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Ruling

Subject: Employee share scheme

Question and answer:

Is the discount on shares you acquired under an employee share scheme while you were a non-resident of Australia for taxation purposes included in your assessable income to the extent that the amount relates to your employment outside Australia?

No.

This ruling applies for the following period:

1 July 2009 to 30 June 2010.

The scheme commenced on:

1 July 2009.

Relevant facts:

You acquired shares (the shares) in an employee share scheme (ESS) while you were employed overseas and were a non-resident of Australia for taxation purposes.

The shares were qualifying shares for the purposes of the now repealed Division 13A of the Income Tax Assessment Act 1936.

You did not make an election under the now repealed section 139E of the ITAA 1936 for the discount you received on the shares to be taxed at acquisition.

The cessation time for the shares occurred in the 2009-10 income tax year.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 10-5.

Income Tax Assessment Act 1997 Division 83-A.

Income Tax (Transitional Provisions) Act 1997 Division 83A.

Income Tax Assessment Act 1936 Division 13A.

Reasons for decision

Assessable income of non-residents - general

Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that if you are a foreign resident (non-resident) your assessable income in Australia includes the statutory income you derive:

· from all sources within Australia, and

· from sources outside Australia if a provision of the tax law includes that statutory income in your assessable income.

A discount obtained on the acquisition of shares through participation in an employee share scheme (ESS) is an example of statutory income.

Employee share schemes, new and old rules and transitioned interests - general

As a general rule, a discount you obtain on shares you acquire through an ESS is included in your assessable income at some point in time. Usually, this will either be the income year in which you acquire shares under an ESS, or at a later time depending on the circumstances applicable to particular cases. The circumstances will differ depending on which rules apply.

The ESS rules contained in Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) (the old ESS rules) that applied to shares acquired through an ESS before 1 July 2009 were repealed effective from 14 December 2009.

The old ESS rules were replaced by Division 83A in the ITAA 1997 which contains the ESS rules (the new ESS rules) that apply to shares acquired on or after 1 July 2009 through an ESS.

Both the old and the new ESS rules contain provisions that allow you to disregard and not include in your assessable income a discount you receive on shares acquired through an ESS during a period you are a non-resident of Australia for taxation purposes and:

· the discount relates to shares you acquired during a period of foreign service (the old ESS rules) or,

· the discount relates to shares acquired through employment outside Australia (the new ESS rules).

Even though you may have acquired shares through an ESS before 1 July 2009, the new ESS rules may apply to determine if and when you are required to include the discount in your assessable income, and how you determine the discount to be included or excluded as the case may be.

Shares acquired through an ESS before 1 July 2009 to which the new rules apply are known as transitioned interests.

Shares acquired under an ESS before 1 July 2009 are transitioned interests if:

· they are qualifying shares under the old ESS rules, and

· no election was made to be taxed upfront under the old ESS rules, and

· a cessation time has not happened to the shares before 1 July 2009 under the old ESS rules.

In your case:

· you acquired the shares under an ESS,

· you acquired the shares before 1 July 2009,

· the shares were qualifying shares under the old ESS rules,

· you did not make an election under the old ESS rules to be taxed upfront (that is, at the time you acquired the shares) on the discount you received on the shares, and

· the cessation time for the shares was on or after 1 July 2009 (during the 2009-10 income tax year).

Accordingly, the shares are transitioned interests and the new ESS rules will apply to determine:

· whether or not the discount you received on the acquisition of the shares is included in your assessable income, and if so, when the discount is to be included, and

· how you determine the discount to be included or excluded, as the case may be.

Therefore, it is necessary to examine how the new ESS rules apply to your circumstances.

Application of the new ESS rules to transitioned interests

Section 83A-5 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) provides that subdivision 83A-C of the ITAA 1997 applies to transitioned interests (subsection 83A-5(2) of the ITTPA 1997).

Subdivision 83A-C of the ITAA 1997 contains rules for when the discount received on the acquisition of shares through an ESS is included in a taxpayer's assessable income and how the discount is determined. Essentially, subdivision 83A-C of the ITAA 1997 provides that:

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 (subsection 83A-110(1) of the ITAA 1997).

'Deferred taxing point' is a new term provided for by the new ESS rules.

Essentially, the deferred taxing point under the new ESS rules is similar in concept to what was known as the 'cessation time' under the old ESS rules. The cessation time was the point in time that a discount obtained under an ESS was to be included in a taxpayer's assessable income in cases where the taxpayer did not elect under the old ESS rules to be taxed upfront on the discount.

Under the new ESS rules, the deferred taxing point is determined in accordance with the provisions of section 83A-115 of the ITAA.

The application of Subdivision 83A-C of the ITAA 1997 to transitioned interests is modified slightly by subsection 83A-5(4) of the ITTPA 1997 which provides that where Subdivision 83A-C of the ITAA 1997 applies to transitioned interests:

· You do not include a discount in your assessable income under subsection 83A-110(1) of the ITAA 1997 to the extent that the discount relates to employment outside Australia.

· For the purposes of section 83A-115 of the ITAA, the deferred taxing point for the transitioned interests is taken to be the cessation time under the old ESS rules.

In your case, the shares are transitioned interests. Therefore:

· You will need to determine the discount applicable to the shares in accordance with the provisions of subsection 83A-110(1) of the ITAA 1997. That is, the discount will be the market value of the shares at the deferred taxing point, less the cost base of the shares.

· Your deferred taxing point will be the cessation time of the shares, which you have indicated occurred in the 2009-10 income tax year.

After you have determined the discount, the amount that relates to your employment outside Australia between 22 June 1999 and 20 September 2005 will not be included in your assessable income in accordance with the provisions of subsection 83A-5(4) of the ITTPA 1997.