In summary: Sent v Federal Commissioner of Taxation [2012] FCAFC 187

The ATO released a Decision Review in regards to the following case in June 2013.


The taxpayer was the managing director and chief executive of a listed public company (Primelife Corporation Ltd).

Under his employment agreement, which was for a five-year term that commenced on 1 July 1998, he was entitled to a base salary, a fixed annual bonus and three additional bonus payments based on the company’s profits and losses in the 1999 to 2003 financial years.

In October 2001 a share issue deed was executed, which relevantly provided that the taxpayer would irrevocably waive his past and future bonus entitlements in return for an issue of five million shares in the company.

The company’s shareholders approved the share issue deed in November 2001, satisfying the condition precedent to its operation. In December 2001 the company paid $11.6 million (the value of five million shares) to a trust, of which the taxpayer was the sole beneficiary, and the trustee used those funds to subscribe for the shares.

The Commissioner issued notices of assessment that relevantly treated the $11.6 million payment as part of the taxpayer’s assessable income in the 2002 income year, and imposed an administrative penalty for the recklessness of the taxpayer’s tax agent assessed at the rate of 50% of the tax shortfall amount.

The taxpayer objected to the assessments and to the penalty. The Commissioner disallowed the objections and the taxpayer appealed to the Administrative Appeals Tribunal.

Before the Tribunal there was no evidence as to the mental state of the taxpayer’s tax agent. The Tribunal relevantly determined that $7.4 million was assessable income, and the appropriate administrative penalty was 25%.

The taxpayer appealed, and the Commissioner cross-appealed, to the Court on questions of law. At first instance the judge held that the entire $11.6 million was income, and that the taxpayer had not discharged the onus of establishing that the assessment by the Commissioner of a 50% administrative penalty for the recklessness of his tax agent was excessive.


Whether the amount of $11,600,000 paid by Primelife Corporation Ltd (“Primelife”) to Primelife Share Plans Pty Ltd (“Trustee”) as trustee of the Primelife Executive Share Trust (“the Trust”), of which the appellant was the sole beneficiary, was assessable income of the appellant in the year of income ended 30 June 2002 (“the year of income”).


While the execution of the Share Issue Deed and the shareholders’ approval did not give rise to a derivation of assessable income by the appellant, had Primelife subsequently issued the shares to the appellant or, at his direction, to a nominee, such an event would have given rise to a derivation of income by the appellant as a reward for services rendered or to be rendered

The share entitlement was free and clear of any contingency as to services provided or to be provided and was not defeasible or subject to any condition subsequent which could be described in the way of “claw back”, whatever that encompasses. There would be nothing to deny derivation, in the sense of the shares “coming home”, at the time they were issued.

The character of any such benefit in the form of the shares issued would be income; they would be as much a reward for services rendered or to be rendered as payment of the bonus entitlements

The payment of $11,600,000 was in substitution for the appellant’s entitlement to his right to receive remuneration for his services in the form of the issue to him or his nominee of five million shares in Primelife.

The appellant accepted that payment as the performance of Primelife’s obligation under the Share Issue Deed to pay him for his services by the issue of those shares.

The arrangement under which the appellant gave up his right to the five million shares and accepted the money in its place could be not characterised as converting a receipt of an income character (the right to be issued the shares) into one of a capital character (the payment of the money in substitution for the right to receive the shares). From a “practical and business point of view”, both forms of receipt were intended to reward the appellant for his service to Primelife.

If an employer is obliged to furnish an employee remuneration in one form, the fact that the parties treat the employer’s obligation as having been discharged because the remuneration is furnished in a different or substitute form, does not alter the character of the receipt in the employee’s hand

Here, the appellant was content to have Primelife pay his nominee (the Trustee) the money in substitution for his absolute entitlement to the issue of the shares. But the whole purpose of the arrangements was to remunerate the appellant for his services immediately following upon shareholder approval of the terms of the Share Issue Deed.

It follows that the appellant derived the $11,600,000 as ordinary income within the meaning of s 6-5(4) of the 1997 Act as soon as Primelife paid it to the Trustee as his nominee and thus constitutes assessable income of the appellant in the year of income.

Peter Gell

Peter was admitted as a solicitor in 1981 and holds qualifications in law and a Masters degree in taxation conferred by the University of NSW. Peter practises in taxation advisory, estate planning and wills, probate and commercial law.