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Authorisation Number: 1012179832429

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Ruling

Subject: Employee Share Scheme - shares granted while foreign resident - becoming an Australian resident

Question 1:

Did the deferred taxing point in relation to the unvested shares that were acquired prior to you becoming an Australian resident occur when your overseas employment ended?

Answer:

No.

Question 2:

Is the discount on shares you acquired under an employee share scheme while you were a foreign resident of Australia for taxation purposes included in your assessable income to the extent that the amount relates to your employment outside Australia?

Answer:

No.

Question 3:

Will the capital gains tax cost base of the shares which vested prior to you becoming an Australian resident be the market value of the shares on the date you became a resident?

Answer:

Yes.

Question 4:

Will the capital gains tax cost base of your unvested shares be the market value of the shares on the vesting dates?

Answer:

Yes.

Question 5:

Will the capital gains tax cost base of the un-vested shares be the market value of the shares as at the deferred taxing point?

Answer:

No.

Question 6:

Will there be any taxation implications in relation to your unvested shares acquired prior to you becoming an Australian resident on the occurrence of the vesting dates after you became an Australian resident?

Answer:

Yes.

This ruling applies for the following periods

Year ended 30 June 2011;

Year ending 30 June 2012;

Year ending 30 June 2013;

Year ending 30 June 2014; and

Year ending 30 June 2015.

The scheme commenced on

1 July 2007.

Relevant facts and circumstances

While you were a foreign resident for taxation purposes, you were employed by Company A.

You participated in an ESS offered by Company A under which you were granted a number of parcels of shares on various dates, with various vesting dates.

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You did not make an election under the now repealed section 139E of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to the discount you received on the shares to be taxed at acquisition.

The shares you acquired were qualifying shares for the purposes of the now repealed Division 13A of the ITAA 1936.

A number of the shares vested while you were a foreign resident.

Upon vesting, you were able to sell the shares in accordance with the share plan rules.

You became an Australian resident for taxation purposes.

Your employment with Company A ended a number of months after you became an Australian resident.

Your unvested shares were assessed by the foreign country's revenue authority on the date you ended your foreign employment.

You commenced work at Company B in Australia.

You retained your entitlement to the unvested shares granted to you by Company A after you commenced working for Company B.

You have provided copies of a number of documents, which should be read in conjunction with, and forms part of this private ruling:

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 13A

Income Tax Assessment Act 1936 Section 139B

Income Tax Assessment Act 1936 Subsection 139B(1A)

Income Tax Assessment Act 1936 Subsection 139B(3)

Income Tax Assessment Act 1936 Subsection 139CA(2)

Income Tax Assessment Act 1936 Subsection 139CA(3)

Income Tax Assessment Act 1936 Subsection 139CC(3)

Income Tax Assessment Act 1936 Subsection 139CC(4)

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 Assessment Act 1997 Subsection 83A-330(d)

Income Tax Assessment Act 1997 Subsection 130-83(2)

Income Tax Assessment Act 1997 Subsection 130-83(3)

Income Tax Assessment Act 1997 Subsection 130-83(4)

Income Tax Assessment Act 1997 Section 855-45

Income Tax Assessment Act 1997 Section 855-50

Income Tax (Transitional Provisions) Act 1997 Division 83A

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

Reasons for decision

Employee Share Scheme (ESS) provisions

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.

Therefore, due to the changes in the legislation, your ESS shares granted prior to 1 July 2009 and after 1 July 2009 fall under different provisions and need to be individually addressed to obtain the taxing point and to identify the relevant taxation implications, if any.

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 subsection 139CA(2) of the ITAA 1936, the taxing point of shares with forfeiture or restriction conditions 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.

In your case, the ESS shares you acquired prior to 1 July 2009 are transitioned interests as they meet the conditions listed above. Therefore, in accordance with the provisions contained in Division 83A of ITAA 1997, Division 13A of the ITAA 1936 will apply to those ESS shares and the taxing point will occur when one of the conditions listed above in relation to cessation times occurred, or will occur.

Ceasing employment

The time at which an employee ceases employment is an important concept for applying various provisions in Division 13A of the ITAA 1936.

Subsection 139CA(3) of the ITAA 1936 provides that for the purposes of subsection 139CA(2) of the ITAA 1936, a taxpayer only ceases the employment in respect of which the share was acquired when the taxpayer is no longer employed by any of the following:

· the employer of the taxpayer in that employment; "ceasing employment" means no longer employed by the employer;

· a holding company of the employer; or

· a subsidiary of either of those.

The question whether a company is a "subsidiary" of another company is determined under the Corporations Act 2001.

It follows that transfer of employment from the employer to a holding company or subsidiary does not constitute cessation of employment for the purposes of the above section.

In your case, you were granted the ESS shares while you were employed at Company A. You ended your employment with Company A and commenced working at Company B.

One of the documents you provided outlines that non-vested stock will be forfeited back to Company A upon the awardees termination of their employment for any reasons.

The unvested shares were not forfeited when your employment changed from Company A to Company B. This fact and the fact that both of these companies are subsidiaries of another company would support that your employment did not cease for ESS purposes when you changed your employment from Company A to Company B.

Therefore, it is viewed that a deferred taxing point did not occur when you ended your employment with Company A and the discount in relation to those unvested shares relates to your employment overseas and in Australia. Therefore, the discount relating to your unvested shares granted prior to 1 July 2009 will be apportioned to account for your overseas employment and your employment in Australia.

Calculation of discount

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 share is disposed of within 30 days of the cessation time in an arm's length transaction, then the discount is calculated as the sale price of the share less any consideration paid to acquire it.

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 accordance with subsection 83A-110(2) of the ITAA 1997.

In your case, you were granted parcels of shares prior to 1 July 2009, which vested prior to you becoming an Australian resident. The cessation times in relation to these parcels of shares occurred on the vesting dates. As the cessation times occurred prior to you becoming an Australian resident, the discount amounts in relation to these parcels of shares relates to your overseas employment and are not assessable in Australia.

You were granted parcels of shares prior to 1 July 2009, which have and will vest after you became an Australian resident. The cessation time, vesting dates, in relation to some of the parcels of shares have occurred as at the present time. Therefore, the discount amount arising in relation to those shares must be included in your assessable income in the income year in which the deferred taxing point occurred.

For the purposes of calculating the discount amounts attributable to those parcels of shares that must be included in your assessable income, the discount amounts need to be apportioned for the period that is attributable to your employment exercised in Australia.

You have not disposed of the shares from those parcels within 30 days of cessation time occurring. Therefore, the discount amount for each of those parcels of shares will be calculated as the market value of the shares at the time cessation time occurred for each parcel of shares, being the relevant vesting dates.

You will need to calculate a discount amount for each parcel of shares, with the discount amount being calculated as the market values of the shares on the date the cessation times occurred, being the relevant vesting dates.

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 amounts 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 relevant vesting dates.

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.

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 each of the parcels of shares should be recorded at G item 12, discount on ESS interests acquired prior to 1 July 2009 and cessation time occurred during the financial year in the relevant income year.

The cessation time in relation to a number of the parcels of shares has not occurred as at the present time. Cessation time in relation to those parcels of shares will occur on the vesting date, or at one of the other events listed above for when cessation time will occur in relation to ESS shares. Therefore, it will depend on when cessation time occurs in relation to each parcel of shares as to when the discount amount relating to your Australian employment will need to be calculated using the above method.

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.

The deferred taxing point for a share is the earliest of the following times:

· seven years after you acquired the share

· when you cease the employment in respect of which you acquired the share in accordance with subsection 83A-115(5) of the ITAA 1997; or

· when there is no real risk of forfeiture and the scheme no longer genuinely restricts the disposal of the share.

Section 83A-330 of the ITAA 1997 provides that for the purposes of Division 83A of the ITAA 1997, you will be treated as ceasing employment when you are no longer employed by any of the following:

· your employer in that employment;

· a holding company (within the meaning of the Corporations Act 2001) of your employer;

· a subsidiary of your employer; or

· a subsidiary of a holding company (within the meaning of the Corporations Act 2001) of your employer.

The discount amount will be the market value of the ESS interests at the deferred taxing point, reduced by the cost base of the ESS interests.

In your case, you were granted a number of parcels of shares after 1 July 2009 while you were a foreign resident for taxation purposes, which vested or will vest, after you became a resident:

A condition of the ESS plan was that your unvested shares would be forfeited if your employment with Company A was terminated for any reason. This condition indicates that your shares were granted subject to forfeiture conditions in relation to your continued employment.

As your unvested shares were not forfeited, it is not viewed that your employment ceased under section 83A-330 of the ITAA 1997. Therefore, it is viewed that part of the discount amounts in relation to these shares relates to your employment in both overseas and in Australia and that your services provided in both countries are relevant to the acquisition of the shares.

As you were a resident of Australia for part of the vesting period, the discount amounts assessable in Australia will be apportioned based on the number of days you were an Australian resident between date of grant and vesting dates.

You will calculate the discount amounts in relation to each parcel of shares using the formula provided above, and will include the discount amount attributable to your Australian employment is your assessable income.

The deferred taxing point for the last two parcels of shares has not occurred at this point in time. When the deferred taxing point occurs, you will need to apportion the discount amount accordingly.

Cost base rule where foreign resident ESS recipient becomes an Australian resident

If an individual becomes an Australian resident for capital gains tax (CGT) purposes, special cost base and acquisition rules apply in respect of each CGT asset owned by the taxpayer just before becoming a resident. Special rules may apply where an inbound resident owns employee shares.

Under the special cost base rule, the first element of the cost base and reduced cost base of an asset at the time the taxpayer becomes a resident is its market value at that time. Under the special acquisition rule, the taxpayer is treated as having acquired the asset at the time of becoming a resident. As a result, the taxpayer will only be eligible for the CGT discount if the asset is held for at least 12 months from the time of becoming a resident, even if it was owned before that time.

Where a foreign resident who has acquired shares or rights under an ESS becomes a resident, and taxation of the acquisition discount has been deferred, the cost base rules for the shares or rights are as follows:

if the cessation time occurs after the foreign resident becomes a resident, the cost base of the shares or rights is determined under s 130-83(2) and (3) depending on when the relevant CGT event happens;

· if the cessation time occurs before the foreign resident becomes a resident and the shares or rights are not taxable Australian property, the cost base of the shares or rights will be their market value at the time when the foreign resident becomes a resident under sections 130-83(4) and 855-45 of the ITAA 1997.

· Section 130-83(2) of the ITAA 1997 provides that if CGT event A1, C2, E1, E2, E5 or I1 happens to a qualifying share or right (or a share acquired by exercising a right) under an arm's length transaction within 30 days of the relevant Div 13A cessation time, any capital gain or capital loss is disregarded for CGT purposes.

Where a CGT event listed above for s 130-83(2) happens more than 30 days after the relevant cessation time for the qualifying share or right, s 130-83(3) provides that the first element of the cost base and reduced cost base of the share or right is its market value at the cessation time. This means that a capital gain will arise on any increase in market value from the cessation time up to the time of the relevant CGT event.

In your case, you were granted ESS shares on various dates, with various vesting dates, some of which occurred prior to you becoming an Australian resident, and some vesting after you became an Australian resident.

In accordance with section 855-45 of the ITAA 1997, the shares that vested prior to you becoming an Australian resident ceased being ESS interests and became CGT assets for income tax purposes. Therefore, the cost base of those shares will be their market value on the date you became an Australian resident.

You were granted parcels of shares after 1 July 2009, with the majority vesting after you became an Australian resident. The cost base of these vested shares will be the market value of the shares on the relevant vesting dates.

The cost base of the parcel of shares that have not vested as at this time will be the market value of those shares on their vesting dates.

Note: You maybe entitled to claim a foreign income tax offset for the tax you have paid in Singapore in relation to your ESS shares.

You will not be entitled to claim a foreign income tax offset for any discounts that relate to a period when you were a foreign resident for tax purposes.

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