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Ruling

Subject: Employee Share Scheme

Question

Can you exclude a portion of the discount on your shares from your assessable income?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

At some time prior to 1 July 2009

Relevant facts and circumstances

At some time prior to 1 July 2009 you were granted shares under an Employee Shares Scheme (ESS).

According to the ESS plan:

§ some of your shares are not subject to any additional performance conditions and will be released to you provided that you are still employed with the Group a number of years from the date of award.

§ some of your shares will vest and be transferred to you after the end of a number of years performance period subject to your continued employment with the Group and the satisfaction of the performance condition.

You did not pay any consideration for your shares.

You were a non-resident when your shares were granted.

You became an Australian resident for tax purposes at some time after 1 July 2009 and continued your employment with the Group in Australia.

You continued your employment with the Group and satisfied the performance condition over the vesting period.

You received your full entitlement of shares on the vesting date adjusted for a number of shares forgone to fund the tax liability in Country A.

Your shares are qualifying shares according to section 139CD of the Income Tax Assessment Act 1936 (ITAA 1936).

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 139B(1)

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

Income Tax Assessment Act 1936 Subsection 139B(2)

Income Tax Assessment Act 1936 Subsection 139B(3)

Income Tax Assessment Act 1936 Subsection 139C(1)

Income Tax Assessment Act 1936 Subsection 139CA(2)

Income Tax Assessment Act 1936 Section 139CD

Income Tax Assessment Act 1997 Section 83A-10

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

Income Tax Assessment Act 1997 Section 83A-115

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

Reasons for decision

You acquire shares under an employee share scheme (ESS) if the shares are acquired, whether directly or indirectly, in relation to your employment or in relation to any services you provide. If you pay any money, or provide any other consideration, to acquire the shares, the consideration must be less than the market value of the rights at the time you acquire them.

Generally, your shares will be acquired from an ESS when your employment contract is entered into or when you accept an offer received under an employee share plan. However, if you are a non-resident at the time of acquisition your shares will be acquired when you become an Australian resident.

Individuals will need to examine their circumstances and specific employee share plan to determine whether the period after becoming an Australian resident is relevant to the acquisition of the employee shares. The period of employment after becoming an Australian resident will generally not be relevant if no forfeiture conditions remain at the time an individual becomes an Australian resident.

Where you are granted ESS shares at a discount before or after coming to Australia and where part of the qualifying employment is performed outside Australia, only part of the discount is taxed in Australia. That is, the discount assessable in Australia would be attributed based on the number of days you were an Australian resident between date of grant and vesting date.

The discount amount on shares acquired prior to 1 July 2009 will not be included in your assessable income until the income year in which an event, known as a 'cessation time', occurs.

For shares that have restrictions preventing their disposal or conditions that may result in you forfeiting the share, the cessation time is the earliest of the following:

§ when you dispose of the shares

§ the later of when the disposal restrictions cease to have effect and the forfeiture conditions cease to have effect in relation to the shares (vesting date)

§ when your employment in respect of which the shares were acquired ceases

§ ten years from the date you acquired the shares.

Paragraph 83A-5(2)(a) of the Income Tax (Transitional Provisions) Act 1997
(ITTPA 1997) provides that Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies where:

§ shares were granted under an employee share scheme before 1 July 2009;

§ the shares were to be assessable in the year that the cessation time occurs; and

§ the cessation time did not occur before 1 July 2009.

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 (calculated at the deferred taxing point) of shares that were granted under an employee share scheme reduced by their cost base.

Paragraph 83A-5(4)(b) of the ITTPA 1997 ensures that the ESS deferred taxing point is determined using the cessation time from subsection 139CA (2) of the ITAA 1936 (see the reference to cessation time above).

Application to your case

As you were a non-resident at the time of grant, your shares will be acquired when you became an Australian resident. A condition of the ESS was that your unvested shares may be cancelled if you voluntarily leave the Group or fail to meet other vesting conditions by the scheduled vesting date. This indicates that your shares were granted subject to forfeiture conditions.

As forfeiture conditions exist, the period after you became an Australian resident becomes relevant to determining the amount of discount that is assessable in Australia. As you were a resident for part of the vesting period, the discount assessable in Australia would be attributed based on the number of days you were an Australian resident between date of grant and vesting date.

Your shares were granted under an employee share scheme before 1 July 2009, they were to be assessable in the year that the cessation time occurs, and the cessation time did not occur before 1 July 2009, therefore, the transitional provisions apply. As a result, the tax on the discount amount will be deferred until the deferred taxing point occurs. The amount assessed will be the market value of your shares at the deferred taxing point, reduced by their cost base. The deferred taxing point for your shares is determined by the cessation time, which in your case is the vesting date. Therefore, you will need to include the portion of the discount amount that relates to your residency in Australia in your relevant income tax return.

Additional information (non-binding)

Foreign Income Tax Offset (FITO)

Where Australia has a Tax Treaty with a foreign country, you may be entitled to a tax offset for an income year for foreign income tax. There is a Tax Treaty between Australia and Country A to avoid double taxation of income received by Australian and Country A residents.

The agreement with Country A provides that where Country A tax paid under the law of Country A and in accordance with this Agreement, whether directly or by deduction, in respect of income derived by a person who is a resident of Australia from sources in Country A shall be allowed as a credit against Australian tax payable in respect of that income. If eligible, this amount will be refunded in the form of a foreign income tax offset (FITO).

To be entitled to a foreign income tax offset:

§ the foreign tax must be foreign income tax

§ you must have actually paid, or be deemed to have paid, the foreign income tax

§ the income or gain on which you paid foreign income tax must be included in your assessable income in Australia.

In addition to the above eligibility requirements there are several types of foreign income taxes that are specifically excluded from the offset, including certain residence-based taxes. The offset does not apply to foreign income tax paid to a foreign country by a taxpayer on the basis of their residence in that country on amounts sourced outside that country.

Generally, the country of residence provides the credit for taxes paid or exempts the income.

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