Edited version of private ruling

Authorisation Number: 1011657608957

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Ruling

Subject: Employee share scheme - Shares - Return to Australia from overseas

1. Are the capital gains provisions the primary taxing regime over the shares?

No.

2. Do you acquire the shares at their market value on the date you became an Australian resident again for capital gains purposes?

No.

3. Are you entitled to claim a foreign income tax offset in relation to the amounts that have been taxed in both Australia and overseas?

No.

This ruling applies for the following period<s>:

2009-10 income year

The scheme commences on:

1 July 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You moved from Australia to an overseas country during 2004 and ceased to be an Australian resident for income tax purposes.

You relocated overseas for employment purposes staying with the same employer.

You returned to Australia during 2009 and became an Australian resident for income tax purposes in early 2009.

During your employment overseas, you received a number of performance share grants in your employer or their holding company as a result of your achievements in your foreign based assignment.

Your entitlement to receive these grants and the size of them were wholly related to job performance overseas.

The share grants were made to you at no cost with a three year vesting period. Some company profitability hurdles needed to be fulfilled for them to vest partially or fully. None of these hurdles related to your individual job performance.

There were two grants in question (which were technically unvested when you returned to Australia) were (details provided).

Under the foreign country's income tax law, there is a deemed exercise rule that applies to all share awards granted during the period of residency. These awards were deemed to be vested in full and exercised at the market value of the underlying shares one month prior to the date of cessation of local employment. No consideration is given for the time duration from grant to vest, the entire share grant including the unvested portion is assessable.

As such, you included a specific amount in your foreign country income tax return submitted for the year ending 31 December 2009 on which you paid tax at the prevailing rates before receiving a tax clearance to leave that country.

Subsequent to resuming Australian tax residency, these share grants vested prematurely when your employer was taken over during the 2009-10 income year.

Certain documents that you provided are to be read with and form part of the description of the scheme for the purpose of this ruling.

Assumptions

More than 75% of permanent Australian employees have been entitled to acquire shares under this or another employee share scheme.

You never held a legal or beneficial interest in more than 5% of the shares in the company.

You were never in a position to cast or control the casting of more than 5% of the maximum number of shares that might be cast at a general meeting of the company.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 139B

Income Tax Assessment Act 1936 Section 139C

Income Tax Assessment Act 1936 Section 139CA

Income Tax Assessment Act 1936 Section 139CC

Income Tax Assessment Act 1936 Section 139CD

Income Tax Assessment Act 1936 Section 139E

Income Tax Assessment Act 1936 Section 139G

Income Tax Assessment Act 1936 Section 139GA

Income Tax Assessment Act 1936 Section 139GBA

Income Tax Assessment Act 1997 Section 83A-110

Income Tax Assessment Act 1997 Section 83A-115

Income Tax Assessment Act 1997 Section 83A-125

Income Tax Assessment Act 1997 Section 770-10

International Tax Agreements Act 1953

International Tax Agreements Act 1953

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

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

The capital gains provisions are not the primary taxing regime over the shares. The employee share scheme provisions take precedence over them.

Detailed reasoning

The capital gains provisions may include an amount in your assessable income if a capital gains tax (CGT) event happens. However, they also contain a number of provisions that operate to ensure that the same amount is not included in your assessable income twice if another income tax provision also applies.

The employee share scheme provisions may include an amount in your assessable income if shares or rights are granted to you at a discount as part of your remuneration package.

The employee share scheme provisions apply before the capital gains provisions, so they adjust the amount that you are considered to have paid to acquire the shares for capital gains purposes.

A similar adjustment is made to the cost base of shares if you acquired them before you became a resident of Australia - you use the market value of the shares as at the date you became an Australian resident as the amount you paid to acquire them.

The adjustments made due to the operation of the employee share scheme provisions take precedence over the adjustments for becoming a resident of Australia.

Question 2

Summary

You do not acquire the shares at their market value on the date you became an Australian resident again for capital gains purposes. Instead, you acquire them at their market value calculated as at the taxing point under the employee share scheme provisions.

Detailed reasoning

The employee share scheme provisions apply to the shares for the reasons provided above. The cost base of your shares will include their market value calculated as at the taxing point under the employee share scheme provisions.

Working out the taxing point under the employee share scheme provisions

The employee share scheme provisions apply to you as the following conditions are met:

· you acquired the shares under an employee share scheme

· the shares are qualifying shares, and

· you did not elect to be assessable on the shares in the 2008-09 income year when you became an Australian resident again.

You acquired the shares under an employee share scheme because they were issued to you as part of your remuneration package in your employment and you paid less than their market value to acquire them. Employment includes service in a foreign country as the holder of an office or in the capacity of an employee.

The shares are qualifying shares because they meet all of the following conditions:

· you acquired them under an employee share scheme

· the are shares in your employer (or a holding company of your employer)

· they are ordinary shares

· more than 75% of the permanent Australian employees have been entitled to acquire shares or rights under this or another scheme

· you never held a legal or beneficial interest in more than 5% of the shares of that company

· you were never in a position to cast or control the casting of more than 5% of the maximum number of shares that might be cast at a general meeting of the company, and

· the 'cessation time' hadn't happened in relation to them when you became a resident of Australia again.

The election enables you to bring forward the assessment of the discount under the employee share scheme provisions to the date you became a resident of Australia. As you did not make this choice, the discount you received due to the grant of the shares is calculated and assessable at the deferred taxing point.

The deferred taxing point is the earliest of the following:

· the date you sold the shares

· when the selling restrictions and forfeiture conditions ended

· when your employment with your employer, their holding company or a subsidiary of your employer or their holding company, and

· ten years from the date of grant of the shares.

However, the deferred taxing point becomes the disposal date if you dispose of the shares within 30 days of the earliest of the above dates.

The market value of the shares at the deferred taxing point is the basis for working out how much is to be included in your assessable income due to the grant of the shares (with an adjustment for your foreign employment).

This market value is then substituted as the amount you paid to acquire the shares for CGT purposes.

These adjustments apply irrespective of whether an amount is actually included in your assessable under the employee share scheme provisions.

Your employer should advise you of the amount to be included in your assessable income under the employee share scheme provisions. This advice should take your change of residency into account.

Question 3

Summary

You are not entitled to claim a foreign income tax offset in relation to the amounts that have been taxed in both Australia and overseas.

Detailed reasoning

There is an Agreement between the foreign country and Australia to avoid double taxation on income. It deals with employment income under the banner of 'personal services'.

Remuneration paid (including in the form of shares) to you while you were a resident of the foreign country for personal services you performed there is taxable only in that country.

Remuneration paid (including in the form of shares) to you while you are a resident of Australia for personal services you performed in Australia is taxable only in Australia.

As a result, you should not be taxed in both the foreign country and Australia on the same amount of income.

Remuneration paid in the form of shares may be derived or earned over an extended period. They may be earned during a period before their grant, at the time of grant or over a period after they are granted. The relevant period is worked out by analysing the terms of the grant and the obligations that are placed on the employee.

The share scheme required you to continue in your employment for the three year vesting period or else you might forfeit them. The vesting period is therefore the period over which you earned them.

The earning of the shares over the vesting period means that you have earned part of them while a resident of the foreign country (and taxable there) and the remainder of them while a resident of Australia (and taxable in Australia). The value of the grant must be apportioned between the two countries. This is achieved using a time based apportionment.

The amount that you declared for income tax purposes in the foreign country before leaving there is described as an estimate of your final tax liability there according to the Tax Position Summary attached to one of the documents that forms part of the scheme. The letter also indicates that you can ask the foreign Authorities to revise the tax clearance if they have over-charged you.

We would expect the foreign Authorities to reduce the amount of that you are expected to pay as tax there in accordance with the Agreement mentioned above. You should not be double taxed after that reduction.

Please note that you are entitled to re-apply for the entitlement to claim a foreign income tax offset in Australia if your request to the foreign Authorities for a reduction to the tax payable there is denied.