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04 Jul 13 Employee share schemes: time of acquisition – Fowler

The Full Court of the Federal Court has found that a company director acquired options to purchase shares under an employee share scheme when the options were issued to him, following approval by shareholders at the annual general meeting, and not at the earlier date of resolution by the board of directors to issue options to the directors: Fowler v FCT [2013] FCAFC 69 (Besanko, Gordon and Dodds-Streeton JJ, 3 July 2013). The Full Court unanimously dismissed the taxpayer’s appeal from the first instance judgment in the Federal Court: Fowler v FCT [2012] FCA 1040.

On 14 September 2006, the board of the company resolved to issue options over unissued shares in the company to the directors, including the taxpayer, on the same terms and conditions as the company’s employees share option plan, and that shareholder approval be obtained prior to being issued.

Shareholder approval was duly given at the next AGM on 30 November 2006, and the options were issued to the trustee of the taxpayer’s family trust accordingly.

It was accepted that the options were issued under an employee share scheme within the meaning of Div 13A of Pt III ITAA 1936. The options were issued for no consideration. The Commissioner included an amount in the taxpayer’s assessable income under that Division, calculated by reference to market value at the date of acquisition of the options in accordance with s 139CC(2). The Commissioner decided that the date of acquisition was 30 November 2006. The taxpayer objected, claiming that the date of acquisition was 14 September 2006. The significance of the two dates was that the market value of the options was lower at the earlier date, and the amount to be included in the taxpayer’s assessable income would have been correspondingly lower.

The Full Court made the following findings.

The question was whether the options were “acquired” by the taxpayer for the purposes of Div 13A at the time they were issued (30 November 2006) or at the time of entry into the contract with respect to the options (14 September 2006). The Full Court held that, for the purposes of Div 13A, the options were not “acquired” until their issue on 30 November 2006.

On 14 September 2006 the taxpayer had a right to insist that the company put the issue of options to him to its shareholders for their approval. His right went no further than that. The company’s shareholders were perfectly entitled to reject the proposal and, if they did, the taxpayer had no redress against the company. Such a right is not properly characterised as a right to acquire shares in the company. The right the taxpayer had as a result of the contract entered into on 14 September 2006 was, as a matter of fact, an essential pre-condition to the right to acquire shares, but it was not a right to acquire shares.

On appeal, the taxpayer put an additional argument to the effect that the court should also take into account as a relevant contextual matter the CGT provisions and the relationship between them and Div 13A. The Full Court, however, decided that it did not need to address this issue.

The Full Court also upheld the primary judge’s findings as to penalty.

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