The High Court has dismissed an appeal from a judgment of the Full Federal Court on the taxation of income from employee profit participation arrangements. The appellant, a senior executive at a commodities firm, received a salary package that included a profit participation arrangement which paid him a lump sum of $160mil payable in several instalments, payable after he left his role (the Incentive Profit Participation Plan or ‘IPPA’). The international holding company was incorporated in Switzerland, and the IPPA operated in the form of a Genussscheine or ‘profit sharing certificate’. The central issue was whether this amount was ordinary income and thus part of the appellant’s assessable income under s 6-5 of the Income Tax Assessment Act 1997 (Cth). A majority of the FCAFC held that it was, and rejected the appellant’s claims that the rights under the IPPAs were a benefit provided in consideration for the appellant’s services (see [49]). Pagone J in dissent holding that it was a capital gain because it conferred on the appellant an entitlement similar to that of a shareholder (see [50]).

The High Court (French CJ, Kiefel, Gageler, Keane and Gordon JJ) unanimously dismissed the appeal, holding that the payments were ordinary income. The Court rejected the appellant’s argument that the amount paid was the proceeds of his exploitation of several interconnected rights that conferred on him a right to receive, in the future, a portion of the company’s profits, which should therefore be assessed as a capital gain. Instead, the Court held that the amount was received as part of the consideration for services rendered in employment. The IPPA described the amount as ‘deferred compensation’ payable after employment ceased (at [60]). Further, the right to claim that payment through the Genussscheine required the appellant cease employment, and would be granted ‘upon restitution to [the holding company] a claim to a cumulative portion of the balance sheet profit’ (see at [16]). The Court held this meant ‘a GS granted no more than a claim to a cumulative portion of the balance sheet profit, and that the claim was granted not upon the issue or allocation of the GS to the employee but upon restitution of the GS at the time the employment ceased.’: at [61] (emphasis in original). A lack of shareholder type rights and a focus to redistribute profits rather than provide the recipient with a return on the shares in the company, the appellant’s rights were not appropriately analogous to those of a shareholder (see [61]–[62]). Consequently, the amount was ordinary income in the form of deferred compensation for the appellant’s services as an employee and thus formed part of his taxable income.