's reasons refer only to s 284-75(1). Ultimately, the applicant accepted that s 284-75(2) could provide a basis for the imposition of a penalty, as the reviewable decision recorded, because the applicant's contentions about the reasonableness of the position he took were equally applicable to both provisions. Further, the Commissioner submitted, and I accept, that [86] of the Tribunal's reasons should fairly be read as a finding by the Tribunal that the Commissioner's decision on the application of both ss 284-75(1) and 284-75(2) was correct. 43 The Tribunal expressed agreement with the Commissioner's finding that Mr Watsford had made a statement that was false and misleading because the CBH options were not new options. 44 The Tribunal then turned to examine the application of Item 3 in the table in s 284-90(1) and the asserted failure to take reasonable care to comply with a taxation law. It referred to the decision of Greenwood J in Aurora Developments Pty Ltd v Federal Commissioner of Taxation (No 2) (2011) 196 FCR 457 at [38]-[39], where his Honour stated: It follows as a matter of principle that the reasonable care test 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. 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. At para 1.75 of the Explanatory Memorandum, the observation is made that a taxpayer who prepares his or her own Business Activity Statement would usually be taken to have exercised reasonable care if the taxpayer relies upon the advice of an accountant or lawyer (or both) whom the taxpayer could reasonably expect to provide competent advice on the relevant matter in issue. At para 1.76, the observation is made that a taxpayer would be at risk of a penalty if the taxpayer was careless (that is to say, did not act reasonably) in presenting all of the relevant facts to an adviser and such a failure materially affected the advice upon which the taxpayer sought to rely. 45 The Tribunal then identified a number of problems in the evidence before it on this issue. It identified: gaps in the evidence about what Mr Watsford told his accountants, the absence of any correspondence between Mr Watsford and his accountants about his instructions, whether he provided the information from his Quicken program to his accountants, no evidence whether Mr Watsford provided his accountants with the Deed of Release, and no evidence that Mr Watsford's lawyers were under the impression Mr Watsford thought the 2006 options had expired. The Tribunal also relied on the fact Mr Watsford was legally represented in his employment dispute negotiations with CBH and the Tribunal's inference (which it was entitled to draw) that his lawyers were aware of the definition of "Options" in the deed. 46 The Tribunal also rejected the submission made on behalf of Mr Watsford that, if the expiry argument was reasonable and arguable and Mr Watsford believed this, that was sufficient to meet the reasonable care standard in s 284-90 of the TA Act. It held (at [83]): Had he provided that document to his accountants, I have no reason to doubt that they would have come back to him with some questions about that. It follows I cannot accept Ms Baker's submission that to the extent that Mr Watsford had formed a belief concerning the options which was reasonable and arguable on the facts, it must follow that he took reasonable care in lodging his income tax return for the 2007 income year. 47 Finally, the Tribunal also rejected the submission that Mr Watsford's position was "about as likely as not correct". It found (at [85]): No question arose in this case about the nature or legal characterisation of the options. The only matter in dispute was the characterisation of the terms of the contract between Mr Watsford and CBH regarding the options. Whether those options had lapsed or expired was simply a matter of carefully interpreting the terms of the agreement between the parties. As I have indicated above, a careful reading of the rules of the ESS and the Terms and Conditions under which the options were issued to Mr Watsford makes the situation abundantly clear. If that were not enough, there can be no disputing what is set out in the Deed of Release. 48 On appeal to this Court there was no dispute between the parties about the calculation of Mr Watsford's tax liability, nor about the quantum of the penalty imposed, if the challenges in the appeal otherwise failed.

The amended Notice of Appeal 49 Leave was granted to the applicant to rely on an amended Notice of Appeal, dated 30 July 2013. 50 The amended Notice of Appeal identifies seven questions of law. As developed in both the written submissions and oral argument, the applicant identified three issues he asked the Court to determine: (a) Whether the Tribunal erred in holding that the directors could extend the Expiry Date of the 2006 Options in the Deed of Release, after Mr Watsford's employment terminated. (b) If the 2006 Options would otherwise have lapsed on the termination of Mr Watsford's employment, whether the Deed of Release prevented the 2006 Options from so lapsing. (c) Whether on the termination of his employment Mr Watsford lost his right to acquire shares for the purposes of s 139DD of the ITAA 1936, because any exercise of those rights after termination of employment depended upon the exercise of a discretion by the directors of CBH. 51 It is debatable whether and how these three issues are referable to the questions of law in the Notice of Appeal. In his written submissions the applicant sought to link the argument on each issue with one or more questions of law. The first issue was asserted to be covered by questions of law 1, 2 , 3 and 6, namely: The first question of law raised on the appeal is whether, assuming that the Tribunal's findings of fact were correct, and having regard in particular to the Tribunal's findings that - a. the Applicant's employment terminated on 27 April 2007 (at par [19]); b. the terms and conditions of his employment included a term that the options would expire upon termination of his employment (at par [60]); c. the Applicant had not, at the date of termination of employment, exercised any of the options allotted to him (at par [61]); and d. his employer refused to accept the Applicant's purported exercise of the options in May 2007 (at par [61]) - it was open to the Tribunal to find (at para. [71]) that the options that were exercised in October and November of 2007 (Exercised Options) were options granted to him under the CBH Resources Limited (CBH) Employee Options Plan (EOP) on the commencement of his employment on 1 May 2006 (Original Options), and not new options. The second question of law raised on the appeal is whether, on the facts as found, in particular the facts set out at a. to d. above, it was open to the Tribunal to conclude at para. [73] that section 139DD of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) did not apply to treat the Applicant as never having acquired the Original Options. The third question of law is whether the Tribunal erred in its construction of Term A of the Terms and Conditions of the issue of options to the Applicant (Term A) at paras. [21] and [60] in holding that Term A of the EOP did not require the directors of CBH to make any determination extending the expiry date of the Original Options before the Original Options expired. The sixth question of law is whether, on the facts as found, the Tribunal erred in finding that the cessation time for the purposes of s 139B(3) of the ITAA 1936 for the Original Options occurred when Mr Watsford's employment with CBH terminated. 52 The second issue was asserted to refer to questions of law 4 or 5, namely: The fourth question of law is whether the Tribunal erred in law at paras. [68], [69] and [71] by treating the terms of the Deed of Release, which was executed after the Applicant's termination of employment, and which was enforceable as between the parties, as conclusively determining for the purposes of Division 13A of Part III of the ITAA 1936 that the expiry date of 2,000,000 of the Original Options had been extended. The fifth question of law is whether the Tribunal erred in its construction of the Deed of Release in paras. [68] and [71] where it found that the Deed of Release extended the expiry date of 2,000,000 of the Original Options. 53 The third issue was asserted to refer to question of law 2, extracted at [51] above. 54 The applicant also challenged the way the Tribunal dealt with the penalty imposed on the applicant. The issue said by the applicant to be raised about this was whether Mr Watsford's belief that he was exercising new options granted in October 2007 was reasonable, and whether he took a reasonably arguable position, so that there should have been no administrative penalty imposed by the Tribunal. 55 This was said to be dealt with by question of law 7, namely "whether it was open to Tribunal to impose the administrative penalty".

Questions of law: applicable principles 56 An applicant cannot avoid the task imposed by s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act), and its consequences for this Court's jurisdiction, by moving from expressed questions of law to "issues" and then asking the Court to address these "issues". Such an approach sidesteps the limits of this Court's jurisdiction imposed by s 44. 57 Unless a question of law is clearly identified, this Court has no jurisdiction under s 44 to make orders in respect of the Tribunal's decision: Birdseye v Australian Securities and Investments Commission (2003) 76 ALD 321 at [11]-[15]; TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 82 ALR 175 at 178. In this and other courts where a jurisdiction similar to s 44 exists, debate continues about what does and does not constitute a question of law. The identification of a question of law is not only necessary for the Court's jurisdiction, but an approach which does not identify a question of law causes a court to alter the function it is performing, to one where it undertakes a general review of a Tribunal decision: Australian Securities and Investments Commission v Saxby Bridge Financial Planning Pty Ltd (2003) 133 FCR 290 at [46] per Branson J. The Court's powers must be exercised "having regard to the limited nature of the appeal. Absent such restraint, a question of law would open the door to an appeal by way of rehearing": Osland v Secretary, Department of Justice (No 2) (2010) 241 CLR 320 at [20] per French CJ, Gummow and Bell JJ. 58 It is important to appreciate, in this context, the different roles played by the question of law posed in an amended Notice of Appeal, the grounds relied upon and the orders sought. In Birdseye 76 ALD 321 at [18], Branson and Stone JJ, with whom Marshall J agreed on this issue, said that the question posed should raise a "pure" question of law. Their Honours continued: It is in the specification of the grounds relied upon in support of the orders sought that, in our view, one should expect to find the links between a question of law, the circumstances of the particular case and the orders sought on the appeal. 59 In other words, a question of law (not fact) having been posed, the ground should then identify how it is said the Tribunal erred in dealing with or answering that question, and the error thus identified is what should support or justify the orders sought on the appeal. 60 One of the regularly agitated issues in this area concerns the meaning of words in a statute and the circumstances in which a question of law then arises: see, eg, Bell v Federal Commissioner of Taxation [2013] FCAFC 32 at [17]-[18]. The High Court has observed, by reference to its own decision in Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389 at 396-397, that notions of meaning and construction are interdependent, and in any statutory interpretation exercise the meaning of a word or phrase in a statute will be affected by context, syntax and other words used in the statute: Aktiebolaget HÄssle v Alphapharm Pty Ltd (2002) 212 CLR 411 at [36]. Observations such as that may suggest a narrowing of the circumstances in which the interpretation of statutory words determined to be used by the Parliament, in accordance with common understanding or that elusive term "ordinary meaning", is held not to give rise to a question of law. The development and refinement of the approaches to statutory construction (see, eg, Lacey v Attorney-General (Qld) (2011) 242 CLR 573 at [43]-[44]) may well signal the demise of the distinction made in cases such as Federal Commissioner of Taxation v Broken Hill South Ltd (1941) 65 CLR 150 at 160 and NSW Associated Blue-Metal Quarries Ltd v Federal Commissioner of Taxation (1956) 94 CLR 509 at 512. That point has not yet been reached: see Director of Public Prosecutions v JM (2013) 298 ALR 615 at [38]-[39]. 61 In this appeal, none of the questions of law in the amended Notice of Appeal challenge the Tribunal's construction of a provision in the ITAA 1936. At most, some of the questions go to the manner in which the Tribunal applied the relevant statutory provisions to the facts as found. Aside from circumstances where a decision-maker's application is so perverse as to fit the description of irrational, the determination of the way in which the statutory provisions apply to the facts as it has found them will not give rise to a question of law: see Vetter v Lake Macquarie City Council (2001) 202 CLR 439 at [26]. 62 The nuances of when the task described by the High Court in Vetter 202 CLR 439 at [26] may, in contrast, suggest an error of law (and thus be capable of giving rise to a question of law) were addressed by Basten JA in Health Care Complaints Commission v Karalasingham [2007] NSWCA 267 at [14]-[19] (Giles JA and Bergin J agreeing). I respectfully agree with his Honour's observations in those passages, and in particular at [18]-[19]: The use of the word "reasonably" as qualifying open or possible has been criticised as a "distraction": see Phillips JA in S v Crimes Compensation Tribunal [1998] 1 VR 83 at 90-91, in a passage quoted with approval by the Full Court of the Federal Court in Minister for Immigration and Multicultural Affairs v Epeabaka (1999) 84 FCR 411 at 421-422 and by Spigelman CJ in Attorney-General (NSW) v X at [60]-[61]. The preferable language may be that adopted by Jordan CJ in Australian Gas Light Co v Valuer-General (1940) 40 SR(NSW) 126 at 138: [I]f the facts inferred … from the evidence … are necessarily within the description of a word or phrase in a statute or necessarily outside that description, a contrary decision is wrong in law. Whatever the precise language used in particular circumstances, it is well understood that the test is intended to be the same. As Phillips JA noted in relation to review of a tribunal decision, "we are speaking of rational tribunals acting according to law, not irrational ones acting arbitrarily" (at p 91). The same may be said in relation to the characterization of the supposed error. It is according to this test that the Appellant must establish error in the present case.

Does the amended Notice of Appeal raise questions of law? 63 Only two of the questions of law posed in the Notice of Appeal refer to a provision of the ITAA 1936. Question of law 2 refers in terms to s 139DD of the ITAA 1936, but only for the purpose of posing a question about whether a finding made by the Tribunal about the application of s 139DD was "open" to it. For reasons I set out below, the argument as developed about s 139DD really turned on an attack on the Tribunal's findings of fact about whether the options granted to Mr Watsford were those referred to in his contract of employment in May 2006, or were new options given to him for the first time in October 2007. 64 The other way in which a question of law that uses the phrase "Whether it was open to the Tribunal" can be understood is as a challenge to the fact-finding of a tribunal on the basis that there was no evidence or other material at all before the tribunal that could have entitled it to reach the factual finding it did: see Bruce v Cole (1998) 45 NSWLR 163 at 188-189 per Spigelman CJ, and the cases there referred to. No submissions to this effect were made on behalf of the applicant in the current appeal. 65 Question of law 6 also refers to s 139B(3) of the ITAA 1936 and the concept of "cessation time". It attacks the Tribunal's finding that the relevant cessation time in respect of Mr Watsford's circumstances was the date of the termination of his employment. No submissions were made in writing or orally to develop this point. Indeed, in the written submissions, question of law 6 was said to be encompassed in the first issue identified by the applicant. That issue, as I discuss in more detail below, is wholly concerned with an impermissible attack on the Tribunal's fact-finding. 66 Question of law 1 also uses the "whether … it was open" formulation. No submissions were made to the effect there was no evidence at all on which the Tribunal could have based its findings. The question in its terms does not concern any provision in the ITAA 1936. Nor does the question deal with the construction of Mr Watsford's employment contract. In terms, it is dealing with the characterisation of conduct occurring in October and November of 2007, which is a question of fact. 67 Question of law 3 poses a question about the construction of Term A of the Options Terms and Conditions, which formed part of Mr Watsford's contract. The proper construction of a term in a contract, just like the proper construction of a provision in a statute, is a question of law: Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 78-79 per Isaacs J. The corresponding ground alleges the Tribunal in this case did not consider the nature of an option and the need for notice of exercise and payment to be made before the expiry date. Even if one understands this question and ground as encompassing the proper construction of the contract between Mr Watsford and CBH, in the sense of to what point in time did that contract allow for the options granted when he commenced employment to remain available, for the reasons I set out at [78] to [94] below, although a question of law is raised, this ground is not made out. 68 Question of law 4 proceeds, as I explain at [94] to [97] below, on a mistaken characterisation of the Tribunal's findings. It does not in any event raise a question of law because there is no contention raised about the construction of the Deed. Rather, the attack is on the Tribunal's finding that the Deed was evidence of the exercise of discretion by the directors, for which the Options Terms and Conditions and CBH Rules provided. That does no more than take issue with the Tribunal's fact-finding. 69 Question of law 5 suffers from the same problem in the sense that it also mischaracterises the Tribunal's findings. Although this question is styled as an argument about the construction of the Deed of Release, in reality it goes back to the only question of law in this case, which is the proper construction of Mr Watsford's employment contract (read with the CBH Rules) in terms of what "expiry date" referred to. Indeed, in his reply submissions, Mr Watsford expressly disavowed reliance on any questions about the construction of the Deed of Release, submitting the construction of the Deed of Release was "irrelevant to his arguments". 70 Question of law 6, like question of law 1, impermissibly seeks to challenge the application by the Tribunal of the facts as found to a statutory provision, in circumstances where there is no challenge to the construction of the statutory provision (s 139B(3)) itself. With its focus on the "cessation time" identified by the Tribunal for the purposes of s 139B(3) of the ITAA 1936, question of law 6 was not encompassed in the three issues identified by the applicant, nor developed in oral argument. No error in the Tribunal's construction of s 139B(3) was identified by the applicant. The Tribunal's approach to identifying the cessation time was one open to it on the materials before it and no further consideration of this question of law is required. 71 Finally, in my opinion, no question of law is raised in respect of the imposition of an administrative penalty by the Tribunal (question of law 7). The question of an appropriate penalty is a matter for the Tribunal. The manner in which this question of law is expressed exposes it as a challenge to the merits of the Tribunal's decision to uphold the penalty imposed by the Commissioner. There is no question of statutory construction raised about the relevant provision of the ITAA 1936: rather, the argument rests on a persuasive exercise about why Mr Watsford's conduct should not be characterised as a failure to take reasonable care to comply with a taxation law. That is a quarrel with the Tribunal's findings of fact. 72 On the conclusion reached about the existence of questions of law in the Notice of Appeal, the Court only has jurisdiction in relation to question of law 3. Nevertheless, in case I am wrong about the characterisation of the questions in the Notice of Appeal as amended, I deal in the alternative with each of three "issues" raised on behalf of the applicant, and the questions of law to which they were submitted to relate.

The applicant's characterisation of the Tribunal's reasoning process 73 It is as well to start with the way the applicant characterises the Tribunal's reasoning process, because in my opinion there is a flaw at the outset of the applicant's analysis. This flaw infects questions 4 and 5. Accordingly, the second issue does not arise for consideration, as well as there being no question of law. 74 The applicant submitted that the Tribunal found Mr Watsford exercised the 2006 Options, not fresh options, on two grounds - (a) Under Term A of the Terms and Conditions the Options did not expire until such time as the directors determined, or indicated expressly and clearly that all of the 2006 options had expired. (b) In the Deed of Release the parties agreed to extend the time to exercise the 2006 Options, and the deed superseded all earlier agreements. 75 I do not agree that is an accurate summary of the Tribunal's findings. It is clear from the Tribunal's reasons that it made the finding expressed at (a) above. This was the central plank of its reasoning and the basis on which it affirmed the Commissioner's decision. From that finding flowed the conclusion that s 139DD did not apply. 76 However, although the Tribunal did find (at [67]) that "[h]aving regard to the definition of Options in the Deed of Release, it is not possible to conclude otherwise than the parties agreed to the extension of time for the exercise of 2,000,000 of the 3,000,000 options granted to Mr Watsford on commencement of employment with CBH in 2006", in my opinion the Tribunal only used the terms of the Deed to confirm its finding in (a) above. 77 The contents of the Deed were not, in that sense, a basis for an independent finding about the characterisation of the options, or Mr Watsford's employment contract. Rather, the contents of the Deed provided evidence of the exercise of discretion by the Directors, for which the Options Terms and Conditions provided. The Deed was either (as those representing Mr Watsford submitted to the Tribunal) evidence that what had been granted were new options, or (as the Commissioner submitted) it was evidence that what had been granted were the 2006 options. Each argument depended on the interpretation of the Options Terms and Conditions, read with the CBH Rules. The Tribunal preferred the latter interpretation, which is at least in some way raised by question of law 3. Once the Tribunal determined the interpretation question, the evidence provided by the terms of the Deed involved conclusions of fact for the Tribunal to reach. The important point is that the Tribunal's reasoning turned on one basis, not two: namely (as set out at [63] of the Tribunal's reasons) the Options Terms and Conditions provided that, subject to the ultimate five-year limit set out in the CBH Rules, the Options did not expire until such time as the directors determined.

FIRST ISSUE: WHETHER THE TRIBUNAL ERRED IN HOLDING THAT THE DIRECTORS COULD EXTEND THE EXPIRY DATE OF THE 2006 OPTIONS IN THE DEED OF RELEASE, AFTER MR WATSFORD'S EMPLOYMENT TERMINATED (applicant IDENTIFIES Questions 1, 2, 3 and 6)

Mr Watsford's argument on the first "issue" 78 The applicant submitted the Court should find that the Tribunal erred in its construction of the Options Terms and Conditions because the Tribunal's construction is inconsistent with Rule 11.3 of the Rules, which provides for the 2006 Options to lapse automatically on the expiry date. If Term A is construed as requiring the directors to select such a date before an employee's termination date, it was submitted there is no inconsistency between Rule 11.3, which provides for the automatic lapse of the options on the expiry date, and Term A, which allows the directors to choose a date beyond the termination date as the expiry date. The Tribunal's construction was said to frustrate the operation of Rule 11.3, by allowing an exercise of discretion by the directors after an employee's employment had ceased. 79 Second, with respect to the 2,000,000 2006 Options, which were not exercisable at the date of Mr Watsford's termination of employment, the Tribunal's construction is inconsistent with Rule 13.1 of the Rules, which provides the 2,000,000 2006 Options lapse automatically on Mr Watsford ceasing to be an eligible person, unless otherwise determined by the Board. The Tribunal's construction was said similarly to frustrate the operation of Rule 13.1. 80 Third, it was submitted that the Tribunal's construction of Term A gave an employee's termination date very little work to do, since the options would not expire on the actual date of termination of employment unless the directors had, using the Tribunal's description, "made a determination, or indicated expressly and clearly that all of the options had expired". The options would remain on foot until the directors determined otherwise. 81 Fourth, the applicant submitted the Tribunal's construction is inconsistent with Rule 13.2 of the Rules, which deals with cessation of employment by reason of retirement, permanent disability, redundancy or death. While recognising this rule did not apply to Mr Watsford, the applicant submitted it could be used to test the consistency of the Tribunal's construction. He submitted the inconsistency arose because Rule 13.2 imposed a time limit on the exercise of options after an employee ceased to be an eligible person, whereas the Tribunal's construction of Term A allowed the CBH directors an indefinite period of time to determine whether an eligible person may exercise options after their employment is terminated. 82 Finally, the applicant submitted the Tribunal's construction gave rise to uncertainty in identifying the expiry date. It was said that, if Mr Watsford had wanted to lodge his tax return in July 2007, it would have been unclear whether the 2006 Options had or had not expired. Similarly, if the Deed of Release was not signed until July 2008, Mr Watsford would not have known whether the 2006 options had expired. This left, the applicant submitted, "everything up in the air" until the directors made their determination. 83 The general principles to be applied to the construction of the Rules (as part of the statutory contract between CBH and its shareholders and therefore to be construed in accordance with the same principles as those applying to other contracts) and the Options Terms and Conditions (as forming part of the employment contract between Mr Watsford and CBH) are those set out in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40]: The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction. 84 The two documents, although existing independently and having a different operation, are related and should be construed in a way which advances the purpose of the Rules: namely, to empower the Board to enter into contracts with employees in respect of share options. Where the grant of employee share options is contemplated by one document, through the execution, and on the terms of, another document, then the two should be read and construed together, so as to make commercial sense: see Zhu v Treasurer (NSW) (2004) 218 CLR 530 at 558-559. This includes taking sufficient account in the interpretation exercise of any hierarchy created by the two documents themselves. Reconciling the way the two documents are intended to operate together may involve invoking the principles of construction that words capable of bearing a very wide meaning may have to be given a narrower construction in that reconciliation process, especially if the effect of general words might be to nullify what the parties seem to have contemplated as an important element of the transaction (here, the grant of employee share options): William Sindall plc v Cambridgeshire County Council [1994] 1 WLR 1016 at 1024; Australian Medic-Care Co Ltd v Hamilton Pharmaceuticals Pty Ltd (2009) 261 ALR 501 at [241]. 85 The Rules are the general authorising source for the grant of options. They set some overall and fixed limits on the exercises of power by the Board, as determined by CBH shareholders. For example, in the definition of "expiry date", an upper limit of five years is set on the date at which the options must expire. Otherwise, the Rules evince a clear intention to leave the content of the term "expiry date" (and other specific terms and conditions) to be defined and set by the Board in contracts with individual employees. 86 The power given to the Board in Rule 5.1 to set the terms and conditions for the grant of options is wide, with the only two express qualifications being the subjugation of the exercise of power to the terms of the Rules themselves (for example, the five-year upper limit on the currency of options) and the minimum content which any offer of options must contain. It is important to the resolution of the matter whether the Tribunal's construction is correct to note that the limit imposed by Rule 5.1(b) is in itself one which gives broad discretion to the Board. Although it stipulates that any offer must specify "the period within which the offer may be accepted, and the period or periods during which the Options or any of them may be exercised and the Expiry Date" it is notable that the Rules do not seek to prescribe or otherwise constrain the content to be given to these matters. That is left to the discretion of the Board in the terms on which the offer is made. 87 Rules 11.1 and 11.3, on which the applicant relies, are similarly expressed and do not advance the applicant's construction. To the contrary they evince an intention that the Board is to be able to choose to define the expiry date in a way which it sees fit, subject only to such matters as the five-year upper limit imposed by the Rules. 88 In other words, the content given to the term "expiry date" in any given offer to employees is a matter for the Board to determine. There is no inconsistency with Rule 11.3 and there could not be, given that Rule 11.1 expressly contemplates the exercise of options within periods which are not determined by the Rules themselves, but left to be determined by the Board. 89 That being the case, any indeterminacy in the period over which the options are capable of being exercised flows from the operation of the Options Terms and Conditions, read with the Rules, and is an intended consequence. The description "uncertain" is a negative way to express the effect: the description "flexible" is a more positive way. In the current case, that flexibility operated to the benefit of Mr Watsford in the terms of settlement he was able to secure with CBH following the termination of his employment. 90 Similarly, in Rule 13.1, the operation of this Rule is made expressly subject to any determination of the Board to the contrary. That qualification picks up the powers conferred on the Board by Rule 5.1 to mould the terms and conditions of employee share offers to employees. 91 There are no inconsistencies in the Tribunal's construction of the kind alleged by the applicant. Nor is there any uncertainty of the kind identified by the applicant: the Options Terms and Conditions simply mean that until a date five years after the date of grant of the options, the options remain available to an employee, either as of right (subject to compliance with other requirements) if she or he remains employed, or at the discretion of the Board is she or he does not. 92 The Commissioner submitted that CBH, as a listed company, was required at law publicly to disclose whether the applicant still held any options as at 30 June 2007 in its financial statements/directors' report. On the evidence before it, the Tribunal found CBH made such disclosures. If, in any given case, there has been no exercise of discretion (one way or the other) under relevant terms and conditions of options contracts with employees whose employment is terminated, that is what a corporation would be obliged to do until the options expired at the end of five years. There is no uncertainty attached to that. An ex-employee could seek a decision (one way or the other) if she or he wished to clarify the situation for her or his own tax purposes. There is no relevant uncertainty. 93 The Tribunal's construction of the Options Terms and Conditions, read with the Rules, was correct. The result of this construction was that, after the termination of Mr Watsford's employment, the Board retained a discretion to decide to allow him to exercise the options previously granted to him, notwithstanding the termination of his employment. That discretion was subject to the ultimate five-year limit in the CBH Rules. The Deed is, as the Tribunal found, evidence of the exercise of that discretion. As the Commissioner submitted, and the Tribunal found, CBH acted consistently with this construction in not altering its options register to reflect expiry of CBH options, and in not notifying the ASX of the expiry of any CBH options nor the issue of any new ones. Accordingly, there was no error of law in the Tribunal's finding that the options were not "lost" for the purposes of s 139DD of the ITAA 1936.

SECOND ISSUE: IF THE 2006 OPTIONS WOULD OTHERWISE HAVE LAPSED ON THE TERMINATION OF MR WATSFORD'S EMPLOYMENT, WHETHER THE DEED OF RELEASE PREVENTED THE 2006 OPTIONS FROM SO LAPSING (APPLICANT IDENTIFIES QUESTIONS OF LAW 4 AND 5) 94 This issue concerns the effect of the Deed on the availability of the options, if they had otherwise lapsed. The Tribunal found that the options had not lapsed and there is no error of law in its approach to that finding. The Tribunal found the Deed provided evidence of the continuation of the options and was evidence of an exercise of discretion by the directors, as contemplated in the Options Terms and Conditions, and the Rules. It was entitled to find that the language of the Deed and especially the definition of "options" in the Deed supported the finding it made. 95 Accordingly, this second issue does not arise for consideration. The applicant's argument that what he described as the "taxable facts" were fixed on 30 June 2007 and did not include the options because there had been no determination made is not an argument the Court need consider. The applicant's attempt to rely on the remarks of Hill J in Davis v Federal Commissioner of Taxation (2000) 171 ALR 654 at [55] does not arise for consideration. 96 The Commissioner submitted this was, in any event, a new argument and the applicant should not be permitted to raise it for the first time on appeal. The Commissioner identified the prejudice which would be suffered as the inability to respond to the argument with a counter-argument based on the concept of rectification. That is, the Commissioner submitted that if the applicant was permitted to put the "taxable facts" argument and it was accepted, consideration would need to be given to whether the Commissioner is correct to contend that by a Deed such as the one under consideration in this proceeding, the parties could nevertheless rectify their agreement if they were under a mutual mistake as to the effect of the contract between them about the grant of options. The Commissioner contended there was sufficient evidence in what was before the Tribunal to make it clear the parties had acted on the basis the options were still available after Mr Watsford's termination of employment. 97 In an appeal under s 44 of the AAT Act, the Court should not generally entertain an argument not raised before the Tribunal, dependent on findings of fact the Court is asked to make which the Tribunal was not. While there may be limited circumstances in which the Court may draw inferences of fact, or perhaps make findings, in order to determine a question of law arising from the Tribunal's orders, neither the applicant's "taxable facts" argument nor the Commissioner's rectification argument are of that character. Neither argument was put to the Tribunal, and therefore there is no fact-finding about either of them. Even if, contrary to the Court's findings, the second issue was seen to arise, the applicant should not be permitted to run a case different from that which he put to the merits review tribunal, especially where different factual issues may be raised: Bell v Federal Commissioner of Taxation [2013] FCAFC 32 at [16].

THIRD ISSUE: WHETHER ON THE TERMINATION OF HIS EMPLOYMENT MR WATSFORD LOST HIS RIGHT TO ACQUIRE SHARES FOR THE PURPOSES OF Section 139DD OF THE ITAA 1936 (APPLICANT IDENTIFIES QUESTION OF LAW 2) 98 As the Commissioner submitted, the applicant's submission to the Tribunal about s 139DD was quite different to his argument in this proceeding about the operation and effect of s 139DD. 99 Before the Tribunal, the applicant submitted that he "lost" his options on termination of his employment on 27 April 2007, without having exercised them. In contentions consistent with those which constituted his arguments about the construction of the CBH Rules and the Options Terms and Conditions, he submitted the Deed was a new agreement, creating new share options, and that the options granted under the Deed were "not the same options" as those issued to the applicant in May 2006. 100 The applicant submitted to the Tribunal that this sequence of events fell within s 139DD(2) of the ITAA 1936. 101 The Tribunal dealt with this argument. Unsurprisingly, given the way the argument was couched, the Tribunal saw the answer to this submission as lying in the findings it had already made on the principal question whether the options granted to Mr Watsford were new options or were the ones he had been granted at the time of his employment with CBH. 102 The Tribunal found (at [73]): Given the findings of fact which I have made above, s 139DD of ITAA 1936 cannot have any bearing on Mr Watsford's case. He did not lose the right in the form of the options without having exercised it. He subsequently exercised the right provided by the options in relation to the first two tranches of options which he acquired at the commencement of his employment in 2006. He did lose the right to exercise the third tranche of options. 103 That paragraph involves findings of fact. There being no contest between the parties about the proper construction of s 139DD of the ITAA 1936, and there being evidence and other material available to the Tribunal, it was open to the Tribunal to make the finding it did about the non-application of s 139DD. Its finding on this matter depended on its conclusion about the construction of the Options Terms and Conditions and the CBH Rules and for the reasons already expressed there was no legal error in that principal finding. 104 Before this Court, the applicant sought to develop his contentions about the operation of s 139DD rather differently. He sought to focus on the discretionary nature of any entitlement Mr Watson had after the termination of his employment in April 2007. In the face of the Commissioner's written submissions in advance of the appeal that his argument was new and not put to the Tribunal, and that the question of law as currently expressed was not a question of law and did not go to the matters the applicant now sought to raise, he did not seek leave to amend further his Notice of Appeal. The Court's jurisdiction then remains limited to that which appears in Mr Watsford's amended Notice of Appeal. 105 Instead the applicant submitted in reply that what the respondent was objecting to was "the same argument put differently to reflect the Tribunal decision and subsequent case law in the argument". The applicant submitted that, even if the options did not lapse, Mr Watsford lost his right to acquire shares when his employment was terminated, and this was "the result of the Full Court's reasoning in Fowler v Federal Commissioner of Taxation (2013) 212 FCR 149, a judgment delivered after the Tribunal's decision in this case." He contends the argument based on Fowler is solely on the law as set out in that case and on the "undisputed facts". The applicant identifies in his reply submissions as the point from Fowler concerning the meaning of the term "right to acquire shares", which appears to be a more general reference to similar phrases used throughout Div 13A, and perhaps most relevantly in provisions such as s 139B(1), which uses the phrase "acquired a share or right under an employee share scheme". 106 The Tribunal stated in its reasons that there was no dispute between the parties that Mr Watsford's rights under the CBH employee share scheme were "qualifying rights" for the purposes of Div 13A. So much was also expressly conceded in Mr Watsford's submissions to this Court. To accommodate reliance on the Full Court's reasoning in Fowler, Mr Watsford essentially sought to rely on s 139DD to concede that, although there was a qualifying "right" until Mr Watsford's employment was terminated, thereafter the "right" was transformed into nothing more than "a right that may have led to the acquisition of a right to acquire shares, but it was not a right to acquire shares" because, after the termination of employment, Mr Watsford was dependent on the exercise of a discretion by the directors: see Fowler 212 FCR 149 at [94] per Besanko J. 107 The Commissioner correctly submitted that Fowler involved the question whether a right to acquire shares had been acquired at a time when options had not yet been issued, in contrast to Mr Watsford's circumstances. The Commissioner submitted that the Full Court held that no such right had been acquired, inter alia, because the taxpayer did not have an unconditional contractual right to have options issued to him. All he had was a right to insist that a company put the issue of options to him to its shareholders for their approval. In contrast, the Commissioner submitted that Mr Watsford did not dispute he had acquired rights to acquire shares when the CBH Options were issued to him. In Fowler, the Court accepted that options are Div 13A rights, and something less than an option can also be a Div 13A right. Further, the Court accepted that an option can be a Div 13A right despite conditions being placed on its exercise. 108 In the present case, the Tribunal was not asked by Mr Watsford to examine and make findings about any transformation of Mr Watsford's previously undisputed Div 13A right into something less than that by reason of the termination of his employment. That was not the argument put about how Mr Watsford's rights were said to have been "lost" for the purposes of s 139DD. It is not possible for the Court in this appeal under s 44 to know whether and what facts might have been in issue before the Tribunal, and necessary for it to decide, in order to consider and determine that argument. The factual issue of how and when the CBH directors exercised their discretion under the Options Terms and Conditions to determine an expiry date after the termination of Mr Watsford's employment may have become a much more important factual issue than it was. For example, the Tribunal dealt briefly with, and rejected, a submission put on behalf of Mr Watsford that there needed to be a formal determination by the directors to "extend" the expiry date. 109 The Court should not speculate one way or the other on the course the evidence and argument may have taken in the Tribunal had this matter been raised. Suffice to say it is likely to have been quite different from the approach to s 139DD required by reason of Mr Watsford's initial submission to the Tribunal about the operation of that provision. 110 More critically, the Fowler argument finds no expression in the Notice of Appeal on which Mr Watsford moves this Court. That is, as I have noted, despite the Commissioner's clear submissions about it being a new argument, and about the formulation of the questions as not giving rise to questions of law. The Court has no jurisdiction to consider the argument, even if it were otherwise appropriate. 111 It should also be noted that the Full Court in Fowler upheld the orders and relevant reasoning of the trial judge on the nature of Div 13A rights. The first instance judgment was delivered well prior to the Tribunal's decision: see Fowler v Commissioner of Taxation [2012] FCA 1040. That authority was available to those advising Mr Watsford prior to the Tribunal hearing and it appears the argument was not put. Further, the argument in Fowler was based in large part on the decision in this Court of Commissioner of Taxation v McWilliam (2012) 204 FCR 478, which was also available to those advising Mr Watsford. I reject the submission that this argument was so "new" that it could not have been made prior to the Full Court's decision in Fowler.

PENALTIES (QUESTION OF LAW 7) 112 As I have outlined at [39] to [41] above, the penalty provisions in issue before the Tribunal were ss 285-75(1) and (2), and Item 3 of the table in s 284-90(1). There was no challenge to, or argument on the appeal about, the Tribunal's findings in respect of s 284-75(1) or (2), other than the principal argument about the asserted legal error in the Tribunal reaching the conclusion the options were the 2006 options. Accordingly, there was no question of law raised about the application of s 284-75(1) or (2). 113 The argument instead seemed to focus on Item 3 in the table in s 284-90(1) and what constituted a failure to take reasonable care. The applicant submitted that the correct construction of the terms of the options and the application of s 139DD were "matters about which reasonable minds night differ". It was submitted that, although the reasonable care test and the "reasonably arguable position" test are separate tests with different requirements, the reasonable care test has some subjective factors which are not relevant to the reasonably arguable position test. 114 Whether that is so or not does not advance the applicant's argument on this appeal, since only a failure to take reasonable care was in issue. At times, the argument seems to be that if reasonable minds might differ, then both positions were reasonably arguable, therefore there was no failure to take reasonable care. As a sequence, this argument runs many different concepts together in an impermissible way, however issues arising from this need not be explored. 115 The sole question arising for this Court is whether a question of law is identified with respect to the Tribunal's reasoning about the "failure to take reasonable care" requirement in Item 3 of s 284-90(1). If one is identified, the Court can consider the answer to it. 116 The question of law relied on by the applicant is expressed in the style of whether it was "open" to the Tribunal to impose an administrative penalty. That language, if it is to suggest a question of law at all, can only suggest a question whether there was any evidence at all on which a penalty could be imposed: Bruce v Cole (1998) 45 NSWLR 163. The ground in support of the question does not assist the applicant: it simply asserts error and then states that the Tribunal "should have found" the assessment was incorrect because "the Applicant did not make a false or misleading statement and/or the Applicant did not fail to take reasonable care to comply with a taxation law". Like the question, the ground asks this Court to assess the merits of the Tribunal's decision. 117 The applicant submitted in his written submissions that the terms of the options and the application of s 139DD are both matters about which reasonable minds might differ and "[t]he Court should therefore reject the Tribunal's conclusion that Mr Watsford's belief that he was exercising new options was necessarily unreasonable.… the Court should find that Mr Watsford satisfied the reasonably arguable position standard". This, and the general tenor of the submissions, both written and oral, expose the merits basis of this ground. 118 No question of law arises on the applicant's Notice of Appeal in respect to the penalty imposed by the Tribunal. 119 If I am wrong about the existence of a question of law then, doing the best I can to identify what it might be, I see no legal error in the approach taken by the Tribunal. The Tribunal considered the relevant provisions, and turned its mind to the principles to be applied, as set out in Aurora Developments 196 FCR 457. It then applied those principles to the evidence before the Tribunal. It made findings on the evidence about a number of factors suggesting a failure to take reasonable care: they are set out above at [45] to [46] of these reasons. In summary, most of those findings revolved around failures by Mr Watsford to give relevant information to his accountants, including alerting them to the terms of the Deed and the definition of "Options" in the Deed. Those findings were open to the Tribunal on the evidence and no legal error is made out. 120 As developed in writing and orally, and taking as generous an approach as possible to how the submissions were framed, there also seemed to be an argument about the Tribunal's approach to the standard contemplated by Item 3. The applicant submitted that the "error" made by Mr Watsford was in "the proper application of the law to the facts in circumstances where the applicable law was complex and Mr Watsford's level of sophistication as to the application of the tax law as an individual taxpayer was low". This, it was submitted, should not be seen as a failure to take reasonable care. 121 As the Commissioner submitted, the contention about Mr Watsford's "level of sophistication" cannot be sustained given, first, his position as an executive of a listed company and, second, (and more critically) his engagement of experienced tax agents/accountants. Further, this argument must confront the Tribunal's findings of fact about both gaps in the evidence before it and failures by Mr Watsford. Those matters render the argument unsustainable.

CONCLUSION 122 Aside from question of law 3, none of the questions in the amended Notice of Appeal are questions of law which confer jurisdiction on this Court under s 44 of the AAT Act. Question of law 3 is to be answered adversely to the applicant, on the basis that the construction of the Options Terms and Conditions and the CBH Rules adopted by the Tribunal was correct. 123 If, contrary to the findings I have made, any or all of the other questions confer jurisdiction on this Court and should be answered, they are to be answered adversely to the applicant for the reasons I have given. Those reasons include the fact that the applicant's arguments on those questions go to the merits of the tribunal's decision, and impermissibly raise new arguments on appeal for the first time. The failure to amend the Notice of Appeal to reflect arguments made also means there is no real basis for the Court to consider those arguments. 124 There is no basis for anything but the usual order as to costs. I certify that the preceding one hundred and twenty-four (124) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mortimer.