Edited version of your written advice

Authorisation Number: 1051503498176

Date of advice: 8 April 2019

Ruling

Subject: ESS – Deferred taxing point – International – Restricted Stock Units

Question 1:

Is the portion of the discount on the ESS Interests that relates to employment outside Australia included in the Taxpayer’s Australian assessable income?

Answer:

Yes.

Question 2:

Is the Taxpayer able to claim a foreign income tax offset for any tax paid on the ESS interests outside Australia to the extent the discounts have a source outside Australia?

Answer:

Yes.

Question 3:

Is the Taxpayer able to claim a foreign income tax offset for any tax paid on the ESS interests outside Australia to the extent the discounts have a source in Australia?

Answer:

No.

This ruling applies for the following periods:

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Taxpayer is an Australian citizen and has been a tax resident of Australia since about 20XX.

Until then, the Taxpayer was permanently residing and working outside Australia for Company A. For that reason, the Taxpayer was a foreign resident prior to that date.

After returning to Australia, the Taxpayer has been employed by the same employer in Australia.

While working outside Australia for Company A, the Taxpayer was granted Shares under Employee Share Scheme (ESS) agreements with Company A.

All Share parcels were granted after 1 July 20XX and were vesting over several years in accordance to the ESS agreements entered.

The Shares granted and vested entirely while the Taxpayer was a foreign resident were included in the income tax returns of the foreign country.

The Shares granted and vested whilst the Taxpayer was a resident in Australia, were subject to tax in the foreign country based on the number of days (pro-rata basis) that the Taxpayer was a resident of the foreign country. The Taxpayer has paid the foreign country tax.

No consideration was paid by the Taxpayer for the vesting of any of the Shares.

Company A has provided an ESS Statement for the year ended 30 June 20XX stating the amount that was your assessable discount from shares granted after 1 July 20XX and taxable at the deferred taxing point.

Company A has provided an ESS Statement for the year ended 30 June 20XX stating the amount that was your assessable discount from shares granted after 1 July 20XX and taxable at the deferred taxing point.

Company A has completed both of these ESS Statements on the basis that the whole of the ESS discount is assessable in Australia. The amounts calculated as assessable income are correct if the whole of the ESS discount is assessable in Australia. The ESS Statements have not considered the Taxpayer’s eligibility for any foreign income tax offsets.

All of the aforementioned shares were granted while the Taxpayer was a foreign resident and vested after the Taxpayer returned to Australia.

You have undertaken two apportionment calculations to attribute part of the ESS discounts to an Australian source and the remainder to a foreign source.

First apportionment – time based

You have apportioned the shares between foreign and Australian sources on the basis of the proportion of the vesting period for each tranche that the Taxpayer was a foreign resident or an Australian resident. You have determined that less than one-third of the amount reflected in the ESS Statement for the year ended 30 June 20XX has an Australian source. You have determined that about two-thirds of the amount reflected in the ESS Statement for the year ended 30 June 20XX has an Australian source.

Second apportionment – value based

You have apportioned the shares between foreign and Australian sources on the basis of the market value of Company A shares on the date the Taxpayer became an Australian resident. You have determined that less than one-quarter of the amount reflected in the ESS Statement for the year ended 30 June 20XX has an Australian source. You have determined that about one-third of the amount reflected in the ESS Statement for the year ended 30 June 20XX has an Australian source.

Assumption

For the purpose of this ruling, it is assumed that the foreign country tax on the ESS interests are less than the Australian tax payable on them.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-110

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Division 775

Income Tax Assessment Act 1997 Section 775-10

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

The portion of the discount on the ESS Interests that relates to employment outside Australia is included in the Taxpayer’s Australian assessable income.

Detailed reasoning

Basic ESS calculations are undertaken to determine when an ESS discount is to be included in a taxpayer’s assessable income and how much that discount is. For the Taxpayer, these dates and amounts have been calculated by Company A for the year ended 30 June 2016 and year ended 30 June 2017.

As a deferral scheme, the calculated amounts are included in the Taxpayer’s assessable income by subsection 83A-110(1) of the Income Tax Assessment Act 1997 (ITAA 1997) which states:

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.

As a final step, some taxpayers need the outcome from the basic calculation to be apportioned into the part that has an Australian source and the part that has a foreign source.

Subsection 83A-110(2) of the ITAA 1997 states:

Treat an amount included in your assessable income under subsection (1) as being from a source other than an *Australian source to the extent that it relates to your employment outside Australia.

There is a detailed discussion on the preferred method for apportioning ESS discounts between Australian and foreign sources in Chapter 4 of the Explanatory Memorandum to the New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005.

It is accepted that at least some of each of the ESS discounts calculated by Company A has a foreign source.

The Taxpayer’s ultimate liability to tax is determined by subsections 6-10(4) and 6-10(5) of the ITAA 1997 which state:

(4) If you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia.

(5) If you are a foreign resident, your assessable income includes:

(a) your statutory income from all Australian sources; and

(b) other statutory income that a provision includes in your assessable income on some basis other than having an Australian source.

The Taxpayer is an Australian resident for the whole of both the year ended 30 June 2016 and the year ended 30 June 2017. Therefore both the Australian and foreign sourced portions of the ESS discount are included in his assessable income.

The rationale for this outcome is explained in the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 at paragraphs 1.347 to 1.357.

Question 2

Summary

The Taxpayer is able to claim a foreign income tax offset for any tax paid on the ESS interests outside Australia to the extent the discounts have a source outside Australia.

Detailed reasoning

Australian residents are generally subject to tax on their worldwide income from all sources. But some income may be subject to tax in a foreign jurisdiction. One country has to provide a concession to avoid double taxation.

Subsection 770-10(1) of the ITAA 1997 provides such a concession in relation to foreign sourced income that is assessable in Australia and states:

You are entitled to a tax offset for an income year for foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.

The amount of the foreign income tax offset is calculated in accordance with Subdivision 770-B of the ITAA 1997.

The Taxpayer meets the conditions to be eligible for a foreign income tax offset in relation to the ESS discounts to the extent they have a source outside Australia.

Question 3

Summary

The Taxpayer is unable to claim a foreign income tax offset for any tax paid on the ESS interests outside Australia to the extent the discounts have a source in Australia.

Detailed reasoning

Australian residents are generally subject to tax on their worldwide income from all sources. But some income may be subject to tax in a foreign jurisdiction. One country has to provide a concession to avoid double taxation.

Subsection 770-10(3) of the ITAA 1997 outlines an instance where Australia will not provide a concession in relation to income that is assessable in both Australia and another country and states:

An amount of foreign income tax you paid does not count towards the tax offset for the year if you paid it:

(a) to a foreign country because you are a resident of that country for the purposes of a law relating to the foreign income tax; and

(b) in respect of an amount derived from a source outside that country.

This is consistent with the principle mentioned at paragraph 9 of Taxation Ruling TR 2001/13 that the country of source is generally considered to have the first taxing right and the country of residence has the obligation to provide relief from any potential double taxation on any income. Although we note that the foreign country is considered to be an unlisted country.

The Commissioner expects the Taxpayer to approach the tax authorities of the foreign country for tax relief if they have actually taxed income that has an Australian source.