Commissioner of Taxation v McWilliam: Employee share schemes

In Commissioner of Taxation v McWilliam [2012] FCAFC 105 (8 August 2012) the full court of the Federal Court has heard an appeal relating to the Income Tax Assessment Act 1936 (Cth) (ITAA), and “employee share schemes”.

The Commissioner had concluded that Mr McWilliam (the respondent) had adopted the wrong date as the date on which he acquired certain options to purchase shares in the Seven Network, and hence the wrong date at which the “discount” included in his assessable income ought to have been calculated under s 139CC of Division 13A of the ITAA.

The respondent’s position was that the relevant date was 1 July 2003, whereas the Commissioner considered the correct date was 22 December 2003 or alternatively 28 November 2003.  The Commissioner issued an amended assessment which included an additional $443,500.00 in the respondent’s taxable income for the year ended 30 June 2004 and imposed a tax shortfall penalty of five percent. Additional tax was attributable to a movement in the share price of Seven Network between the date asserted as the date of acquisition by the applicant and the date adopted by the Commissioner.

In March 2012, the Administrative Appeals Tribunal (AAT) set aside the decision and allowed the respondent’s objection in full “on the basis that the relevant date was 1 July 2003 for the purposes of s 139B of the ITAA.  Consequently, the applicant is not liable to pay penalty for shortfall.”

There were two main issues before the Court:

(i) Whether the Tribunal had decided that the respondent acquired a right to acquire shares in Seven Network on 1 July 2003, alternatively;
(ii) Whether the proper construction of the relevant provisions, the rights the respondent had acquired on 1 July 2003 were not rights to acquire shares in Seven Network.

The court dismissed the appeal stating  at [82] and [83] of the judgment that:

[82] 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.

[83] 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 following legislation was considered in the case:

• Administrative Appeals Tribunal Act 1975 (Cth) s 44

• Income Tax Assessment Act 1936 (Cth) ss 139B, 139C, 139CD, 139DD, 139FC, 139FF, 139G, as was the meaning of “right” in Division 13A.

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