Edited version of your private ruling

Authorisation Number: 1012146744027

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Employee share scheme - discount - conversion to Australian currency

Question: Will foreign currency amounts relevant to the calculation of the discount amounts of your employees share scheme interests be translated into Australian currency when each of the relevant taxing points occurs?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You participated in employee share schemes (ESS) offered by your employer.

Under the ESS, you were granted a number of options and shares on various dates.

You did not pay any consideration to acquire the options or shares.

You did not make a section 139E election in relation to your options and shares.

You exercised your options during the 2010-11 income year.

You disposed of a number of the shares acquired as a result of exercising the options on the date of exercising and have kept some of the shares you acquired as a result of exercising the options.

The cessation time for your shares occurred during the 2010-11 income year.

You have provided the following calculations for the discount amounts assessable in relation to your shares and options using ATO forex rates for the relevant dates.

You have provided the calculations used by your employer to calculate the discount amount as provided in your Employee Share Scheme Statement for the income year ending 30 June 2011. These calculations have not used the ATO forex rates in calculating the discount amounts in relation to your options and shares.

You provided copies of the following documents, which should be read in conjunction with, and form part of this private ruling:

· Your employer Incentive Award Program Restricted Stock and Restricted Stock Units dated late 2011;

· Your employer Common Stock previous to 1995 Incentive Program; and

· Employee share scheme statement from your employer for the year ending 30 June 2011.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 13A

Income Tax Assessment Act 1936 Section 139B

Income Tax Assessment Act 1936 Section 139CA

Income Tax Assessment Act 1936 Section 139CB

Income Tax Assessment Act 1936 Section 139CC

Income Tax Assessment Act 1936 Section 139E

Income Tax Assessment Act 1997 Section Division 83A

Income Tax Assessment Act 1997 Subdivision 960-C

Income Tax Assessment Act 1997 Section 960-49

Income Tax Assessment Act 1997 Section 960-50

Income Tax (Transitional Provisions) Act 1997 Subdivision 83 A-B

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

Reasons for decision

Translation (conversion) to Australian dollars - foreign currency exchange rates to use

All foreign income, deductions and foreign tax paid must be translated (converted) to Australian dollars before including them in your return. From 1 July 2003, there are specific rules that tell you which exchange rate to use to convert these amounts. Generally, these require amounts to be converted at the exchange rate prevailing at the time of a transaction, or at an average rate.

Subdivision 960-C of the Income Tax Assessment Act 1997 (ITAA 1997) contains the core translation rule which outlines that an amount of foreign currency is to be expressed in Australian currency. The core translation rule applies not only to assessable income and allowable deductions, but also to other amounts that are relevant to calculating an entity's income tax liability.

As a taxpayer you can translate an amount into Australian currency using an exchange rate that is an average of the exchange rates applicable during a period (which may be less than, but not exceeding, 12 months) chosen by you.

However, an average rate cannot be used unless the average rate is a reasonable approximation of the exchange rates that would otherwise be applicable if you had used spot rates at the specific translation times provided for by the forex legislation.

Average rates are published on the Australian Tax Office (ATO) website. Alternatively, you can use appropriate exchange rates provided by a banking institution operating in Australia including, where relevant, the banking institution through which your foreign income is received. You can also use rates published by another reliable external source. The rate used and the source of rates should be kept with your records.

In your case, you were granted employee options and shares with values in foreign currency. These amounts must be converted into Australian currency on the relevant taxing dates in accordance with subdivision 960-C of the ITAA 1997 when calculating the discount amounts that must be included in your assessable income.

The taxing points, and the dates on which the conversions of currency in relation to your employee share scheme interests will occur, is determined by the employee share scheme provisions.

Employee share schemes

Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) deals with the taxation of discounts on shares, rights and stapled securities acquired under employee share schemes (ESS) on or after 1 July 2009.

Depending on the date of the original grant, the ESS interests may be taxed under the Division 83A policy, or the transitional rules that preserve the operation of the previous regimes.

The Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) extend the application of Div 83A to employee share scheme interests acquired before 1 July 2009, on which tax was deferred beyond 1 July 2009 under the previous regimes, but certain parts of the tax policy from the previous regimes are preserved by the ITTPA 1997.

Section 83A-5 of the ITTPA 1997 provides that this section will apply when Division 13A of the ITAA 1936 applied to the shares or options prior to it being repealed. In those cases, to avoid doubt, section 83A-5 of the ITTPA 1997 outlines that the former Division 13A will continue to apply, in spite of its repeal, to the share or right.

Under Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936), an employee acquires shares under an employee share scheme if the shares were acquired in respect of, or in relation directly or indirectly to, any employment of the employment of the employee and the consideration to the acquisition is less than the market value of the shares at the time you acquired them.

If an election under section 139E of Division 13A of the ITAA is not made, the discount is included in the employee's assessable income when cessation time occurs.

In your case, you were granted ESS interests prior to 1 July 2009. As you did not make an election in relation to your ESS interests, the taxing point for these interests was deferred until after 1 July 2009. Therefore, under the ITTPA provisions, Division 13A of the ITAA 1936 will apply and the discount given in respect of these interests must be included in your assessable income in the income year in which cessation time occurred.

The relevant foreign currency amounts must be converted into Australian currency on the dates cessation time occurred to enable you to calculate the discount amounts relating to your ESS interests in your assessable income in the income year in which cessation time occurred.

Calculation of discount

The calculation of the discount that is assessable when cessation time occurs will vary depending on when the shares were disposed of in relation to that time.

Where shares acquired as a result of the exercising of the options are disposed of at arm's length within 30 days of cessation time, the discount will be calculated as the consideration received for the disposal of the shares acquired as a result of the exercising of the options, less

· Any consideration paid or given by the employee for their acquisition; and

· If the options have been exercised, any consideration paid or given by the employee to exercise them.

Where shares, or shares acquired as a result of exercising options, are not disposed of at arm's length within 30 days of cessation time the discount is calculated as:

The market value of the share or right (or any share acquired by the exercise of the right) calculated as at the cessation time, less

Any consideration paid to acquire it.

Your employer options

In your case, you exercised your options and disposed of a number of the shares acquired from the exercising of your options on the exercise date. You kept the remaining shares acquired from the exercising of the options and have not disposed of them as at the present time.

The taxing point in relation to your options occurred on the date they were exercised. Therefore, the relevant foreign currency amounts relating to your options must be converted into Australian currency based on forex rates from that date.

You provided a calculation for the discount amount in relation to your options in which you have calculated a loss. This calculation is incorrect as you have accounted for the shares acquired from the exercising of the options in the one calculation and a discount amount cannot be a loss.

As you disposed of some of the shares acquired from the exercising of the options on the date of exercise, and have kept some of the shares acquired at exercising, two calculations must be undertaken to determine the discount amounts in relation to the shares you acquired from the exercising of the options

Using the facts you have provided, including the ATO forex average rates, the discount amount for the shares that you disposed of on the date the options were exercised will be calculated as the consideration you received for the disposal of the shares, being the proceeds in foreign currency converted in Australian currency using the ATO forex average rate on the date of exercise, less

the exercise consideration you paid to exercise the options relevant to the shares being disposed of. Therefore, the exercise consideration paid per option in foreign currency will be converted into Australian currency using the ATO forex average rate on the date of exercise.

Using the facts you have provided, the discount amount for the shares acquired from the exercising of your options that you still own will be calculated as:

· the market value of the shares you still own as at the date of exercise, being the foreign currency amount per share converted into Australian currency using the ATOI forex average rate of A$1.0068 per share on the date of exercise, less

· the exercise consideration you paid to exercise the options relating to the shares you still own. The exercise consideration, being US$45.218750 per option converted into Australian currency using the average rate of A$1.0068 per option.

Your employer shares

You were granted a number of shares on various dates. The cessation times for those shares occurred during the 2010-11 income year.

You have provided calculations on the discount amounts in relation to these shares. Based on the facts you have provided, your calculations for the discount amounts in relation to these shares are correct when using the ATO average rates.