Legal News & Analysis – Asia Pacific – Australia – Tax

The Federal Court has found in Blank v Commissioner of Taxation [2014] FCA 87 that deferred payments made to the taxpayer, a former employee, under a deferred compensation scheme were reward for services rendered while the taxpayer was an employee, and not paid in consequence of the termination of his employment. Therefore, the amounts paid were assessable as ordinary income.

The taxpayer came to Australia in 2002, and became a resident of Australia for tax purposes at that time, to work for the Australian subsidiary of a global business. The employer operated employee profit participation plans, of which the taxpayer was a participant. As a result, the taxpayer received various shares in the employer entity. The taxpayer’s employment terminated with his employer on 31 December 2006, when the taxpayer resigned. He subsequently signed a Declaration of Assignment and General Release on 15 March 2007, in which, for consideration of USD160,033,328 , payable in 20 instalments over a 5 year period, he relinquished his claim to various payments and rights under the profit participation plans, as they stood and as they had been varied over the duration over his employment.

The taxpayer treated the signing of the declaration on 15 March 2007 as an event that gave rise to a capital gain. The Commissioner considered the amounts were assessable as dividends or non-share dividends.

 
The Court held that the amounts were deferred compensation as a reward for services while the taxpayer was an employee. Even though the amounts were not paid until the taxpayer’s employment was terminated, the Court considered that the termination of the taxpayer’s employment was only the occasion by reference to which the amount became payable, which was not sufficient for it to be said that the payments were made in consequence of the termination of his employment.

For further information, please contact:

Geoffrey Mann, Partner, Ashurst
[email protected]

Jadie Teoh, Ashurst
[email protected]

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