Edited version of private ruling

Authorisation Number: 1011475859905

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Ruling

Subject: Employee share schemes - Options granted to Director - Foreign resident

Question 1

Will paragraph 83A-5(4)(a) of the Income Tax (Transitional Provisions) Act 1997 (ITTPA) apply to exclude the portion of the total gain (market value less cost base) realised by you on your company A options/underlying company A shares that relates to Board/Committee meetings that you did not physically attend in Australia from being included in your assessable income under subsection 6-10(5) of the Income Tax Assessable Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period<s>:

2009-10 income year

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You are an Australian citizen who has been working overseas for some years. You currently maintain your principal place of residence in country X. You are a resident of country X for taxation purposes.

In recognition of the services that you have provided to company A, you were granted some options to acquire ordinary company A shares for no consideration during the 200X-0Y income year. They had an exercise price slightly below the market value of company A shares. These company A options were 'qualifying rights' for the purpose of section 139CD of the Income Tax Assessment Act 1936 (ITAA 1936).

Company A is an Australian resident company for tax purposes.

The company A options were originally scheduled to vest in a number of annual tranches.

Subparagraph (d)(i) of the company A options terms and conditions provides that all the company A options were to vest at the time a takeover bid for company A became or was declared to be unconditional. Such a bid was made and became unconditional during the relevant income year.

You exercised your company A options and sold the underlying company A shares to the bidder company.

During the period you owned the company A options (the service period) company A held a total of X board meetings, a number of which were attended by you in Australia and some of which you participated remotely.

During the service period, there were some other Committee Meetings, all of which you participated remotely.

You have not yet made an election under section 139E of the ITAA 1936 to include the discount attributable to the company A options at the time you acquired them in your assessable income for the 200X-0Y income year. (You have obtained a lodgement extension for your income tax return for the 200X-0Y income year.)

The following documents are to be read with and form part of the scheme for the purpose of this ruling:

- The letter of offer - your original employment agreement

- An extract from the annual general meeting held immediately before the grant of your options

- Terms and conditions of the options granted to you

- Announcement of results from the annual general meeting

- The takeover announcement

- Appendix 3Y notice advising change of interest

Assumption

You will not make an election under section 139E of the ITAA 1936 for the 2008-09 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-10(5),

Income Tax Assessment Act 1997 Subsection 83A-110(1),

Income Tax Assessment Act 1997 Subsection 83A-120(3),

Income Tax Assessment Act 1936 Section 139B,

Income Tax Assessment Act 1936 Section 139C,

Income Tax Assessment Act 1936 Section 139CB,

Income Tax Assessment Act 1936 Section 139CD,

Income Tax Assessment Act 1936 Section 139E,

Income Tax (Transitional Provisions) Act 1997 Section 83A-5,

Income Tax (Transitional Provisions) Act 1997 Paragraph 83A-5(2)(a),

Income Tax (Transitional Provisions) Act 1997 Paragraph 83A-5(4)(a) and

Income Tax (Transitional Provisions) Act 1997 Paragraph 83A-5(4)(b).

Reasons for decision

Summary

Paragraph 83A-5(4)(a) of the ITTPA will not apply to exclude the portion of the total gain (market value less cost base) realised by you on your company A options/underlying company A shares that relates to Board/Committee meetings that you did not physically attend in Australia from being included in your assessable income under subsection 6-10(5) of the ITAA 1997.

Detailed reasoning

The company A options are rights to acquire shares.

Division 13A of Part III of the ITAA 1936 applies for the 2008-09 income year to determine:

- whether the options were granted under an employee share scheme

1. if so, whether any amount is assessable in the 2008-09 income year, and

2. if so, how much is assessable in the 2008-09 income year.

Subsection 139B(1) of the ITAA 1936 provides that any discount you receive in relation to a right that you acquire under an employee share scheme is included in your assessable income.

Subsection 139C(1) of the ITAA 1936 provides that you acquire a right under an employee share scheme if you acquire it in respect of, or for or in relation directly or indirectly to any employment of yours. Subsection 139C(3) of the ITAA 1936 provides that a right is only acquired under an employee share scheme if you acquire it at a discount to its market value.

We have concluded that the options were granted to you under an employee share scheme as they clearly form part of your remuneration package and so relate to your employment with company A.

We have also concluded that the options were granted at a discount because the exercise price was less than the market value of the underlying shares at that time.

Subsection 139B(2) of the ITAA 1936 provides that any discount that you receive due to the grant of rights under an employee share scheme is included in your assessable in come in the year of grant unless the rights are qualifying rights and you do not choose to be assessable in the year of grant.

Section 139CD of the ITAA 1936 provides that rights in a company are qualifying rights if five conditions are met. The conditions are:

- The rights are granted under an employee share scheme

- The rights are granted in a company that is your employer, or a holding company of your employer

- The rights are rights to acquire ordinary shares

- You do not hold a legal or beneficial interest in more than 5% of the shares in the company, and

- You are not in a position to cast or control the casting of more than 5% of the maximum number of votes that might be cast at a general meeting of the company.

We accept that all five of the abovementioned conditions have been met.

You choose to include the discount on qualifying rights in your assessable income in the year of grant by making an election under section 139E of the ITAA 1936.

You have not elected to be taxed in the 200X-0Y income year.

Subsection 139B(3) of the ITAA 1936 provides that any discount that you receive due to the grant of rights under an employee share scheme is assessable in the year that the cessation time occurs if they are qualifying rights but you don't choose to be assessable in the year of grant.

Subsection 139CB(1) of the ITAA 1936 defines the cessation time of a right as the earliest of:

- The time when you dispose of the right (other than by exercising it)

- The time when your employment with a relevant employer ceases

- The later of the time when any selling restrictions end and any forfeiture conditions cease on any share acquired by exercising the right

- If there are no selling restrictions or forfeiture conditions on the share acquired by exercising the right - when the right is exercised, and

- 10 years from the date of grant of the right.

None of these occurred before 30 June 200Y.

Paragraph 83A-5(2)(a) of the ITTPA provides that Subdivision 83A-C of the ITAA 1997 applies where:

- Rights were granted under an employee share scheme before 1 July 200Y

- The rights were to be assessable in the year that the cessation time occurs, and

- The cessation time did not occur before 1 July 200Y.

Each of these conditions is satisfied.

Subsection 83A-110(1) of the ITAA 1997 provides that your assessable income for the year that the deferred taxing point occurs includes the market value of the shares reduced by their cost base.

Paragraph 83A-5(4)(b) of the ITTPA ensures that the ESS deferred taxing point is determined using the cessation time from Division 13A of Part III of the ITAA 1936 (see the reference to subsection 139CB of the ITAA 1936 above).

However, subsection 83A-120(3) of the ITAA 1997 adjusts the deferred taxing point to be the time when you sell your shares if this occurs within 30 days of the cessation time.

The deferred taxing point for your company A options was the date you exercised the options and sold the company A shares.

Paragraph 83A-5(4)(a) of the ITTPA excludes amounts that relate to your employment outside Australia from being included in your assessable income under subsection 83A-110(1) of the ITAA 1997.

Paragraph 1.399 of the Explanatory Memorandum for the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 states that the intent of paragraph 83A-5(4)(a) of the ITPPA is to continue the foreign employment provisions that existed in Division 13A of Part III of the ITAA 1936.

On the basis that you were awarded your company A options in your capacity as a non-executive director of company A, it follows that the labour and skill that you apply for the benefit of company A would primarily be so applied during your attendance at these meetings.

The relevant Paragraph in the International Tax Agreements Act 1953 states:

In relation to remuneration as a director of a company derived from the company, the provisions of this Article and of Article X shall apply as if the remuneration were remuneration in respect of personal services. Director's fees and similar payments derived by a resident of one of the Contracting States in their capacity as a member of the board of directors of a company which is a resident of the other Contracting State shall be deemed to be derived in respect of personal services performed in, and may be taxed in, that other Contracting State.

This means that the options as 'similar payments' described above are deemed to be derived in respect of personal services performed in Australia and therefore have an Australian source notwithstanding that you were physically outside Australia for some of the meetings.

Consequently, the options do not represent remuneration that relates to your employment outside Australia, so the exclusion in paragraph 83A-5(4)(a) of the ITTPA does not apply to them.

Therefore, the whole of the amount calculated by subsection 83A-110(1) of the ITAA 1997 on the options is included in your assessable income.

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