Edited version of your written advice

Authorisation Number: 1012694098989

Ruling

Subject: Reporting obligations employee share scheme

Question 1

Does the vesting of the shares attract the application of Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is The Taxpayer required to provide the employee with an 'employee share scheme statement' for the period ended 30 June 2014?

Answer

Yes

Question 3

Will The Taxpayer need to apportion the discount upon vesting of the options when reporting on the employee share statement between the period of service in Australia and the foreign country?

Answer

No

This ruling applies for the following period:

1 July 2013 to 30 June 2014

The scheme commences on:

01 July 2013

Relevant facts and circumstances

1. The Taxpayer is an Australian resident private company.

2. The Taxpayer is a wholly owned subsidiary of Head Company which is company resident in the a foreign country.

3. Prior to moving to Australia The Employee was employed by Head Company

4. On the 1 January 2011 The Employee was granted options (The Options) under the Head Company employee share plan (The ESS Plan).

5. Before The Options could vest under The ESS Plan The Employee had to meet performance criteria.

6. The Employee did not declare any discount amount relating to the ESS Plan upfront for the foreign countries tax purposes.

7. In 2012 The Employee moved to Australia from the foreign country, at this time The Employee ceased employment with Head Company and began employment with The Taxpayer.

8. The Employee met the performance criteria under The ESS Plan in the 2014 tax year.

9. The Employee sold the shares acquired as a result of The Options vesting on Vesting Day which happened in the 2014 tax year.

10. The Employee is an Australian resident for the purposes of Tax Law.

11. The Employee is not a temporary resident as defined in section 995-1(1) of the ITAA 1997.

12. The following terms are defined in the rules of The ESS Plan:

• Relevant Employment means employment with any Group Member.

• Group means the Company and its Subsidiaries from time to time, and "Group Member" shall be interpreted accordingly.

• Company means The Head Company incorporated in England and Wales.

• Subsidiary means a subsidiary of the Company within the meaning of section 736 of the Companies Act 1985 (in the foreign country).

• Eligible Employee means an individual who is a bona fide employee or a director of a Group Member.

• Option means a right to acquire Plan Shares granted under the Plan.

• Plan means the Head Company employee share plan in its present form or as amended from time to time.

• Plan Shares means fully paid ordinary shares in the capital of the Company (or any shares representing them).

Relevant legislative provisions

Income Tax Assessment Act 1997, Division 83A

Income Tax Assessment Act 1997, subsection 83A-10(1)

Income Tax Assessment Act 1997, subsection 83A-10(2)

Income Tax Assessment Act 1997, section 83A-110

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

Income Tax Assessment Act 1997, subsection 83A-110(2)

Income Tax Assessment Act 1997, subsection 6-10(4)

Income Tax Assessment Act 1997, subsection 995-1(1)

Taxation Administration Act 1953, section 392-5 of schedule 1

Taxation Administration Act 1953, subsection 392-5(2)

Reasons for decision

Issue 1

Question 1

Division 83A of the ITAA 1997 operates to include discounts on shares in a company, or rights to acquire shares in the company, under an employee share scheme (ESS), as assessable income of the employee.

Subsection 83A-10(2) of the ITAA 1997 defines an employee share scheme as:

….a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of:

(a) the company; or

(b) subsidiaries of the company;

In relation to the employees' employment

Subsection 83A-10(1) of the ITAA 1997 defines an ESS interest in a company as:

…. a beneficial interest in:

(a) a share in the company; or

(b) a right to acquire a beneficial interest in a share in the company.

'Scheme' is defined broadly in subsection 995-1(1) of the ITAA 1997 to mean:

(a) any arrangement; or

(b) any scheme, plan, proposal, action course of action or course of conduct, whether unilateral or otherwise.

The Taxpayer is a wholly owned subsidiary of The Head Company. The ESS Plan, based on its terms, is offered to employees of The Head Company, or its subsidiaries, on the basis of their employment. The Employee was granted The Options under The ESS Plan while employed by The Head Company in the foreign country. During the vesting period for The Options, The Employee has remained an employee of The Head Company, or its Australian subsidiary (The Taxpayer). There is nothing to indicate that when The Employee ceased employment with The Head Company in the foreign country and commenced employment with The Taxpayer, that The Options were forfeit under The ESS Plan. Rather, The Employee went on to meet the performance criteria under The ESS Plan, and The Options vested in the 2014 tax year, converting to shares that were sold on the same day.

The Options meet the definition of an ESS interest, as they are a right to acquire a beneficial interest in a share in The Head Company. Furthermore, The ESS Plan meets the definition of an ESS, as it is a scheme that ESS interests are offered to employees of The Head Company, by virtue of their employment with The Head Company, or one of its subsidiaries.

The Options were issued to The Employee under The ESS Plan, in connection with The Employee's employment with The Head Company, or its subsidiary. As such, the sale of the shares acquired as a result of the vesting of The Options, are covered by Division 83A of the ITAA 1997. Any discount on The Options that vest to The Employee under The ESS Plan would be subject to tax in in the hands of The Employee in accordance with Division 83A of the ITAA 1997.

Question 2

Subsection 392-5(1) of schedule 1 of the Taxation Administration Act 1953 (TAA) requires an employer to give a statement to an employee during the financial year in which a deferred taxing point occurs relating to an ESS interest. A 'deferred taxing point' is defined as when there:

n is no longer any real risk that the employee will forfeit their ESS interest (i.e. any performance criteria under The ESS Plan are met), and

n any restrictions on the employee disposing of their ESS interest no longer apply (i.e. the employee is free to dispose of their ESS interest).

Thus, when an employee meets performance criteria imposed by an ESS, and any associated shares acquired as a result of the vesting of options under the ESS are immediately sold during the financial year, an obligation to provide a statement under section 392-5 of the TAA will exist. This is because:

• as the performance criteria have been met, there is no longer any real risk that the ESS interest will forfeit; and

• the disposal of shares resulting from the vesting of the options demonstrates that any restrictions on disposal of the ESS interest no longer apply.

For completeness, it should be noted that subsection 392-5(2) of schedule 1 of the TAA specifies that the statement given to an employee must be in the approved form. The Employee share scheme statement (NAT 73433A-07.2012) is the approved form for making the statement under subsection 392-5(1) of schedule 1 of the TAA.

Prior to meeting the performance criteria under The ESS Plan, there was a real risk of forfeiture, and The Taxpayer was not at liberty to dispose of their ESS interest. As such, a deferred taxing point had not occurred, and there was no obligation to provide a statement under subsection 392-5(1) of schedule 1 of the TAA. During the 2014 tax year, the performance criteria under The ESS Plan were satisfied, the options vested, and the shares associated with the exercise of options were disposed of.

As outlined above, during the 2014 tax year the conditions for the issue of a statement under subsection 392-5(1) of schedule 10 of the TAA were met, triggering the obligation for The Taxpayer to provide a statement to The Employee for the year ended 30 June 2014.

Question 3

Section 83A-110 of the ITAA 1997 specifies the amount that should be included in assessable income, as a result of the occurrence of an 'ESS deferred taxing point'. Specifically, section 83A-110 states:

(1) Your assessable income for the income year in which the ESS deferred taxing point for the ESS interest occurs includes the market value of the interest at the ESS deferred taxing point, reduced by the cost base of the interest.

(2) Treat an amount included in your assessable income under subsection (1) as being from a source other than an Australian source to the extent that it relates to your employment outside Australia.

Subsection 6-10(4) of the ITAA 1997 states that:

If you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia.

Thus, an Australian resident for tax purposes is subject to income tax on all sources of income. So, despite subsection 83A-110(2) attributing the source, the general principles in subsection 6-10(4) of the ITAA 1997 requires Australian tax residents to include the entire discount relating to an ESS in their assessable income.

The above treatment is in accordance with paragraph 1.355 of the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009, which states that:

Australian resident taxpayers are subject to Australian income tax on all discounts they receive under employee share schemes regardless of whether they received it in relation to employment in Australia or outside Australia. However, this may be affected by Australia's double tax treaties and the temporary resident rules.

For completeness, it should be noted that an Australian resident who has a foreign country sourced amount in their assessable income may be able to claim a foreign tax offset for any foreign country taxes paid against the Australian tax payable on the foreign sourced portion of the gain, as provided for in subsection 83A-110(2) of the ITAA 1997. This will be in accordance with Article 14 of the Convention between the Government of Australia and the foreign countryfor the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains [2003] ATS 22 relating to income from employment, and note 8 of the notes to that agreement, relating to employee share option schemes.

As The Employee is an Australian resident for taxation purposes, when their options vested under The ESS Scheme, they would be taxable on the whole amount of the discount, in accordance with subsection 83A-110(1) of the ITAA 1997, and the general principles relating to source in subsection 6-10(4) of the ITAA 1997.

When completing the Employee share scheme statement The Taxpayer should include the whole amount of the discount from The ESS Scheme, in accordance with subsection 83A-110(1) of the ITAA 1997, at label 'F' relating to 'Discount from deferral schemes'. Apportionment between Australian and non-Australian source is not necessary.

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