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Edited version of private advice
Authorisation Number: 1051918543708
Date of advice: 26 November 2021
Ruling
Subject: Employee share schemes
Question
Did the taxpayer cease employment for employee share scheme purposes on XX/XX/XXXX?
Answer
No.
This private ruling applies for the following period:
Year ended 30 June 20XX
Year ended 30 June 20XX
The scheme commences on:
1 January 20XX
Relevant facts and circumstances
Taxpayer is an Australian citizen.
Between XX/XX/XXXX to XX/XX/XXXX, the Taxpayer was a non-resident of Australia for tax purposes and was a resident of Country A.
While resident in Country A, the Taxpayer was employed by the Company, a Country A incorporated company.
The Taxpayer was employed on a permanent and full-time basis.
The Taxpayer returned to Australia and has been a resident of Australia for tax purposes from XX/XX/XXXX.
While employed with the Company in Country A, the Taxpayer participated in the Company's employee incentive plan and was granted ESS interests being options (rights) and restricted stock units (RSUs) in the Company under the Company's Plan.
The Taxpayer provided a copy of the Company's Plan under which the ESS interests were granted and a copy of the Company's Notice of Grant of Option.
The options and shares granted to the Taxpayer under the Plan qualify for tax deferral under Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997).
Over the course of employment with the Company in Country A, the options and RSUs vested in the Taxpayer's name. The Taxpayer has subsequently exercised a portion of the vested options.
Although the RSUs have vested, the Taxpayer is prohibited by the Company from disposing of the shares until a liquidity event occurs.
The Company has not provided the Taxpayer or the Australian Taxation Office with an ESS Statement.
Following the return to Australia, the Taxpayer remained permanently employed by the Company and continued to work on a permanent and full-time basis.
After approximately XX months from returning to Australia, the Taxpayer changed employment arrangements with the Company and commenced providing services to the Company as an independent contractor.
On XX/XX/XXXX, an independent contractor agreement (the Agreement) was entered into between the Taxpayer and the Company. A copy of the Agreement was provided.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 83A-10
Income Tax Assessment Act 1997 section 83A-115
Income Tax Assessment Act 1997 section 83A-120
Income Tax Assessment Act 1997 section 83A-325
Income Tax Assessment Act 1997 section 83A-330
Reasons for decision
The ESS provisions are contained in Division 83A of the ITAA 1997. An ESS is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees, of the company, or subsidiaries of the company, in relation to the employees' employment.
As noted in the facts, the Taxpayer was granted ESS interests covered by Subdivision 83A-C of the ITAA 1997 which relates to deferred taxation of ESS interests.
Subdivision 83A-C of the ITAA 1997 provides that when certain conditions are satisfied, the discount in relation to an ESS interest is included in the employee's assessable income in the income year when the deferred taxing point occurs.
The deferred taxing point is separately defined for shares and for rights to acquire shares.
For an ESS interest that is a beneficial interest in a share that is granted on or after 1 July 2015, the deferred taxing point will be the earliest of the times provided in subsections 83A-115(4) to (6) of the ITAA 1997, summarised as follows:
• When there is no real risk of forfeiture and the scheme no longer genuinely restricts disposal of the ESS interest (subsection 83A-115(4) of the ITAA 1997)
• When the employment ends in respect of which the ESS interest was acquired (subsection 83A-115(5) of the ITAA 1997)
• Fifteen years from when the employee acquired the ESS interest (subsection 83A-115(6) of the ITAA 1997).
For an ESS interest that is a right (option) to acquire a share that is granted on or after 1 July 2015, the deferred taxing point will be the earliest of the times provided in subsections 83A-120(4) to (7) of the ITAA 1997, summarised as follows:
• When there is no real risk of forfeiting the right and the scheme no longer genuinely restricts disposal of the right (subsection 83A-120(4) of the ITAA 1997)
• When the employment ends in respect of which the right was acquired (subsection 83A-120(5) of the ITAA 1997)
• Fifteen years from the grant date (when the ESS interest was acquired) (subsection 83A-120(6) of the ITAA 1997)
• Exercise the right and the resulting share is not at a real risk of forfeiture or subject to genuine selling restrictions (subsection 83A-120(7) of the ITAA 1997).
The 2nd possible taxing point (subsection 83A-115(5) and subsection 83A-120(5) of the ITAA 1997) is the time when the employment in respect of which the ESS interests were acquired ends.
To determine if employment ended for ESS purposes, first it needs to be considered if Division 83A applies to independent contractors.
The term 'employment' is not directly defined for the purposes of Division 83A of the ITAA 1997. However, section 83A-325 of the ITAA 1997 provides that Division 83A applies to an individual covered by column 1 of an item in the table below as if:
(a) he or she were employed by the entity referred to in column 2 of that item; and
(b) the thing referred to column 3 of that item constituted that employment.
|
Application of Division to relationships similar to employment |
|||
|
Item |
Column 1 This Division applies to an individual who: |
Column 2 as if he or she were employed by: |
Column 3 and this constituted that employment: |
|
1 |
receives, or is entitled to receive, *work and income support withholding payments (otherwise than as an employee) |
the entity that pays or provides the work and income support withholding payments (or is liable to do so) |
the relationship because of which the entity pays or provides the work and income support withholding payments to the individual (or is liable to do so). |
|
2 |
is engaged in service in a foreign country as the holder of an office |
the entity by whom the individual is so engaged |
the holding of the office. |
|
3 |
provides services to an entity (other than services covered by a previous item in this table and services provided as an employee) |
the entity |
the *arrangement between the individual and the entity under which those services are provided. |
Item 1 and 2 of the Table do not apply to the relationship under the Agreement. Thus Item 3 of the Table would appear to apply to independent contractors as per the relationship under the Agreement.
The Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009 indicates the ESS rules are intended to cover relationships similar to employment such as independent contractors. An extract from the EM states:
Relationships similar to employment
1.373 The employee share scheme rules cover not only employees of a company offering an employee share scheme, but also cover employees in relationships similar to employment. [Schedule 1, item 1, section 83A-325]
1.374 This is to ensure that people such as directors or office holders who are not considered employees, but who are in an employee-like relationship are not excluded from participating in employee share schemes.
1.375 The rules also cover taxpayers who are independent contractors
Accordingly, we consider for the purposes of Division 83A the Taxpayer would be an employee of the Company and the employment relationship under the Agreement constitutes employment as per Item 3 of section 83A-325 of the ITAA 1997.
The table in section 83A-325 of ITAA 1997 needs to be considered in conjunction with the following provision affecting the interpretation of " employment " for the purposes of Division 83A of the ITAA 1997:
Section 83A-330 of the ITAA 1997 states:
Application of Division to ceasing employment
For the purposes of this Division, you are treated as ceasing employment when you are no longeremployed 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-115(5) of the ITAA 1997 or 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-115(5) of the ITAA 1997 and 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 the Taxpayer's circumstances
In this case the Taxpayer was a non-resident of Australia for taxation purposes until XX/XX/XXXX. Prior to becoming an Australian resident, the Taxpayer worked for the Company in Country A for approximately X years and was granted various ESS interests under a deferral ESS from XX/XXXX.
The Taxpayer returned to Australia and became an Australian resident for tax purposes on XX/XX/XXXX. For approximately X months the Taxpayer continued to work for the Company as a permanent full-time employee, albeit remotely from Australia.
On XX/XX/XXXX the Taxpayer changed employment relationships with the Company and commenced providing services to the Company as an independent contractor. It has been determined the Taxpayer is considered to be in the employment of the Company for ESS purposes in accordance with section 83A-325 of the ITAA 1997.
Additionally, the Taxpayer's employment did not cease for ESS purposes when moving from a permanent full-time basis to an independent contractor in accordance with section 83A-330 of the ITAA 1997.
Therefore, we consider the Agreement would not result in a situation that section 83A-115(5) of the ITAA 1997 or section 83A-120 (5) of the ITAA 1997 would apply to the Taxpayer's ESS interests.