Edited version of private ruling

Authorisation Number: 1011781300042

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Ruling

Subject: Employee share scheme - Options - Foreign employment while Australian resident

Question: Is the amount of the assessable discount on the first parcel of options calculated as at the time you sell the shares acquired by exercising the options?

Answer: Yes.

This ruling applies for the following period<s>:

2010-11 income year

The scheme commences on:

1 July 20XX

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 are employed by a foreign company in Australia and lived and worked in overseas for about a year between 20XX and 20XX. You have always remained an Australian resident, including for tax purposes.

The company has 'A' and 'B' class shares on issue with their values denominated in their home currency.

The company established a stock option programme over its 'B' class shares some years ago.

In 20XX, you were offered the entitlement to be granted the first parcel of options at an exercise price specified in the home currency. You were granted these options in early 20XX at no cost to you. The options had a three year vesting period followed by a five year exercise period (total of eight years).

In 20XX, you were offered the entitlement to be granted the second parcel of options at an exercise price specified in the home currency. You were granted these options in early 20XX at no cost to you. The options had a three year vesting period followed by a five year exercise period (total of eight years).

In 20XX, you were offered the entitlement to be granted the third parcel of options at an exercise price specified in the home currency. You were granted these options in early 2010 at no cost to you. The options had a three year vesting period followed by a five year exercise period (total of eight years).

The market value of the company's 'B' class shares on each of the grant dates was such that all of the options would have a market value greater than $nil (using the market value calculation from sections 139FJ to 139FN of the Income Tax Assessment Act 1936 (ITAA 1936).

You do not own, nor can you control the casting of more than 5% of the shares in the company.

You provided certain documents that assist in explaining the scheme. These documents are to be read with and form part of the description of the scheme for the purpose of this ruling

Assumptions

For the purpose of this ruling, you will exercise each parcel of options shortly after their vesting date.

For the purpose of this ruling, you will immediately sell the shares that you acquire due to exercising the options (that is within 30 days of the exercise date).

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG,
Income Tax Assessment Act 1936 Section 139B,
Income Tax Assessment Act 1936 Section 139C,
Income Tax Assessment Act 1936 Section 139CB,
Income Tax Assessment Act 1936 Section 139CD,
Income Tax Assessment Act 1936 Section 139FA,
Income Tax Assessment Act 1997 Section 83A-110,
Income Tax Assessment Act 1997 Section 83A-120 and
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.

Summary

The amount of the assessable discount on the first parcel of options is calculated as at the time you sell the shares acquired by exercising the options.

Detailed reasoning

The options provide you with the right to acquire shares. Therefore, they are rights to acquire shares for the purpose of Division 13A of the ITAA 1936.

Division 13A of Part III of the ITAA 1936 applies for the 20XX-XX income year to determine:

· whether the options were granted under an employee share scheme

· if so, whether any amount is assessable in the 20XX-XX income year, and

· if so, how much is assessable in the 20XX-XX income year.

Subsection 139B(1) of the ITAA 1936 provides that any discount you receive in relation to a right that you acquire under an employee share scheme is included in your assessable income.

Subsection 139C(1) of the ITAA 1936 provides that you acquire a right under an employee share scheme if you acquire it in respect of, or for or in relation directly or indirectly to any employment of yours. Subsection 139C(3) of the ITAA 1936 provides that a right is only acquired under an employee share scheme if you acquire it at a discount to its market value.

We have concluded that the options were granted to you under an employee share scheme as they clearly form part of your remuneration package and so relate to your employment.

We have also concluded that the options were granted at a discount because of the relationship between the exercise price, the exercise period and the market value of the underlying shares at that time.

Subsection 139B(2) of the ITAA 1936 provides that any discount that you receive due to the grant of rights under an employee share scheme is included in your assessable income in the year of grant unless the rights are qualifying rights and you do not choose to be assessable in the year of grant.

Section 139CD of the ITAA 1936 provides that rights in a company are qualifying rights if five conditions are met. The conditions are:

· The rights are granted under an employee share scheme

· The rights are granted in a company that is your employer, or a holding company of your employer

· The rights are rights to acquire ordinary shares

· You do not hold a legal or beneficial interest in more than 5% of the shares in the company, and

· You are not in a position to cast or control the casting of more than 5% of the maximum number of votes that might be cast at a general meeting of the company.

We accept that all five of the abovementioned conditions have been met. Specifically, we accept that the 'B' class shares are ordinary shares because they provide you with voting rights and they are not preference shares.

You choose to include the discount on qualifying rights in your assessable income in the year of grant by making an election under section 139E of the ITAA 1936.

You have not elected to be taxed in the 20XX-XX income year.

Subsection 139B(3) of the ITAA 1936 provides that any discount that you receive due to the grant of rights under an employee share scheme is assessable in the year that the cessation time occurs if they are qualifying rights but you don't choose to be assessable in the year of grant.

Subsection 139CB(1) of the ITAA 1936 defines the cessation time of a right as the earliest of:

· The time when you dispose of the right (other than by exercising it)

· The time when your employment with a relevant employer ceases

· The later of the time when any selling restrictions end and any forfeiture conditions cease on any share acquired by exercising the right

· If there are no selling restrictions or forfeiture conditions on the share acquired by exercising the right - when the right is exercised, and

· 10 years from the date of grant of the right.

None of these occurred before 30 June 20XX.

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

· Rights were granted under an employee share scheme before 1 July 20XX

· The rights were to be assessable in the year that the cessation time occurs, and

· The cessation time did not occur before 1 July 20XX.

Each of these conditions is satisfied.

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 you acquired by exercising rights that you were granted under an employee share scheme reduced by their cost base. (The cost base will include the exercise price.)

Paragraph 83A-5(4)(b) of the ITTPA ensures that the ESS deferred taxing point is determined using the cessation time from Division 13A of Part III of the ITAA 1936 (see the reference to subsection 139CB of the ITAA 1936 above).

However, subsection 83A-120(3) of the ITAA 1997 adjusts the deferred taxing point to be the time when you sell your shares if this occurs within 30 days of the cessation time.

The deferred taxing point for your options will be the date you sell the shares you will acquire by exercising the options granted to you on 25 January 20XX.

Note: These provisions will also apply to the options granted to you on 22 January 20XX and 28 January 2010.

Adjustment for foreign service

Paragraph 83A-5(4)(a) of the ITTPA excludes amounts that relate to your employment outside Australia from being included in your assessable income under subsection 83A-110(1) of the ITAA 1997.

Paragraph 1.399 of the Explanatory Memorandum for the Tax Laws Amendment (20XX Budget Measures No. 2) Bill 20XX states that the intent of paragraph 83A-5(4)(a) of the ITPPA is to continue the foreign employment provisions that existed in Division 13A of Part III of the ITAA 1936.

At that time, Division 13A of the ITAA 1936 was modified by section 23AG of the ITAA 1936 such that remuneration in the form of options to acquire shares could be included within foreign earnings.

Neither section 23AG nor Division 13A of the ITAA 1936 provide a mechanism for determining the extent to which remuneration in the form of options to acquire shares should be assigned to foreign or domestic service. Therefore, the outcome will depend on the facts and circumstances of your case.

Paragraph 4.41 of the Explanatory Memorandum for the New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005 acknowledges that the OECD commentary in respect of rights provides principles that offer guidance when working out this apportionment.

Generally, options with forfeiture conditions are considered to be earned during the period between the grant date and the vesting date (the vesting period). In special cases, an alternate 'earning period' may be warranted. We cannot see any reason to depart from the general position in your case.

The assessable discount that was calculated above is apportioned so that you only include the part of the vesting period that relates to your Australian employment.

The vesting period runs for three years. Your Australian employment during the vesting period runs from (the date you returned to Australia until the end of the vesting period). This is about two of the three years.

Note: You will not make the 'foreign service' adjustment in relation to the second and third parcels of options as you had returned to Australia before they were granted to you.