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Ruling

Subject: Employee Share Acquisition Scheme - Assessable discount

Question 1

Do ESAS provisions apply to the options you held before becoming an employee and temporary resident of Australia?

Answer

Yes.

Question 2

Are you entitled to a full foreign income tax offset (FITO) for foreign taxes paid on the assessable discount on your options?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

February 2008

Relevant facts and circumstances

In February 2008 (prior to your arrival in Australia) you were granted an option to purchase shares at a discount under an ESAS agreement.

At the time of grant you were a citizen of Country A and were employed by a Country B company.

You did not make an election for the discount on your options to be assessed on acquisition.

Your options vested and became exercisable each year at the dates provided.

The only vesting condition was continuous employment. Once the options have vested you may exercise the options at anytime before the expiry of the option period.

Unexercised optioned shares which are not vested on the date of your termination of employment will be terminated on that date.

During the 2008 income year you were transferred on secondment to the Australian operation of your employer and were taxed on Australian sourced income as a non-resident taxpayer.

During the 2009 income year you were granted an Australian Visa under Category 457 and became a temporary resident for Australian tax purposes.

During the 2010 income year you ceased to be an Australian resident when you left Australia and permanently relocated to a foreign country.

During the 2011 income year you exercised your options

You declared and paid taxes in Country A in relation to the assessable discount on your options.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 139B(2A)

Income Tax Assessment Act 1936 Subsection 139C(1)

Income Tax Assessment Act 1936 Subsection 139CB(1)

Income Tax Assessment Act 1936 Section 139E

Income Tax Assessment Act 1997 Subsection 770-10(1)

Income Tax Assessment Act 1997 Subsection 770-10(3)

Income Tax Assessment Act 1997 Section 770-70

Income Tax Assessment Act 1997 Section 770-75

Income Tax Assessment Act 1997 Section 83A-115

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

International Tax Agreements Act 1953 Subsection Sch 2-Art 15(2)

International Tax Agreements Act 1953 Subsection Sch 2-Art 22(2)

Reasons for decision

Question 1

Summary

ESAS provisions do apply to the options you held before becoming an employee and temporary resident of Australia.

Detailed reasoning

You acquire options from an employee share scheme if the options are acquired, whether directly or indirectly, in relation to your employment or in relation to any services you provide. If you pay any money, or provide any other consideration, to acquire the shares or rights, the consideration must be less than the market value of the shares or rights at the time you acquire them.

Generally, your options will be acquired from an employee share scheme when your employment contract is entered into or when you accept an offer received under an employee share plan. However, if you are a non-resident at the time of acquisition your options will be acquired when you first become an employee in Australia.

When an employee who is a temporary resident acquires ESAS interests before coming to Australia and continues the employment or service connected to the options whilst in Australia, ESAS rules may apply from the time they begin work in Australia.

If you are a temporary resident you are required to look at your own circumstances in conjunction with your employee share plan to determine whether the time after you became an employee in Australia is related to your options.

You will not be taxed under ESAS rules if, when you become an employee in Australia, no forfeiture conditions remain on the options you hold. However, if a condition of your employee share plan is that your options may be forfeited unless you undertake further employment or services, a portion of the discount will generally be assessable in Australia under the ESAS rules.

Your options may be assessed:

· in the year you become an employee in Australia for the first time;

· for options acquired before 1 July 2009 - at a cessation time for qualifying options - where a section 139E election was not made (when you first became an employee in Australia); or

· for options acquired after 30 June 2009 - at a deferred taxing point.

If your options are assessed in the year you became an employee in Australia, the discount will be calculated by reference to the market value at the time you acquired the ESAS interests.

The cessation time for options is the earliest of the following:

· when you dispose of the options - other than by exercise;

· when your employment in respect of which the options were acquired ceases;

· when the options are exercised, if the shares that are acquired by exercising the options have no restrictions or conditions affecting their subsequent disposal or you forfeiting ownership of the shares;

· if there are such restrictions or conditions on the shares acquired by exercising the rights, when the last of the restrictions or conditions cease to have effect; or

· ten years from the date you acquired the options.

Where an employee is granted options at a discount under an employee share scheme, before or after coming to Australia and where part of the qualifying employment is performed outside Australia, only part of the discount is taxed in Australia. That is, the discount assessable in Australia would be attributed based on the number of days worked in Australia between date of grant and date of exercise.

During the 2008 income year you were granted options under an employee share scheme prior to becoming an employee in Australia. A condition of your employee share plan was continuous employment and any unexercised optioned shares which were not vested on the date of your termination of employment will be terminated on that date. Whilst in Australia you continued employment connected to your options. The requirement of continuous employment determines that the time after you became an employee in Australia is related to your options and a portion of the discount is assessable in Australia under the ESAS rules.

As you did not make an election to be assessed when you first became an employee in Australia your options will be assessed at cessation time. The cessation time for your options was when the vested options were exercised.

As you worked in both country A and Australia over the vesting period the discount assessable in Australia needs to be apportioned based on the number of days worked in Australia during the period between the date of grant and the date of exercise.

ESAS election on becoming a resident

When you become an employee after acquiring qualifying options you may make an election to be assessed when you first became an employee (the employment year). If the qualifying options are assessed in the year you became an employee in Australia, the discount will be calculated by reference to the market value at the time you acquired your qualifying options. If made, the election applies to all qualifying options acquired during the year of income by the taxpayer.

The election must be in writing and in a form approved by the Commissioner and as there are consequences to making this election on both the timing and amount of the tax liability, the election is required to be made before the lodgement of the tax return for the employment year. You are required to make the choice on the information you have at that time. The Commissioner is then given the discretion to accept a late election if he considers it appropriate.  

When considering if an extension of time should be granted, the Commissioner will treat each case on its own merits and consider the following factors:  

· the circumstances which led to you not making the election prior to the lodgement of your income tax return for the relevant income year

· your explanation of the time delay between the date of lodgement of the income tax return and the date of the late election

· whether it is fair and equitable in the circumstances for the Commissioner's discretion to be exercised.

As you did not make the election by the time you lodged your income tax return for the employment year and you have not requested the Commissioner's discretion to accept a late election, your options will be assessed at deferred taxing point (date of exercise).

Question 2

Summary

You are not entitled to a full foreign income tax offset (FITO) for Country A taxes paid on the assessable discount on your options.

Detailed reasoning

Where Australia has a Tax Treaty with a foreign country, you may be entitled to a tax offset for an income year for foreign income tax. There is a Tax Treaty between Australia and Country A to avoid double taxation of income received by Australian and Country A residents.

An Article of Country A provides that where tax has been imposed in respect of country A-sourced income in accordance with the Convention on a person who is an Australian resident for tax purposes, a credit against Australian tax payable on that income will be allowed. If eligible, this amount will be refunded in the form of a foreign income tax offset (FITO).

To be entitled to a foreign income tax offset:

· the foreign tax must be foreign income tax

· you must have actually paid, or be deemed to have paid, the foreign income tax

· the income or gain on which you paid foreign income tax must be included in your assessable income in Australia

In addition to the above eligibility requirements there are several types of foreign income taxes that are specifically excluded from the offset, including certain residence-based taxes. The offset does not apply to foreign income tax paid to a foreign country by a taxpayer on the basis of their residence in that country on amounts sourced outside that country.

In your case, you paid Country A taxes on your Australian-source income on the basis that you were obliged to do so as a Country A resident for tax purposes. Therefore, the tax you paid was a residence-based tax. As residence-based taxes are specifically excluded from the offset you are not entitled to any foreign income tax offset for the Country A taxes you paid.

Generally, the country of residence provides the credit for taxes paid or exempts the income.