Edited version of your written advice

Authorisation Number: 1013016550961

Date of advice: 17 May 2016

Ruling

Subject: Employee share scheme - temporary resident - becoming an Australian resident - capital gains tax - cost base

Question 1:

Will you be assessable on the whole amounts described as 'Discount from deferral schemes' on the Employee Share Scheme Statements for the income years ending 30 June 20xx, 30 June 20xx and 30 June 20xx?

Answer:

Yes.

Question 2:

Will the first element of the cost base of the options which vested when you were a temporary resident be the market value of the interests on the date you ceased being a temporary resident?

Answer:

Yes.

Question 3:

Will the first element of the cost base of the options which vested after you became an Australian resident be the market value of the interests on their vesting dates?

Answer:

Yes.

This ruling applies for the following periods

Income year ending 30 June 20xx

Income year ending 30 June 20xx; and

Income year ending 30 June 20xx.

The scheme commences on

1 July 20xx.

Relevant facts and circumstances

You have provided documentation with this private ruling which should be read in conjunction with, and forms part of the scheme of this private ruling.

In 20xx, you commenced employment with Company A.

Company A is based overseas and is the parent company of Company B.

In 20xx you travelled to Australia on a temporary visa, Visa 457, and commenced employment with Company B shortly after arriving in Australia.

After you arrived in Australia, you participated in an employee share scheme offered by Company A under which you were granted employee share scheme options that would vest over a number of income years.

You were a temporary resident until 20xx, when you were granted Australian Permanent Residency.

You exercised your options a number of months after you became an Australian resident and sold the resulting shares on the same day as a result of the sale of Company B.

A number of months after you exercised the options, Company A prepared calculations of the employee share scheme discount amounts for your options and had advised you that there were employee share scheme discount amounts which were taxable in Australia in the 20xx, 20xx and 20xx income years.

You were issued employee share scheme statements by Company A which outlined that you had employee share scheme discount amounts from deferral schemes in the 20xx, 20xx and 20xx income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Division 83A-C

Income Tax Assessment Act 1997 Subdivision 768-R

Income Tax Assessment Act 1997 Subdivision 855-B

Reasons for decision

QUESTION 1:

Summary

Employee share scheme interests are considered to be 'earned' over the vesting period. Therefore, the amount of the gain calculated on the vesting of the employee share scheme interests will be fully assessable if the whole vesting period relates to Australian sourced income.

You acquired employee share scheme options under a tax deferred employee share scheme in relation to your Australian employment. Therefore, Subdivision 83A-C of the ITAA 1997 will apply and the options will be taxed at their deferred taxing points.

Detailed reasoning

Employee Share Schemes (ESS)

All references are to the ITAA 1997 unless otherwise noted.

Subsection 83A-110(1) provides that your assessable income for the year that the deferred taxing point occurs includes the market value of the ESS interest (calculated at the deferred taxing point) reduced by the cost base of the interest.

The cost base of the ESS interests includes any consideration paid or given for the ESS interests, and any other incidental costs incurred in relation to the ESS interests before the deferred taxing point occurs.

Subsection 83A-110(2) prescribes that you 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 83A-110(2) attributes a source to a gain that is (or would be) assessable income under subsection 83A-110(1). Whether the gain is ultimately included in the taxpayer's assessable income is then determined by the core residence and source rules relating to statutory income in section 6-10.

The assessability of statutory income is affected by the residency status of the person who derives it. The assessable income of an Australian resident will include statutory income from all sources, whether in or out of Australia (subsection 6-10(4)). On the other hand, for a foreign resident, the assessable income includes statutory income from all Australian sources (paragraph 6-10(5)(a)). Temporary residents of Australia for taxation purposes are subject to tax on discounts they receive under an ESS in relation to employment in Australia.

A gain on an ESS interest that relates to employment in Australia is treated as income from sources in Australia. The gain will be assessable income under the core residence and source rules, whatever the residency status of the taxpayer.

Application to your situation

You commenced employment with Company A in 20xx

In 20xx, you arrived in Australia on a temporary visa, and commenced your employment with Company B shortly after arriving in Australia.

After you arrived in Australia you participated in an ESS offered by Company A under which you were granted options in 20xx. The ESS was a deferred taxing scheme.

You became an Australian resident in 20xx.

In your case, while you were a temporary resident when you were issued the ESS options you are assessable on the ESS discount arising in relation to the ESS options because they are solely attributable to your Australian employment.

Therefore, you are assessable on the whole ESS discount amounts outlined on the ESS Statements issued by Company A and those ESS discount amounts should be included in your assessments.

QUESTIONS 2 and 3:

Summary

ESS interests issued under deferral schemes to temporary residents who become Australian residents after the deferred taxing points occur; the first element of the cost base of ESS interests will be the market value of the ESS interests at the time the taxpayer ceases to be a temporary resident.

ESS interests owned by Australian residents are assessable under the CGT provisions. The first element of the cost base for ESS interests acquired under a deferred taxing scheme is the market value of the ESS interests on the date that the deferred taxing point occurred.

Detailed reasoning

Temporary residents and Capital Gains Tax

In accordance with the policy of minimising Australian taxation of a temporary resident's foreign source investment income, several provisions in Subdivision 768-R effectively restricts the operation of the Australian CGT rules to a temporary resident's assets which are taxable Australian property. In short, the purpose of these rules is to treat temporary residents as if they are foreign residents for the purposes of the CGT rules.

A capital gain or loss made by a temporary resident is disregarded if the individual would not make a capital gain or loss from a CGT event, or the capital gain or loss would have been disregarded under Division 855 if they were a foreign resident when, or immediately before, the CGT event happens. This means that, for Australian tax purposes, a temporary resident will generally need to account for a capital gain or loss only in relation to a CGT asset which is "taxable Australian property".

Application to your situation

You came to Australia on a temporary visa and commenced employment with Company B in 20xx.

You participated in an ESS offered by Company A after you had arrived in Australia and were granted ESS options (the interests) in 20xx.

No CGT event occurred in relation to your interests while you were a temporary resident.

Based on the facts of your situation, if you had made a capital gain or capital loss in relation to your interests while you were a temporary resident, it would have been disregarded. However, a CGT event did not occur in relation to your interests while you were a temporary resident. Accordingly, you cannot disregard any capital gain or capital loss made in relation to the interests under Subdivision 768R.

Temporary resident becoming a permanent resident

If you are a temporary resident of Australia who ceases to be a temporary resident, but at the time they cease being a temporary resident becomes an Australian resident, there are rules that apply to each CGT assets that:

• You owned just before you ceased being a temporary resident; and

• Is not taxable Australian property; and

• You acquired it on or after 20 September 1985.

Accordingly, assets which were previously excluded from the Australian CGT rules because they were not taxable Australian property must be brought within the ambit of those rules if a temporary resident becomes a permanent resident.

The cost base of any post-CGT assets which are not taxable Australian property must be calculated in accordance with section 768-955. The first element of the cost base and reduced cost base of such an asset is its market value at the time that the taxpayer ceases to be a temporary resident under subsection 768-955(2).

Each asset brought within the CGT net by section 768-955 is treated as if it had been acquired by the taxpayer at the time he or she ceased to be a temporary resident under subsection 768-955(3). This means that a taxpayer who disposes of an appreciating asset within 12 months of becoming a permanent resident will not qualify for the CGT discount, although it should be noted that the benefit of the discount is lost only with respect to any amount in excess of the market value of the asset at the time the temporary resident becomes a permanent resident.

However, subsection 768-955(4) outlines that section 768-955 will not apply to an employee share scheme interest if:

(a) Subdivision 83A-C applies to the interest; and

(b) the ESS deferred taxing point has yet to occur.

Application to your situation

Your interests are viewed as being non-taxable Australian property.

You became an Australian resident in 20xx. As at that date the deferred taxing point for some of your interests had occurred, and for the others it had not occurred as addressed below:

• the deferred taxing point for the interests acquired in the first three tranches occurred on their vesting dates which occurred in 20xx, 20xx and 20xx.

• As the deferred taxing point for those interests occurred prior to you becoming an Australian resident, the first element of the cost base of those interests will be their market value on the date you ceased being a temporary resident in accordance with subsection 768-955(2). As a result, you are viewed as having acquired those interests when you ceased being a temporary resident; and

• the deferred taxing point for fourth tranche of interests had not occurred prior to you becoming an Australian resident. Therefore, section 768-955 will not apply to those interests and the general CGT provisions will apply to those interests.

CGT treatment of an ESS interest

Once the ESS discount has been taxed under the ESS provisions, any future gain or loss is then taxed under the capital gains tax (CGT) provisions apply.

For an ESS interest for which tax is deferred, the ESS interest (and the share or right that it forms part of) is taken to have been re-acquired immediately after the deferred taxing point. This resets the cost base of the ESS interest to its market value at this time, and resets the acquisition time which will be relevant to an employee's eligibility for the 50% CGT discount.

Application to your situation

The deferred taxing date for the fourth tranche of interests occurred when they were exercised in 2015. The first element of the cost base of those interests will be their market value on that date.

Conclusion

The first element of the cost base for the first three tranches of interests that vested while you were a temporary resident will be their market value on the date you ceased being a temporary resident.

The first element of the cost base for the fourth tranche of interests which vested when you were an Australian resident will be their market value on the date the deferred taxing point for those interests occurred.

Note: Any expenses incurred in relation to ESS interests after the vesting date can be included in their cost base.

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