Edited version of private advice

Authorisation Number: 1051629250881

Date of advice: 4 February 2020

Ruling

Subject: Employee share scheme - Deferred taxing point - International

Question 1

Can the Taxpayer exclude the foreign service portion of the employee share scheme (ESS) discount from the Taxpayer's assessable income?

Answer

No. The foreign service portion is assessable.

Question 2

Is the Taxpayer entitled to claim a tax offset for at least some portion of the foreign tax paid in relation to the foreign service portion of the ESS discount?

Answer

Yes.

This ruling applies for the following period:

2018-19 income year

The scheme commences on:

1 July 20XX

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 left Australia for a foreign country some years ago at which time the Taxpayer ceased to be an Australian tax resident. During this period of non-tax residency, the Taxpayer was granted many shares in a foreign multinational company. The Taxpayer re-entered Australia recently, at which time the Taxpayer again became an Australian tax resident.

The Taxpayer is an employee at this company. In the 2018-19 income year prefill report, the Australian employer has advised the ATO that an assessable discount has been derived by the Taxpayer and added: 'These amounts have been adjusted to exclude foreign service period.'

The Taxpayer can prove with documents that the Taxpayer has paid in foreign income tax at the vesting point in relation to the gross discount. Some shares were sold to cover the foreign tax liability and the net balance (of shares) was transferred to this taxpayer.

The ESS interests granted to the Taxpayer were subject to material contingencies right up until the vesting dates. No shares previously granted would have vested if, for example, the Taxpayer ceased employment with the employer company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 6,

Income Tax Assessment Act 1997 Division 83A,

Income Tax Assessment Act 1997 Division 770, and

Convention between the Government of Australia and the Government of the United States of America for the avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income Article 15

Reasons for decision

Question 1

Summary

The Taxpayer cannot exclude the foreign service portion of the ESS discount from the Taxpayer's assessable income.

Detailed reasoning

The ESS provisions are contained in Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997). Their basic operation in relation to ESS interests is not dependent on the residency of the Taxpayer.

In short, the ESS provisions recognise the dual nature of ESS interests as both remuneration and investments. To this end, the ESS provisions provide a mechanism for recognising an appropriate value for remuneration purposes and an adjustment to the purchase price for investment purposes to reflect the amount treated as remuneration.

The ESS provisions achieve this outcome by determining:

·        When a taxpayer needs to include any discount received in relation to ESS interests in their assessable income, and

·        The amount of the ESS discount.

In the Taxpayer's situation, the ESS discount is assessable at the deferred taxing point as the shares were granted under an ESS that is a deferral scheme. The employer has determined that this occurred during the 2018-19 income year.

Once the amount of the ESS discount has been determined, the employee share scheme provisions use a source rule to determine if any part of the discount should be considered to have a foreign source (based on the extent to which it relates to employment outside Australia).

In the Taxpayer's situation, the ESS discount partly relates to Australian service (which is therefore considered to have an Australian source) and partly to foreign service (which is considered to have a foreign source).

Section 6-10 of the ITAA 1997 includes both the Australian and the foreign source portions of the ESS discount in the Taxpayer's assessable income because the Taxpayer was an Australian resident at the deferred taxing point.

Article 15 of the Convention between the Government of Australia and the Government of the United States of America for the avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income allows Australia to tax remuneration (including ESS discounts) as the Taxpayer was an Australian resident at the point in time when they were assessable under Australian tax law.

Question 2

Summary

The Taxpayer is entitled to claim a tax offset for at least some portion of the foreign tax paid in relation to the foreign service portion of the ESS discount.

Detailed reasoning

Division 770 of the ITAA 1997 allows the Taxpayer to claim a foreign income tax offset in relation to foreign income tax paid in respect of foreign source income that is included in the Taxpayer's assessable income.

Please refer to the Guide to foreign income tax offset rules 2019 for assistance in calculating the amount of the foreign income tax offset that can be claimed.