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24 Feb 14 Moneys received under deferred compensation scheme ordinary income when received - Blank

The Federal Court (Edmonds J) has held that amounts (paid by way of instalments and totalling USD160,033,328.25) received by a taxpayer from his former employer pursuant to a deferred compensation scheme were ordinary income and assessable to the taxpayer in the years in which they were received or otherwise dealt with on his behalf. The amounts were ordinary income on the basis that they were a reward for his services as an employee.

The taxpayer's submission that the right to the payments under the scheme was an asset to which the capital gains provisions applied was rejected.

Edmonds J said, at para 101:

"It could not be seriously suggested, and I hasten to add that it was not, that the applicant’s contractual right to be paid a salary was reward for his services and its monetary value ordinary income, but the salary itself was nothing more than the realisation of that right and not ordinary income as reward for those services. In my view, the applicant’s right to deferred compensation...is no different. It is the money constituting the Amount, not the contractual right to the Amount, which is the reward for his services and if that analysis be correct, it is the money constituting the Amount which is ordinary income not the monetary value of the contractual right."

An alternative submission by the Commissioner that the amounts were dividends paid in respect of non-share equity interests was also rejected on the basis that the relevant "scheme" was not a "financing arrangement" as required by s 974-75(2) ITAA 1997. Employees could not "be said to be 'effectively funding the company by providing services instead of money'. Rather they are being rewarded for their performance by deferred compensation" (at para 84).

Blank v FCT [2014] FCA 87 (21 February 2014).


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