Edited version of private advice

Authorisation Number: 1051699572641

Date of advice: 24 June 2020

Ruling

Subject: Employee share schemes

Question:

Will the awards that have, or will, vest after you became an Australian resident for taxation purposes be assessable under Division 83A of the Income Tax Assessment Act 1997?

Answer:

Yes. The portion of the employee share scheme discount arising in relation to each award that relates to your employment in Australia must be included in your assessable income in the income year in which the deferred taxing point occurs.

This ruling applies for the following period

Income year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You were a non-resident of Australia for taxation purposes for more than XX years.

You were formerly employed by Company A which is based in an overseas country for XX years.

During your employment with Company A you participated in various awards offered by the company under which you were granted various interests.

You retired from your role with Company A.

When you retired a number of the awarded interests had vested prior to the date you retired, or on the date you retired. Payment of these awards became unconditional upon your retirement with Company A subject to only a non-complete and non-solicitation agreement.

Other interests were unvested as at that date and you continued to hold them with them vesting as scheduled, exercisable up to the specified expiry dates.

You returned to Australia several months after your retirement with Company A and became a resident of Australia for taxation purposes.

Prior to your retirement with Company A you held executive roles with Company XYZ and Company ABC for which you did not receive any remuneration as you were employed full-time with Company A.

Company XYZ has the following shareholders:

·         More than 50% shareholding held by Company X; and

·         More than 40% shareholding held by Company A.

Company ABC has the following shareholders:

·         More than 50% shareholding held by Company A; and

·         More than 40% shareholding held by Company Y.

After you retired from your role with Company A your roles with Companies XYZ and ABC were downgraded to non-executive roles and you commenced receiving non-executive director's fees in relation to your new roles from around the time you retired from your employment with Company A.

A tranche of the Company A awards vested during the period covered by this ruling. You received $XXX in relation to those awards and paid tax on them in the overseas country in which Company A is located.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Division 83A

Reasons for decision

Assessable income in relation to employee share schemes

An Australian resident is subject to income tax on their worldwide income. Consistent with the treatment of most other types of income, whether an amount is included in a taxpayer's assessable income under employee share scheme (ESS) provisions will depend on the taxpayer's residency status and the source of income.

An Australian resident is subject to Australian income tax on all discounts they receive under ESS regardless of whether they received it in relation to employment either inside or outside of Australia. However, where a foreign resident's ESS interests fully vest prior to their arrival in Australia, there will be no Australian taxation implications under Division 83A of the ITAA 1997.

Foreign residents who become Australian residents and hold unvested ESS interests granted to them prior to becoming an Australian taxation resident will be assessable in relation to those ESS interests to the extent that it does not relate to their employment outside of Australia in accordance with subsection 83A-110(2) of the ITAA 1997.

The following should be taken into consideration when determining whether a resident of Australia's unvested ESS interests, that were granted while they were a foreign resident, will be assessable in full or in part in Australia due to their employment both inside and outside of Australia:

Relationships similar to employment

Division 83A of the ITAA 1997 applies to "employee share schemes". An ESS is defined as a scheme under which ESS interests in a company are provided to employees, or associates of employees, of the company, or subsidiaries of the company, in relation to the employees' employment (subsection 83A-10(2) of the ITAA 1997).

Section 83A-325 of the ITAA 1997 provides that Division 83A applies to an individual covered by column 1 of an item in the table below as if:

(a)  he or she were employed by the entity referred to in column 2 of that item; and

(b)  the thing referred to column 3 of that item constituted that employment.

This table needs to be considered in conjunction with the following provision affecting the interpretation of " employment " for the purposes of Division 83A of the ITAA 1997:

Ceasing employment

Under section 83A-330 of the ITAA 1997 you are treated as ceasing employment when you are no longer employed by any of the following:

(a)  your employer in that employment;

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

(c)   a subsidiary of your employer;

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

The phrase 'that employment' in this section is not to be read as a requirement that an employee must remain on the same terms of employment if he/she is to ensure a taxing point will not arise under subsection 83A-120(5) of the ITAA 1997. Rather, section 83A-330 of the ITAA 1997 is to be read as a single requirement that the employee remain employed with the same employer, or employer group.

This interpretation of section 83A-330 of the ITAA 1997 informs the operation of subsection 83A-120(5) of the ITAA 1997, such that a cessation of employment, and consequently a taxing point, would not arise where the employee remains employed within the group of companies that includes the employer.

Application to your situation

In this case you were a non-resident of Australia for taxation purposes until you returned to Australia after retiring from your employment with Company A.

While you were overseas you had been awarded various interests over a number of years during your employment with Company A.

You commenced providing executive services to Company ABC and Company XYZ prior to retiring from your position with Company A. You continue to provide your services to Companies ABC and XYZ following your retirement with Company A in non-executive positions and are remunerated with the payment of director's fees, which commenced around the time you retired.

The total vesting period for some of the interests awarded to you and the deferred taxing point occurred wholly while you were a non-resident of Australia. Therefore, the ESS discount amounts arising in relation to those interests are not assessable in Australia.

However, the vesting period for your unvested awards as listed above occurred, or will occur, after you became an Australian resident for taxation purposes.

Those unvested interests were not forfeited when you retired from your employment role with Company A and continued to provide services to Companies ABC and XYZ. Based on the information provided it is viewed that you were an employee under section 83A-325 of the ITAA 1997 prior to your retirement as you provided services and held an office in both companies. While you have not held an office with either Company ABC or XYZ from around the time you retired you are still considered to be in their employment for ESS purposes in accordance with Section 83A-325 of the ITAA 1997.

Additionally, as Company ABC is a subsidiary of Company A given that Company holds more than a 50% shareholding in Company A, your employment did not cease for ESS purposes when you retired from your role with Company A but continued with your involvement with Company ABC in accordance with section 83A-330 of the ITAA 1997.

Based on the information provided it is viewed that a deferred taxing point did not occur in relation to all of the awards when you ended your employment with Company A. Therefore, the discount in relation to those unvested interests relates to your employment overseas and in Australia.

The deferred taxing point occurred in relation to a tranche of awards during the period covered by this ruling. Any of the ESS discount arising in relation to this award that is attributable to your Australian employment must be included in your assessable income in which the deferred taxing point occurred.

Similarly, the ESS discount attributable to your Australian employment in relation to your other unvested awards that will vest in the future must be included in your assessable income in the income year in which the deferred taxing point in relation to those interests occurs.

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