Edited version of your written advice

Authorisation Number: 1051401411608

Date of advice: 25 July 2018

Ruling

Subject: Foreign bank - employee share sales

Question 1

Is there a deferred taxing point for each parcel of shares?

Answer

No

Question 2

Was there an assessable capital gain (or loss) when the shares vested in the 2017 tax year?

Answer

Yes

Question 3

Is the 50% CGT discount available on any capital gain given the employment to which the rights to the shares related was conducted in X?

Answer

No

Question 4

Is the deemed acquisition date for the rights to the shares that vested in the 2017 year the date you became an Australian resident for tax purposes?

Answer

Yes

Question 5

Is the first element of the cost base of the rights to the shares the value of the rights at the time you became an Australian resident for tax purposes?

Answer

Yes

Question 6

Was there an assessable capital gain (or loss) on the shares that were sold in the 2017 year to cover your income tax liability in the X?

Answer

Yes

Question 5

Is the 50% CGT discount available on the capital gain on the sale of these shares?

Answer

No

Question 6

Does the 6 month holding period impact the treatment of the shares by deferring the taxing point?

Answer

Not Applicable

Question 9

Does the 30 day rule apply to the shares sold immediately upon vesting?

Answer

Not applicable

Question 10

Are you able to claim a foreign income tax offset in the 2017 year in relation to the capital gain that you made from the sale of the shares for the tax incurred in the X?

Answer

Yes

This ruling applies for the following period:

Period ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You were employed by a bank in the X.

You received shares as a bonus as part of your employment deferred for 1 to 5 years before vesting.

You paid income tax in the X each year the shares were granted.

You left employment with the bank on in mid 2016.

You moved to Australia in late 2016 and became a resident for tax purposes.

You have both Australian and X citizenship.

Some of your shares vested in late 2016, prior to your arrival in Australia.

Some of your shares vested in early 2017, after your arrival in Australia, and were sold in mid 2017.

After you lodged your tax return in the X for the 2016/2017 year, you were assessed and paid tax on the sale of shares.

You still have shares that are yet to reach the vesting date.

Relevant legislative provisions

Section 83A of the Income Tax Assessment Act 1997

International Tax Agreements Act 1953 (the Agreements Act)

Subsection 104-10(3) of the ITAA 1997

Subsections 112-30(2), (3) and (4) of the ITAA 1997

Division 770 of the ITAA 1997

Reasons for decisions

Under Australian tax law, a bonus payment of shares to an employee is treated as taxable income at the market value of the shares at the time of issue. The taxpayer should include the amount as income in their tax return in that income year. From the point the shares or options are issued they become a capital asset with a cost base of the taxable income amount.

Where an Employee Share Scheme (ESS) qualifies for concessional treatment, an employee is able to defer the payment of tax on the shares until a deferred taxation point is reached. However, the shares or options do not become a capital investment until the deferred taxation point is reached.

Employee Share Scheme

In determining the appropriate responses to your questions we must first consider whether an Employee Share Scheme (ESS) is involved.

To determine whether there are any ESS interests under Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997), the considerations to make are whether there are: any shares or right to shares (in your case there are), whether the shares have been issued to employees of the company and in relation to their employment (they have) and whether they are issued at a discount (they have not).

As a result, your bonus shares do not meet the requirement of an ESS and the ESS provisions including deferred taxing point, six month holding period and the three month rule do not apply. The bonus share rights and shares are treated as CGT assets.

Capital gains tax

Capital gains tax (CGT) events are different types of transactions or events that can result in a capital gain or loss. Many CGT events involve a CGT asset – for example, a sale of shares.

The CGT provisions state that you should include in your assessable income, any gain or loss made when a CGT event happens to a CGT asset that you own.

CGT event A1 happens if you dispose of your ownership of a CGT asset. The time of the event is either when you enter into a contract for the disposal of the asset, or when the change of ownership occurs if there is no contract (section 104-10 of the ITAA 1997).

CGT event C2 happens when your ownership of an intangible CGT asset ends by the asset being satisfied, redeemed, cancelled, released, discharged, abandoned or surrendered. The right to receive a share is an intangible asset. The time of the event is when you enter into a contract that results in the asset ending, or of there is no contract, when the asset ends (section 104-25 of the ITAA 1997).

You will make a capital gain if the capital proceeds from the CGT event are more than the cost base of the CGT asset. You will make a capital loss of those capital proceeds are less than the reduced cost base of the CGT asset.

When a CGT event happens to only part of a taxpayer's asset, such as the partial sale of shares, the taxpayer will be required to apportion the cost base or reduced cost using the apportionment rules in subsections 112-30(2), (3) and (4) of the ITAA 1997. If the taxpayer receives no capital proceeds from the sale, the combined effect of these provisions is that no amount is apportioned to the cost base or reduced cost base.

In your case, the CGT provisions applied from the time you became an Australian tax resident in late 2016. Any shares and rights to shares you held were taken to have been acquired at market value in late 2016 and will form the first element of the cost base.

The original scheme gave you the rights to acquire shares and these were later turned into shares. The shares are new CGT assets with an acquisition date on the date they vested if that occurred after the move to Australia.

When some of your shares vested in early 2017, this constituted the ending of the right to receive those shares so CGT event C2 occurred at that time.

Further, CGT event A1 occurred when the shares were disposed of in mid-2017.

50% CGT discount

In certain circumstances, you may be eligible to reduce the amount of tax payable on a capital gain by applying the 50% CGT discount.

To be eligible for the discount on a capital gain you must be an individual and have held the asset for at least 12 months.

Therefore, the CGT discount is available to you but only on shares and rights held for at least 12 months. For those held at the time you became a resident it will be 12 months from that point. As the shares vested in early 2017 and were sold in early 2017, you had not held the rights or the shares for 12 months and as a result the 50% discount will not apply.

Foreign income tax offset

Subsection 770-10(1) of the ITAA 1997 provides that a person is entitled to an offset for foreign tax paid in respect of an amount that is included in the person's assessable income in a year of income. It is not necessary that the payment of foreign income tax actually occurs in the claim year.

As you have had tax deducted in X on the shares sold after you became an Australian resident you can claim a foreign interest tax offset in your income tax return for 2017.