Edited version of your private ruling

Authorisation Number: 1012175700788

Ruling

Subject: Employee Share Scheme

Question 1:

Are discounts on shares acquired under an employee share scheme (ESS) plan while you were a non-resident included in your assessable income from employment outside Australia?

Answer:

No.

Question 2:

Are early retirement allowances under the ESS plan considered a real risk of forfeiture for taxation purposes?

Answer:

No.

This ruling applies for the following periods:

Income year ending 2011.

The scheme commences on:

June 2006.

Relevant facts and circumstances

You left Australia for employment overseas and became a non-resident for taxation purposes.

While you were a foreign resident you participated in an employee share scheme and were granted a number of shares while you were a foreign resident and a number of shares when you were an Australian resident for taxation purposes.

The shares granted vested over a five year period where X% of the shares vested on a yearly anniversary.

The ESS plan states that any unvested shares will forfeit if your employment is terminated.

You did not pay any consideration to acquire the shares.

You did not make an election under the now repealed section 139E of the Income Tax Assessment Act 1936 in relation to your restricted stock.

After a number of years, you returned to Australia and became an Australian resident for taxation purposes.

Early retirement was offered and accepted when you qualified under the stated criteria. You retained the unvested shares.

You have included a discount amount in your 20XX assessment.

You have provided copies of a number of documents, which form part of, and should be read in conjunction with this scheme.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 13A

Income Tax Assessment Act 1936 Section 139B

Income Tax Assessment Act 1936 Section 139CA

Income Tax Assessment Act 1936 Section 139CC

Income Tax Assessment Act 1936 Section 139E

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-25

Income Tax Assessment Act 1997 Section 83A-105

Income Tax Assessment Act 1997 Section 83A-110

Income Tax Assessment Act 1997 Section 83A-115

Income Tax (Transitional Provisions) Act 1997 Division 83A

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

Reasons for decision

Employee share schemes (ESS)

Shares are acquired under an ESS when they are acquired in respect of employment and the consideration paid or given for their acquisition is less than the market value of the shares at the time of the acquisition, being the discount.

As a general rule, a discount you obtain on shares you acquire through an ESS is included in your assessable income at some point in time. Usually, this will either be the income year in which you acquire shares under an ESS, or at a later time depending on the circumstances applicable to particular cases. The circumstances will differ depending on which rules apply.

The old ESS tax rules contained in Division 13A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) applied to ESS interests acquired before 1 July 2009. These rules have been repealed and the new ESS rules contained in Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) applies to ESS interests acquired after 1 July 2009.

However the provisions contained under the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) extend the application of Div 83A of the ITAA 1997 to ESS interests acquired before 1 July 2009, on which tax was deferred beyond 1 July 2009. Under these provisions, Division 13A of the ITAA 1936 will continue to apply to those ESS interests.

In your case, you were granted shares prior to 1 July 2009 and from 1 July 2009. Due to the changes in the legislation, your shares will fall under different provisions and need to be individually addressed to obtain the taxing point.

Shares granted prior to 1 July 2009

Shares acquired through an ESS before 1 July 2009 to which the new rules apply will be transitioned interests if:

· they are qualifying shares under the old ESS rules, and

· no election was made to be taxed upfront under the old ESS rules, and

· a cessation time has not happened to the shares before 1 July 2009 under the old ESS rules.

Transitioned ESS interests will have a deferred taxing point that is determined by reference to the cessation time worked out using the previous law. Therefore in reference to the rules outlined in Division 13A of the ITAA 1936, the taxing point of these shares 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.

The method for calculating the discount amount at cessation time will depend on whether the shares are disposed of within 30 days of the cessation time.

If the shares are not disposed of at arm's length within 30 days of cessation time, the discount is calculated as the market value of the shares at cessation time, less any consideration paid to acquire the shares.

Under the transitional provisions, taxpayers do not include a discount amount in their assessable income to the extent that the discount relates to employment outside of Australia.

In your case, the shares you were granted prior to 1 July 2009 are transitioned interests because:

§ you did not make an election to be taxed on acquisition of your shares

§ a cessation time had not occurred before 1 July 2009;and

§ the shares granted from 12 June 2006 to 21 May 2009 were acquired under the previous ESS rules, being the Division 13A of the ITAA 1936 provisions.

Therefore, the discount amount arising in relation to those shares must be included in your assessable income in the income year in which the taxing point occurred, being the cessation time.

In your case, cessation time occurred when your employment ceased after you accepted an early retirement offer. You have not disposed of your shares within 30 days of cessation time occurring. Therefore, the discount amount will be calculated as the market value of the shares at the time cessation time occurred, being the date you ceased employment.

For the purposes of calculating the discount amount that must be included in your assessable income, the discount amount needs to be apportioned for the period that is attributable to your employment exercised in Australia.

You will need to calculate a discount amount for each of the parcel of shares you were granted prior to 1 July 2009. The discount amount for each parcel of shares will be calculated as the market value of the shares on the date cessation time occurred.

After you have determined the discount amount for each parcel of shares, as outlined above, you will need to determine what portion of the discount amount of each parcel of shares relates to your employment outside Australia, as this amount will not be included in your assessable income.

The following formula is used to determine the discount amount of each parcel of shares attributable to your employment outside of Australia:

Discount amount X Total days of employment in Australia to taxing point

Total days from grant to taxing point

Days of employment in Australia to taxing point will be the total of days from the date you commenced your employment in Australia until the taxing point, being the date your retirement became effective.

Total days from grant to taxing point will be the total number of days from the date each parcel of shares was granted until the taxing point, being the date your retirement became effective.

As mentioned above, the portion of the discount amounts attributable to your employment outside of Australia is not included in your assessable income.

The discount amounts attributable to your time in Australia calculated for the parcel of shares acquired prior to 1 July 2009 should be totalled and recorded at G item 12, discount on ESS interests acquired prior to 1 July 2009 and cessation time occurred during the financial year.

Shares granted from 1 July 2009

Division 83A of the ITAA 1997 taxes discounts on ESS interests acquired either upfront, for example at acquisition, or on a deferred basis. The method will depend on the nature of the employee share scheme rather than at the election of the employee, as was the case under Div 13A of the ITAA 1936.

Generally, deferred taxation only applies where the ESS interest obtained under the employee share scheme is at real risk of forfeiture or is obtained under a salary sacrifice arrangement.

An ESS interest acquired by an employee is at real risk of forfeiture if a reasonable person would consider that there is a real risk that the employee may forfeit or lose the ESS interest, other than by intentionally taking no action to realise the benefit.

Real risks of forfeiture in a scheme may include conditions where the retention of the ESS interests is subject to:

· performance hurdles; or

· a minimum term of employment.

There is no real risk of forfeiture where a scheme includes conditions which:

· restricts an employee from disposing of an ESS for a specified time

· allows an employee to request that the ESS interest be forfeited; or

· provides for an employee to forfeit an ESS interest if they are dismissed for fraud or gross misconduct.

If the discount amount is taxed up front, the taxpayer's assessable income will include the discount amount in relation to the ESS interests in the income year in which the ESS interests are acquired. However, any discount acquired from a source other than Australia will not be included in the taxpayer's assessable income.

The discount amount in relation to taxed upfront shares is calculated as the market value of the shares on the date of acquisition, less any consideration paid to acquire the shares.

In your case, you were granted shares after 1 July 2009 while you were a foreign resident for taxation purposes and after you became an Australian resident for taxation purposes. You accepted an early retirement offer by your employer and retired.

The company's ESS Plan provides that a committee can have sole discretion on whether to apply restrictions on unvested shares when an employee is offered retirement prior to age 65 and allow the employee to retain unvested shares and not forfeit them due to termination of employment as per the ESS.

As there was no real risk of forfeiture in relation to your shares, the discount amount in relation to these shares would be taxed upfront in the income year in which the shares were acquired, being the relevant income year.

The discount amount in relation to the shares granted after 1 July 2009 while you were an Australian resident will be assessable in accordance with the application of Division 83A of the ITAA 1997. The discount amount for these shares should be recorded at E item 12 taxed up front scheme - not eligible for reduction.

The discount amount in relation to the shares granted to you after 1 July 2009 while you were a foreign resident will not be assessable as you were not an Australian resident for taxation purposes when they were granted. Therefore, under Division 83A of the ITAA 1997, it is viewed that these shares were sourced from your employment outside of Australia and will not be assessed.

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