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Analysis and Comment on Sent v FCT代写

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  • A Case Analysis and Comment on Sent v FCT
     
    1.0  Summary of case
     
    In case Sent v FCT [2012] FCA 382[1] analyzed, Mr Sent was the CEO of Primelife Corporation Limited. In December 2001, the Primelife Executive Share Trust was created, and Sent was one of the eligible trustees. His bonus entitlements were used to buy 5 million company shares and thus the tax could be deferred until final disposal of the underlying shares. The key issue is whether the $11,6 million Payment to the Trust by the Employer is assessable income or not. The Tribunal held that a part of the $11,6 payment was assessable income. The Federal Court states that the $11,6 million Payment is assessable income according to section 6-5 of the Income Tax Assessment Act 1997.[2] Then the taxpayer Mr Sent appealed against to that decision on the ground that “an executive share trust were derived as ordinary income”[3], however, the Federal Court dismissed Sent’s appeal and supported the Commissioner of Taxation.
     
    2.0 Analysis of the $11,600,000 Payment
     
    According to section 6-5 of the Income Tax Assessment Act 1997, the assessable income includes ordinary income one derived directly or indirectly from all sources during relevant year.[4] As to the $11,600.000 Payment, Sent and the Commissioner have different arguments. And the key issue is whether the payment has the character of ordinary income. Mr Sent stated that the income must predicates a “gain” or “benefit”, but the fact was that the payment was made to the Trust and was not controlled by him. However, the Federal Court turned down his argument by citing Scott v Federal Commissioner of Taxation, which stated that the determinant factor of income is “the ordinary concepts and usages of mankind”.[5]
     
    Another key issue is the Trust has changed the character of income of this payment or not. According to the case facts, it is common admitted that the payment to the Trust is a substitute for Sent’s rights to shares. The Trust is used to issue share, without the Trust the shares may be issued by him and this is taxable. The change of form of payment would not influence the derivation of income. In this case, Mr Sent claims his payment not assessable based on the form of the Trust could not gain support.
     
    In addition, the Part IVA of the Income Tax Assessment Act 1936 did not apply to this case under the decision of the Federal Court.[6] The Commissioner stated under the above anti-avoidance provisions, some the the 11,6 million payment would be included in assessable income. However, the Federal Court did not use Part IVA because if under the section 6-5 of ITAA 1997, all the whole payment is regarded as ordinary income, there is no need to determine the application of Part IVA of ITAA 1936.
     
    3.0  Comment on the decisions in the case
     
    In this case, Sent denied that the payment was regarded as the income because of the substitution of the Trust. On this question, the Federal Court held that payment in substation for employment bonuses is assessable as ordinary income. This decision provides guidance for this question. The form of payment can not influence the character of ordinary income. The decision leads to a more profound understanding and interpretation of section 6-5 of ITAA 1997, especially the subsection 6-5(4). This provision is used to prevent a taxpayer from avoiding income tax through making certain amount be paid to others. In this case, the payment to the Trust was in respect of Sent and he was the sole beneficiary, thus this payment is his ordinary income in fact and need to be assessed. in one word, it offers as a guidance to operate the section 6-5 of ITAA 1997.
     
    However, the decision on this case also has brought about question on the effectiveness of trust which aims to inspire employees.[7] In the Sent case, the Federal Court and AAT agreed that the benefits of loan was assessable income, thus the employees are requested to pay for the tax when the money was lent. Under such circumstance, the tax will be assessed in advance, and it will prevent them from taking part in the employees’ corporation’s future success. In other words, the decision has will affect the effectiveness of the trust structure. The employees are under obligation of paying tax although his payment is in the form of trust. But on the other hand, this case remind the companies that if they would like to incentivize employees, they should be ware of structuring any trust incentive scheme in a correct manner and make sure that the employees know the tax implications of those structures. This case will guide the companies to behave in a better way to incentivize employees.
     
    It is worth nothing that the decision of this case is consistent with the ATO view in TR 2001/10. The ruling has stated that if the salary or wages are applied or dealt with by the company on behalf of the employee or as the employee has directed, the salary is derived when it is applied or dealt.[8] The decision accords with the TR 2001/10.
     
    4.0  conclusion
     
    In conclusion, through analyzing the Sent case, the taxpayer is request to pay the tax of the $11,600,000 Payment. The form of payment could not affect the character of ordinary income. The decision of the Federal Court helps to develop better interpretation of this provision. And it also has raised doubts about the effectiveness of trust as a way to incentivizing the employees. The decision is consistent with TR 2001/10. Hope the case provide a guidance for both employers and employees to find a better incentive way. 
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
    References:
     
    Cases
    Sent v FCT [2012] FCA 382
    Sent v FCT [2012] FCAFC 187
    Scott v Federal Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219
     
    Legislation
    Income Tax Assessment Act 1936 (ITAA 1936)
    Income Tax Assessment Act 1997 (ITAA 1997)
    TR 2001/10
     
    Articles
    Arron Dickens, “Employee Incentives: New Year, New Issues…” (2013) The Resource Newsletter



    [1] [2012] FCA 382
    [2] sec 6-5, Income Tax Assessment Act 1997 (ITAA 1997)
    [3] Sent v Commissioner of Taxation [2012] FCAFC 187
    [4] sec 6-5, Income Tax Assessment Act 1997
    [5] (1935) 35 SR (NSW) 215 at 219
    [6] Part IVA,Income Tax Assessment Act 1936 (ITAA 1936)
    [7] Arron Dickens, “Employee Incentives: New Year, New Issues…” (2013) The Resource Newsletter, available from:
    [8] Paragraph 68-69, TR 2001/10