In a decision that is interesting because of the increasing trend to defer incentive remuneration, the Federal Court of Australia has determined that amounts paid after termination of employment to settle incentive awards accumulated over many years of employment should be treated as ordinary income, rather than as capital amounts, an eligible termination payment, or anything else.

In V R Blank v Commissioner of Taxation [2014] FCA 87 (21 February 2014), the applicant worked as a coal trader with a global commodities trading firm. He participated in ‘profit participation plans’ whilst employed in several countries prior to termination of his employment on 31 December 2006. On 15 March 2007 the applicant executed documents pursuant to the profit participation plan as it then existed, which resulted in an entitlement to US$160 million plus interest, payable in 20 instalments over a 5 year period after termination of employment and with the final instalment being payable on 31 December 2011 (although this payment schedule was modified to pay the employee’s Swiss tax obligations). The applicant treated the 15 March 2007 event as giving rise to a capital gain to which the 50% discount applied (on the basis that it represented payment for interests he had received under the plan).

The Commissioner of Taxation issued amended assessments on the basis that the payments were assessable as and when received, as ‘eligible termination payments’ or, alternatively, ordinary income as a reward for services.

In his appeal statement, the Commissioner also argued that the payments may be assessable as dividends or non-share dividends (under s44(1) of the Income Tax Assessment Act 1936). The Court held that the payments were deferred compensation as a reward for services rendered.

The fact that the termination of employment was an occasion by reference to which the amount became payable did not mean that the payments were made in consequence of the termination of employment.

The full decision can be seen HERE.

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