Blank v. Commissioner of Taxation, [2015] FCAFC 154, aff'd [2016] HCA 42

The taxpayer was employed by Glencore International AG (“GI”) or a subsidiary from November 1991 to December 2006, with his employment in Australia commencing in 2002 when he also became an Australian resident. In 1994, GI granted him rights (Genusscheine, or “GS”) pursuant to an agreement with him and evidenced by profit sharing certificates issued pursuant to its articles of association, to share in future consolidated net income. At the same time, Glencore Holding AG (“GH”), the ultimate parent, issued shares to him for cash at their SF par value, with the shares being subject a put in his favour, and a call in GH’s favour, exercisable, at a price equal to the par value, upon his termination of employment or certain other triggering events. The two agreements were “stapled,” i.e., the validity of each agreement was conditional on the execution of the other.

The original agreement for GSs was replaced at various junctures, including in 2005 by the “IPPA 2005,” at which time the taxpayer was granted phantom units (Profit Participation Units, or “PPUs”) in GI for calculating his entitlement to the profit participation ultimately payable to him as deferred compensation (styled as “Incentive Profit Participation” or “IPP”) on the surrender of his rights and which were treated in much the same way as GSs (including stapling to an equal numbers of shares in GH). Under the IPPA 2005, his IPP became due 30 days after his termination of employment on December 31, 2006 and was payable in 20 instalments over five years (with interest). Pursuant to a Declaration dated March 31, 2007, the taxpayer, in consideration for the “Amount” of US$160,033,328 and CHF80,000, relinquished to GI his claims to the PPU and GS, and assigned all his GH shares to GH.

It was then agreed between the taxpayer and GI that GI would withhold from the full amount of the first four instalments of the Amount (two of which were due in 2007) on account of Swiss withholding tax, and an agreement to this effect was executed in January 2008, at which time the amount of the first two instalments was remitted to the Swiss authority (the FTA).

In finding that payments to the taxpayer were ordinary income derived by him, Kenny and Roberston JJ stated (at paras. 84, 89-90):

That the GS, Phantom Units and PPUs were not the benefit…conferred on the appellant under the relevant profit sharing arrangements but only mechanisms for calculating his profit share to be paid on termination exposes the fact that it was the payment of this profit share that was the actual benefit conferred on the appellant under the IPPA 2005… . In this circumstance, the fact that the IPPA 2005…described this payment as “deferred compensation” was not merely a label…but was an apt description… .

…The appellant had a restricted right to assign certain rights to a personal holding company provided he had GI’s consent. We are not satisfied that the profit participation agreements in this or any other way conferred a gain at the time the GS or Phantom Units were allocated to him that might be turned to pecuniary account… .

The fact that these two kinds of agreements were “stapled”…. does not mean that the PPUs (including GS and Phantom Units) were a calculation device to determine the value of the appellant’s shares in GH… .

Respecting the timing of recognition of the 2007 instalments, s. 6.5 of the Income Tax Act Assessment Act 1997 provided that "you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct." Kenny and Roberston JJ held (at para. 95):

The… Commissioner’s submission… postulates that income is relevantly “dealt with” on behalf of a taxpayer when the debtor (here GI) refrains from making payment of a debt due to the taxpayer at the creditor’s request. Brent v Federal Commissioner of Taxation [1971] HCA 48; 125 CLR 418 [at para. 13] indicates that more is required… . There was therefore no derivation of income in the 2007 income year when the first two instalments, though due, were merely withheld from payment to the appellant. … The applicant derived the first two instalments as income when, in January 2008, they were paid, with his agreement, to the FTA by GI on his behalf.

The taxpayer was employed by Glencore International AG (“GI”) or a subsidiary from November 1991 to December 2006, with his employment in Australia commencing in 2002 when he also became an Australian resident. In 1994, GI granted him rights to share in future consolidated net income, which initially were labelled as "GIs" and subsequently ((in a replacement agreement) as Profit Participation Units, or “PPUs.” After finding that the "Amount" (totalling U.S.$160 million) paid or to be paid to the taxpayer after his terminiation of employment pursuant to the PPUs was income to him, Kenny and Roberston JJ rejected the taxpayer's alternative argument that the Amount should be apportioned between an exempt and taxable amount based on the respective number of days of foreign and Australian service, stating (at paras. 100, 102, 104):

Section 23AG(1) exempts only foreign earnings derived by a taxpayer from foreign service engaged in by him… .

[N]o part of the Amount can be accurately characterised as earnings “derived … from … foreign service”, as opposed to earnings derived from foreign and Australian service. …

[T]he Amount was incapable of apportionment as between earnings from foreign service, on the one hand, and earnings not from foreign service on the other because the agreed method of calculating that Amount did not allow for that distinction to be made. The Amount was incapable of being calculated on a per diem basis as the appellant proposed. The appellant’s entitlement to the Amount depended on his allocation of vested PPUs…and GI’s profits during particular periods... . The calculation was made irrespective of the days on which the appellant was employed at any particular place. [emphasis in original]

In 1994, a non-resident executive was granted units which entitled him, on retirement, to receive payments calculated by reference to the consolidated profits of Glencore International AG, a Swiss corporation ("GI"). He retired at the end of 2006, and became entitled to receive U.S.$160 million in instalments commencing in July 2007. He and Glencore then agreed (pursuant to an agreement which was not executed until January 2008) that the first four instalments would be paid by GI to the Swiss taxing authority (the FTA) in satisfaction of Swiss withholding tax on the U.S.$160 million. This remittance occurred in 2008.

The relevant Australian tax law provided that, in the case of a reward for personal service, the income “derived” by the taxpayer is the “amount…actually received in the year in question” (Brent, 125 CLR 418, at para. 13), and a deeming provision specified that “you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct."

The Full Court of the Australian Federal Court held that although two of the four instalments were due to him in 2007, they were not income to him until 2008 when they were paid on his behalf to the FTA, stating (at para. 95):

The… Commissioner’s submission… postulates that income is relevantly “dealt with” on behalf of a taxpayer when the debtor (here GI) refrains from making payment of a debt due to the taxpayer at the creditor’s request. Brent v Federal Commissioner of Taxation [1971] HCA 48; 125 CLR 418 ...indicates that more is required… . There was therefore no derivation of income in the 2007 income year when the first two instalments, though due, were merely withheld from payment to the appellant. … The applicant derived the first two instalments as income when, in January 2008, they were paid, with his agreement, to the FTA by GI on his behalf.