Edited version of your private ruling

Authorisation Number: 1012541607536

Ruling

Subject: Employee share scheme - International - Foreign service

Question 1: Was the taxpayer a non-resident for Australian income tax purposes during the period commencing on the date the taxpayer's spouse resigned from the Commonwealth Public Service until the taxpayer returned to Australia?

Answer: Yes.

Question 2: Does section 83A-5 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA) apply so that the amount assessable to the taxpayer under subsection 83A-110(1) of the Income Tax Assessment Act 1997 (ITAA 1997) is limited to the extent that it relates to the taxpayer's service in Australia?

Answer: Yes.

Question 3: Is the sale date the deferred taxing point of the shares that were acquired from the exercise of the rights?

Answer: Yes.

Question 4: Does section 118-20 of the ITAA 1997 apply to reduce any prima facie capital gain by the amount not subject to income tax due to the operation of section 83A-5 of the ITTPA?

Answer: No.

Question 5: Does any other provision of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936) result in an amount not included in the taxpayer's assessable income due to section 83A-5 of the ITTPA being included in the taxpayer's assessable income?

Answer: No.

This ruling applies for the following period<s>:

2009-10 income year

2010-11 income year

2011-12 income year

2012-13 income year

The scheme commences on:

1 July 2009

Relevant facts and circumstances

About ten years ago, the taxpayer commenced employment with a foreign subsidiary of a listed Australian company on a fly-in fly-out basis as an executive for the mining company. The taxpayer paid tax in the foreign country on this salary income. This period ended before the end of the 2008-09 income year and so this income was treated as exempt in the income tax returns under section 23AG of the ITAA 1936 as relating to foreign service.

About five years ago, the taxpayer's employment was relocated to another foreign subsidiary of the listed Australian company located in another country on a fly-in fly-out basis. Tax was paid in this other country on this income. In the 2008-09 income year this income was treated as exempt in the income tax return under section 23AG of the ITAA 1936 as relating to foreign service.

After 1 July 2009 the taxpayer's employment was changed from a fly-in-fly-out basis to a residential basis in the other country and the taxpayer relocated from Australia to this country. The taxpayer's spouse and children relocated to join the taxpayer a few months later.

The taxpayer obtained a private ruling from the Commissioner confirming that the taxpayer was a resident for Australian tax purposes for certain income years.

Notwithstanding the relocation of the taxpayer and family overseas for an extended period and that the taxpayer satisfied all of the other common law and statutory tests for non-residency in section 6(1) resident of the ITAA 1936, the taxpayer remained an Australian tax resident because the taxpayer's spouse was a member of the Public Sector Superannuation Scheme (PSSS) in those income years - see subparagraph (a)(iii)(C) of the definition of 'resident in subsection 6(1) of the ITAA 1936.

The taxpayer's spouse did not resign from the Commonwealth Public Service and cease to be an eligible member of the PSSS, until the 2012-13 income year. The taxpayer (and family) returned to Australia some six months later.

Background - Assessability in respect of interests in the listed Australian company

Before 30 June 2009, the taxpayer was offered rights in the listed Australian company at $nil cost and $nil exercise price. There were various vesting dates.

Disposal restrictions applied to the disposal of the resulting shares after exercise. These disposal restrictions were lifted during the 2012-13 income year and all parcels were sold within 30 days.

Before 30 June 2009, the taxpayer was offered options. No amount was payable to acquire the rights. The exercise price details were provided.

No restrictions were imposed on the disposal of the resulting shares.

The options vested, subject to the Performance Conditions, in the 2011-12 income year.

These options were exercised shortly afterwards. Some of these shares were sold about a year later.

Before 30 June 2009, the taxpayer was offered share rights. No amount was payable to acquire or exercise these rights.

The share rights vested, subject to Performance Conditions, in the 2011-12 income year.

These rights were exercised in the 2011-12 income year. The shares so acquired had conditions attached such that the shares could not be disposed without the permission of the company. The taxpayer applied for the disposal restrictions to be lifted and these were lifted on this date. The resulting shares were sold within 30 days.

Certain documents were provided by the applicant. They are to be read with and form part of the scheme for the purpose of this ruling

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1),

Income Tax Assessment Act 1936 Former Division 13A of Part III

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 Section 130-80 and

Income Tax (Transitional Provisions) Act 1936 Section 83A-5.

Reasons for decision

Question 1

Summary

The taxpayer was a non-resident for Australian tax purposes during the period commencing on the date the taxpayer's spouse resigned from the Commonwealth Public Service until the taxpayer returned to Australia.

Detailed reasoning

The terms 'resident' and 'resident of Australia', in regard to an individual, are defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. These tests are: 

· the resides test

· the domicile test

· the 183 day test, and

· the superannuation test.

A taxpayer is a non-resident if they are not a resident of Australia.

The taxpayer resided in the second foreign country during the period in question as a continuation of a residency period that began a couple of years earlier. The taxpayer's spouse and children had arrived as well.

This period of residence in the second foreign country (exceeding three years) is of sufficient duration, given the taxpayer's circumstances, to warrant the conclusion that this was the taxpayer's permanent place of abode.

Our previous private ruling outlined the operation of the superannuation test to the taxpayer's situation. This test will not apply after the taxpayer's spouse resigned from the Commonwealth Public Service.

Consequently, the taxpayer is a non-resident of Australia during the period in question for the following reasons:

· the resides test - the taxpayer was actually residing in the second foreign country

· the domicile test - the taxpayer's permanent place of abode was outside Australia

· the 183 day test - the taxpayer was in Australia for less than 183 days of the income year, and

· the superannuation test - the taxpayer's spouse was not a member of the PSSS during this period.

Question 2

Summary

Section 83A-5 of the ITTPA applies so that the amount assessable to the taxpayer under subsection 83A-110(1) of the ITAA 1997 is limited to the extent that it relates to the taxpayer's service in Australia.

Detailed reasoning

The employee share scheme (ESS) provisions were amended as from 1 July 2009. Some ESS interests (shares or rights to shares granted as remuneration) were granted when the former provisions applied but will be assessable after the new provisions have commenced. Transitional rules apply in such cases.

The transitional rule that is relevant to foreign service states that amounts are not to be included in a taxpayer's assessable income as an employee share scheme discount to the extent that they relate to the taxpayer's employment outside Australia.

The taxpayer has been working overseas for the whole of the period between the date of the earliest grant (the rights) until the latest sale of shares. All relevant events have occurred within this period.

We accept that the whole of each parcel of rights, options and share rights relates to employment outside Australia.

Question 3

Summary

The sale date is the deferred taxing point of the shares that were acquired from the exercise of the rights.

Detailed reasoning

The employee share scheme provisions were amended as from 1 July 2009. The options were granted when the former provisions applied but will be assessable after the new provisions have commenced. Transitional rules apply in such cases.

The transitional rules provide for the continued operation of some of the former provisions.

The deferred taxing point for these options is generally based on the cessation time as described in the former Division 13A of Part III of the ITAA 1936, however, the new subsection 83A-120(3) of the ITAA 1997 applies if the options are exercised and the resulting shares are disposed of within 30 days of the cessation time.

In the taxpayer's case, there were selling restrictions on the shares acquired by exercising the options. Therefore, the cessation time under the former section 139CB of the ITAA 1936 was when these selling restrictions ended as this was the first of the potential cessation times that occurred.

Subsection 83A-120(3) of the ITAA 1997 moves the deferred taxing point to the sale date as that occurred within 30 days of the cessation time.

Question 4

Summary

Section 118-20 of the ITAA 1997 does not apply to reduce any prima facie capital gain by the amount not subject to income tax due to the operation of section 83A-5 of the ITTPA.

Detailed reasoning

The operation of the capital gains provisions to these ESS interests are modified by the operation of section 83A-125 of the ITAA 1997 so that the ESS interests are taken to have been acquired immediately after the deferred taxing point at their market value unless the ESS deferred taxing point occurs at the time the interest is disposed of.

Section 130-80 of the ITAA 1997 also provides a capital gains exemption where:

· The CGT event happens in relation to an ESS interest acquired under an employee share scheme, and

· The CGT event happens on or before the ESS deferred taxing point (if Subdivision 83A-C applies to the ESS interest).

The effect of these two provisions ensures that there is no double taxation on the taxpayer's ESS interests (granted as rights, options and share rights) for the following reasons:

· The deferred taxing point on the shares acquired by exercising the rights occurred on the sale date - any capital gain or capital loss is disregarded.

· The first element of the cost base of the options granted to the taxpayer is their market value on the deferred taxing point - the cost base will therefore include any part of the ESS discount that is exempted due to it relating to foreign service.

· The deferred taxing point on the shares acquired by exercising the share rights occurred on the sale date - any capital gain or capital loss is disregarded.

Consequently, the capital gains provisions will not be attempting to tax amounts that have already been subjected to Division 83A of the ITAA 1997. Therefore, there is no scope to reduce any capital gain under section 118-20 of the ITAA 1997.

Question 5

Summary

No other provision of the ITAA 1997 or the ITAA 1936 applies to include an amount in the taxpayer's assessable income that is excluded from the taxpayer's assessable income by section 83A-5 of the ITTPA.

Detailed reasoning

The operation of the income tax provisions to these ESS interests are modified by the operation of section 83A-125 of the ITAA 1997 so that the ESS interests are taken to have been acquired immediately after the deferred taxing point at their market value unless the ESS deferred taxing point occurs at the time the interest is disposed of.

This effectively folds the exempt portion of the ESS discount into the 'purchase price' of the ESS interests.