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Ruling

Subject: Employee share schemes - capital gains tax - non resident

Question 1

Are your employer contribution shares and salary sacrifice shares that you acquired before you became a non resident of Australia subject to employee share scheme (ESS) provisions?

Answer

Yes.

Question 2

Are your employer contribution shares and salary sacrifice shares that you acquired after you became a non resident of Australia subject to ESS provisions?

Answer

No.

Question 3

Will you be liable for capital gains tax (CGT) in Australia on the disposal of your shares?

Answer

No.

This ruling applies for the following periods:

Year ending 2008,

Year ending 2009,

Year ending 2010,

Year ending 2011,

Year ending 2012,

Year ending 2013.

The scheme commences on:

1 July 2005

Relevant facts and circumstances

You joined your Australian employer and participated in their ESS.

You moved from Australia to country X as an expatriate.

You received deferred tax shares through salary sacrifice and employer contribution shares while you lived and worked in Australia.

These shares were received monthly and were 100% tax deferred.

You continued to participate in your employers share purchase program after you became a non resident of Australia and will continue to receive deferred tax shares through salary sacrifice and employer contributions until the date of the payroll transfer.

These shares were received monthly and were 100% tax deferred.

You are being permanently transferred from your Australian employers payroll to the payroll of country X.

Your Australian employer treats this transfer as a resignation and all of the shares you purchased under the ESS will be transferred out of the trust account.

You received deferred tax shares through employer contributions dollar for dollar based on your salary sacrifice while you lived and worked in Australia.

You received deferred tax shares through employer contributions dollar for dollar based on your salary sacrifice after you became a non resident of Australia.

You have not sold any shares.

Relevant legislative provisions

Income Tax (Transitional Provisions) Act 1997 Subsection 83A-5(2),

Income Tax (Transitional Provisions) Act 1997 Subsection 83A-5(4),

Income Tax Assessment Act 1997 Subsection 6-5(3),

Income Tax Assessment Act 1997 Subsection 83 A-10(2),

Income Tax Assessment Act 1997 Section 83 A-20,

Income Tax Assessment Act 1997 Section 83 A-110,

Income Tax Assessment Act 1997 Section 83 A-115,

Income Tax Assessment Act 1997 Section 83 A-330,

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 104-160,

Income Tax Assessment Act 1997 Subsection 104-165(2),

Income Tax Assessment Act 1997 Subsection 104-165(3),

Income Tax Assessment Act 1997 Section 855-15,

Income Tax Assessment Act 1936 Section 139B,

Income Tax Assessment Act 1936 Section 139CA,

Income Tax Assessment Act 1936 Section 139E,

Income Tax Assessment Act 1936 Section 139GA (repealed),

Income Tax Assessment Act 1936 Subsection 221A(1) (repealed as of 1 July 2000),

International Tax Agreements Act 1953

Reasons for decision

Question 1

Employer contribution shares and salary sacrifice shares acquired before you became a non resident

The assessable income of a non resident includes both the ordinary and statutory income derived from all Australian sources.

ESS fall under division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) and division 83A of the ITAA 1997.

Any discount that an employee receives from the acquisition of shares through an ESS is required to be included as part of their assessable income. The discount, which is the difference between the market value of the shares and the cost base of the shares is a benefit received by an employee.

139E elections

A taxpayer who acquires shares under an ESS can elect under section 139E of the ITAA 1936 to include the discount in their assessable income in the income year that the employer contribution shares were acquired.

If you have not made an election under section 139E covering the shares the discount is included in your assessable income in the year of income in which the cessation time occurs. As you have not made a 139E election the discount on the shares you have acquired will be included in your Australian income tax returns at cessation time.

Establishing the cessation time

Where you have acquired shares before 1 July 2009 division 13A of the ITAA 1936 will apply.

Cessation time for shares with restrictions is defined in section 139CA of the ITAA 1936 as the earlier of:

· disposal of the share by the taxpayer;

· the later of the lifting of disposal restrictions and forfeiture conditions (if there are no sale restrictions or forfeiture conditions, then the cessation time occurs at acquisition of the share);

· cessation of employment by the taxpayer; and

· 10 years from the date of acquisition.

You will need to work out when a cessation time occurs for your shares and include the discount amount in your Australian tax return at this time.

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.

Even though you may have acquired shares through an ESS before 1 July 2009, the new ESS rules may apply to determine when you are required to include the discount in your income tax return.

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 shares under an ESS,

· you acquired shares before 1 July 2009,

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

· you did not make a 139E 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 some shares acquired before you became a non resident of Australia was on or after 1 July 2009.

Accordingly, some of the shares you acquired before 1 July 2009 under the ESS are transitioned interests and the new ESS rules will apply to determine when the discount is to be included.

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

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.

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 income tax return 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.

'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 the deferred taxing point for the transitioned interests is taken to be the cessation time under the old ESS rules.

In your case some of the shares are transitioned interests. Therefore:

· you will need to determine the discount applicable to the shares. 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.

Cessation time for shares with restrictions is defined in section 139CA of the ITAA 1936 as the earlier of:

· disposal of the share by the taxpayer;

· the later of the lifting of disposal restrictions and forfeiture conditions (if there are no sale restrictions or forfeiture conditions, then the cessation time occurs at acquisition of the share);

· cessation of employment by the taxpayer; and

· 10 years from the date of acquisition.

You will need to work out which of the cessation times listed above are applicable to your situation. You should note that under section 83A-330 of the ITAA 1997 that your transfer from the payroll of your Australian employer to your country X employer will not be treated as a cessation of your employment and will therefore not trigger a cessation time. If a taxpayer has acquired a share under an ESS the assessable income of the taxpayer includes the discount given in relation to the share. As you have not paid any money to acquire the shares the discount will equal the market value of the shares at cessation time.

Double Tax Agreement

In determining liability to tax on Australian sourced income you derived as a non resident taxpayer, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the Agreements Act.

Under Article 15 of the foreign country Convention an ESS discount derived by an individual who is a resident of the foreign country in respect of an employment shall be taxable only in the foreign country unless the employment is exercised or the services performed in Australia. If the employment is exercised in Australia, the ESS discount derived from Australia will be taxed in Australia.

In your case you will be taxed on the discount you received on your shares that were acquired between the time you entered the ESS and the time that you became a non resident of Australia. Your discount is taxed at cessation time. It does not matter that cessation time occurred when you are a non resident of Australia as the ESS discount was derived from your employment in Australia. You are required to include the discount you received on your shares in your Australian income tax returns in the income years when cessation time occurred.

The period of employment after becoming a non resident of Australia will generally not be relevant if no forfeiture conditions remain at the time an individual ceases to be an Australian employee. If the employee share may be forfeited unless you undertake further employment at the time employment commences in country X, a portion of the discount will generally be assessable in Australia. The employer contribution shares that you acquired have a one year forfeiture condition. Therefore, the discount on the employer contribution shares that you acquired within one year before you became a non resident of Australia will need to be apportioned between the time that you spent as a non resident of Australia and your time in country X before the forfeiture restrictions lifted. For example, if you received employer contribution shares 100 days before you became a non resident of Australia the ESS rules will attribute 100/365 of the discount to be from an Australian source and 200/365 to be from a foreign source. The 100/365 portion will need to be included in your Australian income tax return at cessation time.

Question 2

Employer contribution shares and salary sacrifice shares acquired after you became a non resident of Australia

Overseas discount

An employee acquires shares under an ESS if they were acquired in respect of any employment of the employee. An ESS is a scheme under which ESS interests in a company are provided to employees of

· the company,

· subsidiaries of the company.

Division 13A of the ITAA 1936 and division 83A of the ITAA 1997 provides for the taxation of any discount in the value of shares acquired under an ESS.

To determine whether division 13A of the ITAA 1936 and division 83A of the ITAA 1997 applies in your circumstances we need to consider the definition of 'employee'. 'Employee' has the same meaning as in section 221A (section 139GA).

An 'employee' is someone in receipt of 'salary or wages', but does not include payments of exempt income. The income of a non resident employee from sources outside Australia is exempt income. The employer contribution shares and salary sacrifice shares that you acquired after you became a non resident of Australia were in respect to your employment in country X and therefore the discount you acquired on these shares will be exempt. Accordingly, you are not an 'employee' for the purposes of division 13A of the ITAA 1936 or division 83A of the ITAA 1997 and therefore these shares are not acquired under an employee share scheme.

Furthermore, section 139B of the ITAA 1936 provides that you can only include in your assessable income the discount on a share where it is acquired under an ESS. It is not an ESS where the recipient is receiving exempt income.

Question 3

CGT

CGT refers to the income tax you pay on any net capital gain you make. Section 102-20 of the ITAA 1997 provides that you can make a capital gain or capital loss when a CGT event happens to a CGT asset.

The determination on whether an asset is taxable Australian property is dealt with under section 855-15 of the ITAA 1997. Section 855-15 of the ITAA 1997, provides the 5 categories of CGT assets that are taxable Australian property. They are:

1) Taxable Australian real property.

2) A CGT asset that:

· is an indirect Australian real property interest and

· is not covered by item 5 of this table.

3) A CGT asset that:

· you have used at any time in carrying on a business through a permanent establishment in Australia; and

· is not covered by item 1, 2 or 5 of this table.

4) An option or right to acquire a CGT asset covered by item 1, 2 or 3 of this table.

5) A CGT asset that is covered by subsection 104-165(3) (choosing to disregard a gain or loss on ceasing to be an Australian resident)

Category 5 applies when a choice is made to disregard a capital gain or loss on ceasing to be an Australian resident. CGT event I1 takes place when an individual or company ceases being an Australian resident.

When a taxpayer becomes a non resident of Australia, the taxpayer may elect to disregard a capital gain or loss made in respect of an asset that would have otherwise been covered by CGT event I1. As a result of that election, those assets are treated as assets which have the necessary connection with Australia until the earlier of a CGT event happening in relation to the asset or the taxpayer becoming an Australian resident. In your case you elected to disregard any capital gain or loss on your salary sacrifice shares and employer contribution shares when you ceased to be an Australian resident for tax purposes. This event would have otherwise been covered by CGT event I1.

Double tax agreement

An article of the Country X agreement deals with the assessability of income derived from the alienation or disposal of property.

In your case, you elected to defer any capital gain or loss on your Australian assets when you ceased to be an Australian resident for tax purposes, this event would have otherwise been covered by CGT event I1.

An article of the agreement provides that as you made such an election when you ceased to be an Australian resident any capital gain that you have made on the disposal of the shares will be subject to taxation only in Country X.