Edited version of private advice

Authorisation Number: 1051705234769

Date of advice: 24 June 2020

Ruling

Subject: Employee share schemes

Question 1:

Will your assessable income include the proportion of the discount on the employee share scheme interests that relates to employment services provided outside Australia?

Answer:

Yes.

Question 2:

Will your assessable income include the proportion of the discount on the employee share scheme interest that relates to employment services provided in Australia?

Answer:

Yes.

Question 3:

Will the employee share scheme discount be apportioned based on the number of days of your Australian and foreign employment?

Answer:

Yes.

Question 4:

Will the first element of the cost base of each of the employee share scheme interest be its purchase price?

Answer:

Yes.

Question 5:

Did your Australian employment commence when you arrived in Australia?

Answer:

Yes.

This ruling applies for the following period

Income year ending 30 June 2019

The scheme commences on

1 July 2018.

Relevant facts and circumstances

While you were a non-resident of Australia for taxation purposes you participated in an employee share scheme (the ESS) offered by your employer (the Company) under which you were granted several ESS interests.

The ESS plan (the Agreement) included the following information:

·         You were granted an ESS interest for a specified amount of consideration to subscribe for a specified number of shares in the Company, with a specified exercise price per ESS interest subject to specified terms and conditions as outlined below

·         The ESS interest must be exercised within a specified period after the date of the Agreement

·         You could only exercise the ESS interests if a specified event occurred; and

·         The ESS interests would immediately lapse and cease to be exercisable if any of the specified conditions were met, including if you ceased to be employed by the Company or by a qualifying subsidiary of the Company.

Due to an internal restructuring, you were offered a position at Company X based in Australia, which is a subsidiary of the Company.

You made multiple visits to Australia on tourist visas while considering the offer of the Australian employment.

You accepted the offer of employment in Australia.

While your employment commencement date with Company X under your employment contract was recorded as a specified date, you did not arrive in Australia until the following month on a Temporary visa.

After several years you were granted with an Australian Permanent Residency visa.

The Company undertook capital raising activities, and in accordance with the conditions contained in the Agreement you could exercise the ESS interests during the month after you became an Australian resident. You exercised the ESS interests on that date, with the resulting shares being disposed of on the same day.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Section 83A-330

Reasons for decision

All references are to the ITAA 1997 unless otherwise noted.

Tax-deferred employee share schemes

Section 83A-120 provides that the employee share scheme (ESS) deferred taxing point for rights to acquire shares (options) occurs at the earliest of the following times:

·         when the right has not been exercised, there is no real risk of forfeiting the right, and the scheme no longer genuinely restricts disposal of the right (subsection 83A-120(4));

·         when the participant ceases the employment in respect of which they acquired the rights within the meaning of section 83A-330 (subsection 83A-120(5));

·         seven years after the participant acquired the rights (subsection 83A-120(6)); and

·         when there is no real risk of forfeiting the right or underlying share, and the scheme no longer genuinely restricts exercise of the right or disposal of the resulting share (subsection 83A-120(7)).

Subsection 83A-110(1) provides that your assessable income for the year that the deferred taxing point occurs includes the market value of the ESS interest (calculated at the deferred taxing point) reduced by the cost base of the interest.

The cost base of the ESS interests includes any consideration paid or given for the ESS interests, and any other incidental costs incurred in relation to the ESS interests before the deferred taxing point occurs.

Assessability of ESS discount amounts for Australian residents

An Australian resident is subject to income tax on their worldwide income. Consistent with the treatment of most other types of income, whether an amount is included in a taxpayer's assessable income under ESS provisions will depend on the taxpayer's residency status and the source of income.

An Australian resident is subject to Australian income tax on all discounts they receive under ESS regardless of whether they received it in relation to employment either inside or outside of Australia. However, where a foreign resident's ESS interests fully vest prior to their arrival in Australia, there will be no Australian taxation implications under Division 83A of the ITAA 1997.

Foreign residents who become Australian residents and hold unvested ESS interests granted to them prior to becoming an Australian taxation resident will be assessable in relation to those ESS interests to the extent that it does not relate to their employment outside of Australia in accordance with subsection 83A-110(2) of the ITAA 1997.

The following should be taken into consideration when determining whether a resident of Australia's unvested ESS interests, that were granted while they were a foreign resident, will be assessable in full or in part in Australia due to their employment both inside and outside of Australia:

Ceasing employment

Under section 83A-330 of the ITAA 1997 you are treated as ceasing employment when you are no longer employed by any of the following:

(a)  your employer in that employment;

(b)  a holding company (within the meaning of the Corporations Act 2001) of your employer;

(c)   a subsidiary of your employer;

(d)  a subsidiary of a holding company (within the meaning of the Corporations Act 2001) of your employer.

The phrase 'that employment' in this section is not to be read as a requirement that an employee must remain on the same terms of employment if he/she is to ensure a taxing point will not arise under subsection 83A-120(5) of the ITAA 1997. Rather, section 83A-330 of the ITAA 1997 is to be read as a single requirement that the employee remain employed with the same employer, or employer group.

This interpretation of section 83A-330 of the ITAA 1997 informs the operation of subsection 83A-120(5) of the ITAA 1997, such that a cessation of employment, and consequently a taxing point, would not arise where the employee remains employed with the employer.

Application to your situation

You were granted several ESS interests while you employed by the Company, located in a foreign country, while you were a non-resident of Australia for taxation purposes.

The Agreement provided that the ESS interests would lapse and cease to be exercisable if you ceased being employed by the Company. Therefore, the ESS under which you were granted the ESS interests is a tax-deferred scheme as there was a real risk of forfeiture of the ESS interests if you ceased your employment.

You accepted an offer to commence employment in Australia with Company X, a subsidiary of the Company, and you arrived in Australia on a Temporary visa.

The ESS interests had not vested when you left your role with the Company and commenced your employment with Company X. Additionally, they did not lapse with you continuing to hold the ESS interests after you commenced your employment in Australia. Therefore, for ESS purposes it is viewed that your employment had continued in accordance with section 83A-330 given that Company X is a subsidiary of the Company.

You became an Australian resident for taxation purposes after several years.

The ESS interests vested when you were able to exercise them, which was after you became an Australian resident. Therefore, as the ESS interests vested after you became an Australian resident any ESS discount arising in relation to your ESS interests must be included in your assessable income as it is viewed for ESS purposes that your employment had not ended as a result of you commencing your employment in Australia.

You exercised the ESS interests on the same date that they vested, and that date is viewed as the deferred taxing point.

The ESS discount amount arising in relation to those ESS interests will be calculated as the market value of the ESS interests on the deferred taxing point, reduced by the cost base of the ESS interests.

The Agreement outlines that you paid specified amounts to acquire and exercise each ESS interest. These amounts will be included in the cost base of each ESS interest.

Note: The amounts included in the cost base of the ESS interests need to be converted into Australian dollars based on the currency rate on the date the ESS interests were granted.

The official commencement date of your employment with Company A under your employment contract was recorded as at a date earlier than when you arrived in Australia. For the purpose of apportioning the ESS discount in relation to your Australian employment, your employment commencement date will be the date when you physically arrived in Australia.