Blank – Australian High Court briefly affirms a finding that phantom units were not taxable when they vested

What essentially was a deferred compensation plan granted phantom units to an individual, who started off as an employee of Glencore International AG (“GI”) and later became employed by an Australian subsidiary, to participate in the cumulative profits of GI, although it was somewhat dressed up to look like he was investing in shares of the ultimate Swiss parent (Glencore Holding AG). The Australian High Court found that the U.S.$160 million to which he was entitled on his retirement was ordinary income rather than a capital gain when received.

Most of the case was devoted to the income v. capital receipt distinction. However, the “when received” aspect of this case briefly affirmed an interesting finding in the Full Federal Court below, which appeared to implicitly find that the phantom units were not income when they vested, but only when they were paid out. This is consistent with the proposition that phantom units are not constructively received when they vest but no exercise occurs (cf. Bianchini).

The High Court did not address the rejection by the Full Court of an argument that a pro rata portion of the U.S.$160 million was exempt based on the fact that for roughly his first eight years of service after the grant of a predecessor version of the units, the taxpayer had been a non-resident employed outside Australia (with the Full Court finding that the U.S.$160 million “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.”)

Neal Armstrong. Summaries of Blank v Commissioner of Taxation [2016] HCA 42 under s. 6(1)(a) and of Blank v. Commissioner of Taxation, [2015] FCAFC 154, aff’d [2016] HCA 42 under s. 6(1)(a) and s. 115(1)(a)(i).