Edited version of private advice

Authorisation Number: 1051987723421

Date of advice: 30 May 2022

Ruling

Subject: Assessable income

Question 1

Will foreign bonus income earned while the Taxpayer was a resident of Country Z from Country Z employment be assessable in Australia?

Answer

Yes.

Question 2

In respect of the Restricted Stock Units (RSU's) that were fully vested while the Taxpayer was a non-resident of Australia and residing in Country Z, will an amount be assessable under Division 83 of the Income Tax Assessment Act 1997

Answer

No.

Question 3

In respect of the RSU's that vest while the Taxpayer is a tax resident of Australia, does Article 11 of the Australia and Country Z Tax Treaty provide that the portion of the discount that related to the Country Z employment period be taxable only in Country Z.

Answer

No.

Question 4

In respect of the options that are exercised while the Taxpayer is a tax resident of Australia, does Article 11 of the Australia and Country Z Tax Treaty provide that the portion of the discount that relates to the Country Z vesting period be taxable only in Country Z.

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

The scheme commences on:

1 July 2021

Relevant facts and circumstances

You are an Australian citizen.

You relocated to Country Z to commence permanent employment in Country Z and ceased to be a tax resident of Australia at this time.

You were a tax resident of Country Z under the domestic tax law of Country Z.

You were employed on a permanent basis in Country Z.

You returned to Australia after some time overseas and commenced Australian tax residency.

From your return, you were employed in Australia by the same employer in Australia.

You were entitled to a bonus amount from your employer in respect of your employment carried out from Country Z.

The bonus amount was paid after returning to Australia.

While you were employed in Country Z, you were granted employee shares and options by your employer in Country Z.

You were granted RSUs and options.

The RSU's and options vest over a period of several years.

A portion of the RSU's were fully vested while you were a tax resident of Country Z and non-resident of Australia.

The remaining RSU's will vest while you are an Australian tax resident.

Once the RSU's are vested, they are not subject to any disposal restrictions.

A portion of the options vested while you were a resident of Country Z and non-resident of Australia.

The remaining options will vest while you are an Australian tax resident.

You will exercise the options as a tax resident of Australia in the relevant Australian tax years.

Once the options are exercised, the shares are not subject to any disposal restrictions.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 83A-25

Income Tax Assessment Act 1997 section 83A-110

Income Tax Assessment Act 1997 Division 6

Income Tax Assessment Act 1997 Division 83A

International Tax Agreements Act 1953 section 4

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

An entity derives an amount of ordinary income as soon as it is applied or dealt with in any way on the entity's behalf or as directed by it (subsection 6-5(4) of the ITAA 1997).

Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings (TR 98/1) sets out the Commissioner's view on when income is derived and explains that income can be derived either on the basis of the 'receipts' method or the 'earnings' method.

Under the earnings (or accruals) method, income is derived when it is earned, and the point of derivation occurs when a recoverable debt is created. In most cases, the earnings method is the appropriate way to determine business income derived from a trading or manufacturing business (paragraph 20 of TR 98/1).

Under the receipts method, income is derived when it is received, either actually or constructively, and is taken to be derived by a person although it may not actually be paid over but is dealt with on his/her behalf or as he/she directs.

Paragraph 18 of TR 98/1 states that the receipts method is likely to be appropriate to determine: income derived by an employee; non-business income derived from the provision of knowledge or the exercise of skill possessed by the taxpayer; and business income where the income is derived from the provision of knowledge or the exercise of skill possessed by the taxpayer in the provision of services (subject to certain qualifications).

Consequently, income from employment is normally assessable on a receipts basis. Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period (paragraph 42 of TR 98/1) year of income.

You were a resident of Australia for taxation purposes when you derived (received) the bonus payment and the payment was ordinary income. Section 6-5 would normally therefore apply to include it as assessable income. If you are a resident, the source of the payment is irrelevant as the section includes as assessable income, ordinary income from any source.

Double tax agreement

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. As the source of your payments is Country Z, we need to consider the Country Z Agreement which is listed in section 5 of the Agreements Act.

Article 11(1) of the Country Z Agreement provides that salaries, wages and other similar remuneration derived by a resident of Australia in respect of employment shall be taxable only in Australia, unless the employment is exercised in Country Z. If the employment is exercised in Country Z, such remuneration as is derived from that exercise may be taxed in Country Z.

You are a resident of Australia for taxation purposes since your return to Australia.

You have received a bonus payment for services rendered during the period prior to your return.

The bonus was awarded for work performed in Country Z while a non-resident of Australia.

A bonus payment is employment income and is therefore derived when paid or dealt with on your behalf.

When you were paid the bonus, you were an Australian resident for taxation purposes and therefore assessable on your worldwide income.

Article 11 of the Country Z agreement means the bonus may also be taxed in Country Z.

Consequently, the bonus payment income is assessable in Australia and is included in your assessable income under subsection 6-5(2) of the ITAA 1997.

The employee share scheme provisions are contained in Division 83A of the ITAA 1997. Under Australian taxation law, the discount on an ESS only becomes taxable when the deferred taxation point is reached.

The actual liability to tax on employee share scheme discounts is determined by Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) in concert with Division 6 of the ITAA 1997.

Both subsections 83A-25(2) and 83A-110(2) of the ITAA 1997 merely define the component of an employee share scheme discount that relates to foreign employment as having a foreign source.

As statutory income, the actual amount to be included in assessable income is determined by either subsection 6-10(4) of the ITAA 1997 for Australian residents or subsection 6-10(5) of the ITAA 1997 for foreign residents.

Consistent with the treatment of most other types of income, whether an amount is included in a taxpayer's assessable income under the employee share scheme rules will depend on the taxpayer's residency status and the source of the income.

Under the core rules of the Australian income tax system, an Australian resident taxpayer is subject to income tax on their worldwide income. A foreign resident taxpayer is only subject to Australian income tax on their Australian sourced income.

To the extent that a discount on an ESS interest relates to employment outside Australia, the discount is taken to be from a foreign source. In the case of an ESS interest that is subject to a deferred taxing point, it is the amount included in your assessable income that is attributed a source (that is, both the discount and subsequent gains are attributed with a source). The attribution is done in manner consistent with the rule applying to discounts. [Schedule 1, item 1, subsections 83A-25(2) and 83A-110(2)]

Whether the discount on the ESS interest acquired under an employee share scheme relates to employment in Australia or outside Australia is a question of fact that needs to be determined on a case-by-case basis.

Australian resident taxpayers are subject to Australian income tax on all discounts they receive under employee share schemes regardless of whether they received it in relation to employment in Australia or outside Australia. However, this may be affected by Australia's double tax treaties and the temporary residents rules.

Foreign resident taxpayers are only subject to Australian income tax on discounts they receive under employee share schemes to the extent that the discount relates to the employment in Australia. The core rules are contained in sections 6-5 and 6-10 of the ITAA 1997.

For the RSU's that vested while you were a non-resident of Australia for taxation purposes and living in Country Z at the time the RSU's were fully vested you do not need to include any discount in your Australian tax return.

For the RSU's that vested while you were a resident of Australia for taxation purposes, they will be assessable and must be included in your Australian tax return.

They are not Australian source income, but residents of Australia for taxation purposes need to declare statutory income regardless of its source.

Options that vested when you were a resident of Australia for taxation purposes are assessable in Australia.

The options are not Australian source income, but residents of Australia for taxation purposes need to declare statutory income regardless of its source.