Edited version of private ruling

Authorisation Number: 1011653170401

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Ruling

Subject: Employee share scheme

1. Will you be liable to tax in Australia on your foreign sourced award, granted prior to 1 July 2009, from services performed before 1 July 2009?

No.

2. Will you be liable to tax in Australia on your foreign sourced award, granted prior to 1 July 2009, from services performed after 30 June 2009?

Yes.

3. Will you be liable to tax in Australia on your foreign sourced award, granted after 30 June 2009?

Yes.

4. If the awards reduce in value from the time you include the discount in your assessable income can you claim a refund for the tax you have already paid?

No.

5. If the awards increase in value from the time you include the discount in your assessable income, and you do not sell the shares, do you include the additional amount in your assessable income?

No.

This ruling applies for the following periods:

Period ending 30 June 2009

Period ending 30 June 2010

Period ending 30 June 2011

Period ending 30 June 2012

Period ending 30 June 2013

The scheme commenced on:

1 July 2008

Relevant facts and circumstances

You are an employee of a foreign company.

The company has no connection with Australia.

You are and will continue being an Australian resident for tax purposes.

You currently work offshore for several weeks followed by a leave period back in Australia of several weeks.

To provide long term incentive and employee retention, separate from the annual bonus scheme which covers individual periods, the company will from time to time provide employees with equity in the company through an employee share plan.

The key features of the share plan are as follows:

· All company employees are eligible to participate in the share plan,

· You are not asked to pay for any shares, and

· You are given a provisional award of free ordinary shares, provided you remain an employee of the company at the vesting date.

The shares comprised in your awards were granted and will vest as follows:

The company is not publicly listed as a result there is no market price for the shares.

Once each tranche has vested, beneficial ownership in the shares comprising that tranche will be yours.

Upon vesting you are able to sell some or all of your shares in accordance with the share plan rules.

You did not make a section 139E election.

The committee has never used its discretionary powers to vest some or all of the shares in any other event under this employee share scheme.

In the foreign country you pay full tax on your earnings.

The tax treaty between Australia and the foreign country does not provide an exemption from tax on employment income in the foreign country.

The law of the foreign country provides for the imposition of income tax on employment income and does not generally exempt such income from income tax.

You will not receive the cash equivalent of shares at the vesting date.

Assumption

Immediately after the acquisition of the share or right 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.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Section 139B

Income Tax Assessment Act 1936 Section 139C

Income Tax Assessment Act 1936 Section 139CA

Income Tax Assessment Act 1936 Section 139CB

Income Tax Assessment Act 1936 Section 139E

Income Tax Assessment Act 1997 Section 6-5

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

Income Tax Assessment Act 1997 Subsection 83A-105

Income Tax Assessment Act 1997 Section 83A-110

Income Tax Assessment Act 1997 Section 83A-115

Income Tax Assessment Act 1997 Section 83A-120

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

Reasons for decision

The taxation of income in Australia is principally determined on the basis of whether you are an Australian resident or a foreign resident. Residents of Australia must include in their assessable income the income they derive in Australia and from overseas.

Employee share schemes

An employee share scheme (ESS) is a scheme in which the beneficial interest of a share in a company or a right to acquire a share in a company (ESS interest) is provided to employees of the company in relation to the employees' employment.

Where an ESS interest is acquired under an ESS for less than its market value, the assessable income of the individual includes the market value of the interest at the taxing point reduced by any consideration given for it (the discount).

In your case, you were not required to pay anything for the ESS interests therefore the discount to be included in your assessable income will be equal to the market value of the ESS interest at the taxing point.

Taxing point - when included in Assessable income

The ESS tax rules contained in Division 13A of Part III to the Income Tax Assessment Act 1936 (ITAA 1936) which apply to ESS interests acquired before 1 July 2009 have been repealed. The transitional provisions now apply to ESS interests acquired before 1 July 2009 and Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) applies to ESS interests acquired after 30 June 2009.

Therefore, due to the changes in the legislation your award which was acquired before 1 July 2009 and your award which was acquired after 30 June 2009 fall under different provisions and need to be individually addressed to obtain the taxing point.

Share Award - prior to 1 July 2009

The transitional rules for this award of shares indicate that Division 83A of the ITAA 1997 will apply if:

· an election to be taxed on acquisition has not been made, and

· a cessation time has not happened to the shares before 1 July 2009.

However, an employee who acquires shares under the previous employee share scheme rules (Division 13A of the ITAA 1936) will continue to pay tax at the time determined by reference to those previous rules.

In your case:

· you did not make an election to be taxed on acquisition

· a cessation time has not occurred before 1 July 2009, and

· the award was acquired under the previous employee share scheme rules.

Therefore, in reference to the previous rules the taxing point of the award will be the earliest of the following:

· the time when you dispose of the ESS interest

· the time when any restriction preventing you from disposing of the ESS interest ceases to have effect

· the time when any condition that could result in you forfeiting ownership of the ESS interest ceases to have effect

· the time when your employment in respect of which the ESS interest was acquired ceases

· the end of the 10 year period starting when you acquired the ESS interest.

Share Award - after 30 June 2009

Division 83A of the ITAA 1997 applies to this award of shares.

Based on Division 83A of the ITAA 1997 the discount in relation to the ESS interest is included in an employee's assessable income in the income year in which the interest is acquired.

However, where there is a real risk of forfeiture the discount on the ESS interest is included in the employee's assessable income at the deferred taxing point.

In your case, as a result of the employment condition the ESS interest is subject to a real risk that you may forfeit or loose them. Therefore, a real risk of forfeiture exists.

As a result the deferred taxing point of the award will be the earliest of the following:

· when there is no real risk that, under the conditions of the employee share scheme, you will forfeit or lose the ESS interest (other than by disposing of it)

· if, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately disposing of the ESS interest - the scheme no longer so restricts you

· when the employment in respect of which you acquired the ESS interest ends

· the end of the seven year period starting when you acquired the ESS interest.

Income earned overseas

Section 23AG of the ITAA 1936 provides an exception to the general rule that Australian residents are taxed on their worldwide income.

As you are an Australian resident and you acquired ESS interests during your engagement in foreign service, the discount received on those ESS interests may be exempt from tax. In order to be exempt, you must have been engaged in foreign service for a continuous period of not less than 91 days.

Under subsection 23AG(6) of the ITAA 1936 certain temporary absences form part of a period of foreign service, such as, recreation leave which is accrued as a result of the foreign service.

In your case, you have recreational leave that accrues during your employment in the foreign country. This leave will form part of your foreign service.

As per subsection 23AG(2) of the ITAA 1936 the exemption will not be available if your ESS interests are exempt from tax in the foreign country only because of any of the following:

· a double tax agreement with Australia or a law giving effect to a double tax agreement

· the foreign country does not impose income tax on employment or personal services income, or similar income, or

· a law of the foreign country or an international agreement to which Australia is a party, which deals with diplomatic or consular privileges and immunities, or privileges and immunities for people connected with international organisations (such as the United Nations).

In addition, a recent legislative amendment to section 23AG (ITAA 1936) has occurred in which the exemption has been limited and will only apply if the continuous period of service is directly related to:

· the delivery of Australia's overseas aid program by the individual's employer

· the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund

· the activities of the individual's employer being a prescribed institution that is exempt from Australian income tax

· the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force, or

· an activity of a kind specified in the regulations.

This amendment applies to foreign earnings derived on or after 1 July 2009 from foreign service performed on or after 1 July 2009.

Period ESS interest is derived from foreign services performed

The determination of whether and to what extent an ESS interest is derived from employment must be done in each case on the basis of all the relevant facts and circumstances.

In the case of a right or share that is granted to an employee on the condition that they remain employed by their employer for a set period of time, the right or share is considered to be derived from the services performed during this set period of time.

Therefore, providing you remain an employee of the company, ownership of the interest will transfer to you in three equal tranches over a period of three years, from the date of grant. Therefore, each third portion of your awards are considered to be derived from services performed between the grant of the ESS interest and when the employment restrictions lift.

Part of the ESS interest of one of your awards is derived from foreign service performed before 1 July 2009 therefore the transitional provisions apply to this part to disregard the amendment made.

ESS interest derived from foreign service performed before 1 July 2009

As you were employed in foreign service for a continuous period of not less than 91 days and the discount on the ESS interests were not exempt from tax in the foreign country for any of the reasons listed in subsection 23AG(2) of the ITAA 1936, the discount on your ESS interests from services performed in the foreign country before 1 July 2009 will be exempt from tax under subsection 23AG(1) of the ITAA 1936. Therefore as per subsection 6-15(2) of the ITAA 1997 if an amount is exempt income, it is not included in the assessable income of a taxpayer.

ESS interest derived from foreign service performed after 30 June 2009

Your employment does not fall into one of the exemption categories listed by the amended section 23AG of the ITAA 1936, therefore the discount on your ESS interests from services performed after 30 June 2009 will not be exempt under section 23AG and consequently these amounts will be assessable for tax in Australia at the respective taxing points.

Share price change after taxing point

Even though the ESS interests you receive are unlisted equity instruments this does not affect you from trading these once they vest. Once the taxing point occurs and the discount is included in your assessable income the ESS interests become capital gains tax assets for tax purposes and upon their disposal you will make a capital gain or capital loss. Therefore, any subsequent fluctuations in the share price do not affect the ESS regime.

Foreign income tax offset

In your case, as you will be an Australian resident for tax purposes when the discount on your ESS interests is assessable, the ESS interest is in relation to your services performed in the foreign country. Therefore, as this amount is assessable in Australia it may also be assessable in the foreign country. You are permitted any foreign tax paid as a credit against the Australian tax payable in respect of the ESS income.

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