Edited version of private ruling

Authorisation Number: 1011460135707

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Ruling

Subject: Foreign Income

1. Is the discount you received on the shares awarded to you from the foreign parent company of the company you worked for, assessable to you?

Yes.

2. Are the dividends that are reinvested into shares assessable to you?

Yes.

3. Are you entitled to a foreign income tax offset for the foreign tax withheld up to the amount allowed under the treaty on the dividend credited to you?

Yes.

This ruling applies for the following period

30 June 2009

The scheme commenced on

1 July 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian resident.

You were awarded shares of the Country B parent Company of the Australian Company you worked for.

The shares were awarded to you for completing a recognised Australian degree under the employee scholarship program.

You did not have to pay for these shares.

These shares are available to the public for purchase at the same rate.

The shares are ordinary shares of the company.

After acquisition of the share:

· you do not hold a legal or beneficial interest of more than 5% of the shares in the company

· you are not in a position to cast, or control the casting of more than 5% of the vote of the company.

The share offer is open to 100% of the permanent employee who satisfy the condition for the offer.

There are no disposal restriction conditions attached to these shares allotted to you.

The dividends you received on these shares are reinvested to acquire more shares in the same company.

Tax has been withheld in Country B from the dividend paid to you.

You and your associates do not have any other foreign shares or foreign investment apart from these shares.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-10(4)

Income Tax Assessment Act 1997 subsection 6-15(2)

Income Tax Assessment Act 1997 section 51-10

Income Tax Assessment Act 1997 subsection 6-10(2)

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1936 section 23AG

Income Tax Assessment Act 1936 subsection 23AG(7)

Income Tax Assessment Act 1936 section 139

Income Tax Assessment Act 1936 section 139C

Income Tax Assessment Act 1936 subsection 139B(2)

Income Tax Assessment Act 1936 subsection 139B(3)

Income Tax Assessment Act 1936 section 139CD

Income Tax Assessment Act 1936 section 139E

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1997 subsection 770-15 (1)

Income Tax Assessment Act 1997 section 770-70

Income Tax Assessment Act 1936 subsection 44(1)

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1997 subsection 770-15 (1)

Income Tax Assessment Act 1997 section 770-70

International Tax Agreements Act 1953

Reasons for decision

Assessability of Share Award

Subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia. Statutory income includes some employee share acquisition schemes and some payments from other countries.

Subsection 6-15(2) of the ITAA 1997 provides that an amount is not assessable if it is exempt income. Some scholarships or bursaries and certain foreign employment income may be exempt income.

Scholarship

Section 51-10 of the ITAA 1997 exempts from tax income received by a full-time student at a school, college or university from a scholarship, bursary educational allowance or educational assistance.

You studied part-time, therefore you do not meet the essential requirements of section 51-10 of the ITAA 1997 for exemption.

Foreign Employment Income

Certain foreign employment income may be exempt under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) if they are foreign earnings in respect of foreign service.

Subsection 23AG(7) of the ITAA 1936 defines 'foreign service' as service in a foreign country as the holder of an office or in the capacity of an employee.

The foreign company shares awarded to you were not in respect of foreign service, therefore, this exemption provision does not apply.

Employee Share Scheme

Subsection 6-10(2) of the ITAA 1997 provides that statutory income is amounts that are not ordinary income, but are included in the taxpayer's assessable income by provisions about assessable income.

Section 10-5 of the ITAA 1997 lists those provisions about assessable income which are statutory income. Included in this list are sections 139 to 139GH (Division 13A) of the ITAA 1936 dealing with employee share acquisition schemes.

Under Division 13A of the ITAA 1936, you have acquired shares under an employee share scheme if their acquisition was in respect of or in relation directly or indirectly to your employment and you paid less than the market value of the shares at the time of acquisition (section 139C of the ITAA 1936).

Division 13A of the ITAA 1936 applies to shares acquired from 1 July 2006 until 30 June 2009. Shares or right issued under an employee share scheme after 30 June 2009 are governed by Division 83A of the ITAA 1997.

In this case, it is considered that the shares awarded to you constitute the acquisition of shares under an employee share scheme for the purposes of Division 13A of the ITAA 1936 for the following reasons:

· the shares are from your employer's parent company, therefore it is from an associate of your employer

· they were awarded to you as an employee (or associated to your employment), on completion of a degree under your employer's study program, therefore the shares are given to you in relation to your employment, and

· the shares are worth $5,000 but you did not have to pay anything for the shares, therefore you paid less than the market value of the shares.

Under Division 13A of the ITAA 1936, any discount on employee shares, being the difference between the market value of the shares and the amount paid to acquire the shares, are assessable.

The discount is included in the employee's assessable income in the year in which the share or right was acquired (subsection 139B(2) of the ITAA 1936).

Where the shares or rights were "qualifying shares" or "qualifying rights", concessional arrangements were available (section 139B(3)of the ITAA 1936) under which the taxpayer could:

· defer the inclusion of the discount in assessable income for up to 10 years in relation to qualifying shares or rights to which disposal restrictions applied (the discount was assessable in the year in which the "cessation time" occurred), or

· elect to have the discount included in assessable income in the year of acquisition and qualify for exemption for the first $1,000 of the discount, provided certain exemption conditions were satisfied.

A share in a company is a "qualifying share" if it satisfied the six conditions set out in section 139CD of the ITAA 1936. The conditions are:

· the share is acquired by you from an employee share scheme

· the company is your employer or your employer's holding company

· the shares available from the employee share scheme are ordinary shares

· after acquisition of the share, you do not hold a legal or beneficial interest of more than 5% of the shares in the company

· after acquiring the share, you are not in a position to cast, or control the casting of, more than 5% of the votes at the company's general meeting, and

· when you acquired the share, at least 75% of the permanent employees of your employer were, or at some earlier time had been, entitled to acquire shares from an employee share scheme of your employer or its holding company.

The shares that you acquired from your employer were qualifying shares as the shares were acquired under the employee share scheme (see above, that is, shares acquired in relation to your employment at a discount or for a cost below market value), the company is your employer or employer's holding company, the shares are ordinary shares and satisfy the other conditions under section 139CD of the ITAA 1936.

The deferral of the discount is the default concession for qualifying shares and rights. This means that, unless you make an election, the discount on all qualifying shares or rights will not be assessed until a cessation time occurs. The $1,000 exemption is not available if the discount is declared at cessation time.

Cessation time

For shares that have no restrictions preventing their disposal and no conditions that may result in you forfeiting the share, the cessation time is when you acquire the shares.

Since there is no disposal restriction attached to these shares allotted to you, the cessation time for these shares is when they allotted to you or when they were acquired by you.

International Tax treaty

Since the shares are from a Country B company it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one.

The Agreements Act contains the Tax Treaty (the Country B Convention) and Protocol respectively between Australia and Country B. The Country B Convention and Protocol operates to avoid the double taxation of income received by Australian and Country B residents.

The Country B Convention provides that salary and wages and any other similar remuneration derived by an individual who is a resident of Australia shall be taxable only in Australia unless the employment is exercised in Country B.

Shares received in respect of employment are 'other similar remuneration' for the purposes of the Country B Convention, since the shares are allotted in relation to your employment as an employee.

In this case, although they are in respect of Country B shares you did not acquired them in respect of any services performed in Country B, therefore they are taxable in Australia as you are a resident of Australia.

In this case, since the cessation is in the year of allotment, the full discount given on these shares must be included in your assessable income in the income year they are allocated (subsection 139B (3) of the ITAA 1936). The discount is the difference between the market value of the shares and the amount paid to acquire the shares.

Assessability of dividend reinvested shares

The dividend received from a company is assessable under subsection 44(1) of the ITAA 1936. Participation in a dividend reinvestment plan does not alter the assessability of the dividend.

Dividend reinvestment plans enable shareholders to elect to have amounts payable to them as dividends applied to acquire new shares in the company. The relevant transactions involve a constructive payment by the company of a dividend to the shareholder, followed by an application by the shareholder of the dividend to acquire the new shares.

Therefore, the amount of any dividend applied to the purchase of shares represents assessable income of the shareholder under section 44 of the ITAA 1936.

Since the shares are Country B shares we also consider the Country B Convention. The Country B Convention provides that dividend paid by a Country B Resident Company to an Australian resident may be taxed in Australia. However, those dividends may also be taxed in Country B, but the tax charged shall not exceed 15% of the gross amount of the dividend if you not hold at least 10% of the voting power of the company shares.

Since you are an Australian resident the dividend paid to you are assessable to you under section 44 of the ITAA 1936 in Australia. However, you may be entitled to an offset for the tax that you pay in Country B on the dividends.

Foreign Income Tax offset (FITO)

Section 770-10 of the ITAA 1997 is the primary provision under which a foreign income tax offset arises. FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

Foreign income tax is a tax imposed by a law other than an Australian law, on income profits or gains (subsection 770-15(1) of the ITAA 1997). The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign income tax has been withheld from the income at its source.

When claiming a FITO, you are required to 'gross up your income for the foreign tax paid (or which is taken to have been paid) in respect of that income.

The amount of the tax offset is the sum of all foreign income tax that has been paid by the taxpayer for the income year subject to a limit (cap). (section 770-70 of the ITAA 1997).

The foreign tax offset cap is based on the amount of Australian tax payable on the double-taxed amounts and other assessable income amounts that do not have an Australian source.

You do not need to calculate the foreign tax offset cap if you elect to use the $1,000 de minimis cap but you cannot claim more than $1,000 of the foreign income tax.

If the FITO is less than $1,000 you do not need to calculate the foreign tax offset cap.

The Country B Convention provides that where Country B tax has been imposed in respect of Country B-sourced income in accordance with the Country B Convention, a credit against Australian tax payable on that income will be allowed.

The Country B Convention allows Country B to withhold tax up to 15% of the gross amount of the dividend. Consequently, you are entitled to claim FITO for the Country B tax withheld on the dividend credit to you, up to the amount allowed under the treaty under section 770-10 of the ITAA 1997.

Note:

More information about employee shares is available at Tax Office website www.ato.gov.au at the link below or by searching under employee shares schemes

http://www.ato.gov.au/print.asp?doc=/content/24703.htm

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