Blank v Commission of Taxation [2016] HCA 42
Wednesday 9 November 2016 @ 11.51 a.m. | Taxation
The High Court of Australia has unanimously ruled that a lump sum paid in instalments pursuant to an incentive profit participation agreement after termination of employment was nevertheless income according to ordinary concepts. In the case of Blank v Commission of Taxation [2016] HCA 42, the Court held that for the purposes of section 6-5 of the Income Tax Assessment Act 1997, the payment described formed part of the taxpayer’s assessable income.
Background
Vaughan Rudd Blank was an employed by the Glencore Group under several of its various companies. One of Glencore’s companies, Glencore International AG operated employee profit participation plans for the benefit of certain employees and Mr Blank was selected for participation. Under the agreement executed in 1999, he was granted claims to a share of Glencore International’s profits in the form of a contractual claim which were profit sharing certificates provided under Swiss law.
The 1999 agreement was replaced with a 2005 agreement. Under this new agreement, Mr Blank was granted ‘deferred compensation’ such that if he ceased employment with Glencore, provided that he relinquished all claims under his agreement to shares of Glencore International’s profits (now retitled Profit Participation Units), he would be entitled to a lump sum paid in instalments.
My Blank’s employment was terminated in 2006 and accordingly, he relinquished his claims under the PPU and was entitled to a lump sum of over 160 million USD over 20 quarterly instalments.
Mr Banks argued that this was not taxable income within the definition of the Income Tax Assessment Act. The Federal Court of Australia disagreed with Mr Banks and ruled that the payment was deferred compensation for services rendered by Mr Blank. This decision was challenged in the Full Federal Court but was affirmed by the majority of the Court.
High Court Decision
The High Court unanimously agreed with the Federal Court and ruled that the payment was indeed deferred compensation for the services performed by Mr Blank for the Glencore Croup. The High Court therefore ruled that the payment was income according to ordinary concepts. The High Court disagreed that the amount was a capital gain because it did not represent the proceeds of the exploitation of interconnected rights that conferred on him a right to receive, in the future, a profit of Glencore International.
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