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Sent v Commissioner of Taxation [2012] FCA 382 (Australia)

Wednesday, 23 May 2012   (0 Comments)
Posted by: SAIT Technical
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On 16 April 2012, the Federal Court of Australia ruled against Mr Eduard Sent in an appeal against a decision by the Administrative Appeals Tribunal.


Mr Sent taxpayer was a managing director, whose employment contract provided for bonus payments that are:

  • accrued and payable,
  • accruing but relating to periods which had been part performed and
  • not yet accrued as they relate to future periods.

Mr Sent and his employer entered into an agreement whereby the he waived all his past and future bonus entitlement of $11.6m in return for the issue of five million fully paid ordinary shares in the company. The arrangement involved the payment of $11.6m to a special purpose executive share trust in return for five million shares and the taxpayer subsequently acquiring all the units in the trust by way of a loan from the trust (under a round robin transaction). The units cannot be sold by the taxpayer within 12 months of issue.

The Commissioner assessed the $11.6m as assessable income to Mr Sent as ordinary income or statutory income and imposed 50% administrative shortfall penalties. Alternatively, it argued that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applied to include the $11.6m as assessable income. In the first instance, the Tribunal held that $7.25m was assessable income but that $4.35m of the $11.6m which represented future or contingent bonuses were not assessable. The Tribunal also held that Part IVA did not apply and that the shortfall penalties be remitted to 25%.

The decision of the Administrative Appeals Tribunal was appealed by both the Commissioner and Mr Sent.


The Federal Court found that the entire amount of $11.6m payment was ordinary income on the basis that the payment was ultimately in substitution for income by way of bonus. The payment maintained its character as income, being a reward for services.

By reason of its finding that the whole amount was assessable, the Court found it unnecessary to consider whether Part IVA applies. However, the Court held that the Tribunal had made an error in not finding that the taxpayer had failed to discharge the onus of proving that the Commissioner's imposition of an administrative penalty of 50% of the shortfall amount was excessive, accordingly the 50% shortfall penalty still stands.



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