Edited version of private advice

Authorisation Number: 1052045121464

Date of advice: 28 October 2022

Ruling

Subject: Disposal of shares and residency

Question 1

Are the capital gains from the sale of shares while you were resident in Country X exempt from tax in Australia under the double tax agreement between Australia and Country X?

Answer

Yes.

Question 2

For shares that were acquired by exercising options before becoming a resident of Country X, and sold after ceasing to be a resident of Country X, and while an Australian resident, are you taken to have acquired them on the date you exercised the options to purchase the shares?

Answer

Yes.

Question 3

For shares that were acquired by exercising options after becoming a resident of Country X, and sold after ceasing to be a resident of Country X and while an Australian resident, are you taken to have acquired them on the date you became an Australian resident?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were employed by a company in Australia.

You purchased rights to acquire options for shares from your employer via an Employee Share Scheme in June 20XX.

The discount on these rights was included in your assessable income in the year you purchased them.

The rights were not eligible for the reduction of the discount for start-ups (under section 83A-33 of the ITAA 1997).

The rights vested as options at various times between May 20XX and May 20XX.

You exercised the options to acquire the Shares on three occasions from December 20XX to August 20XX.

You were transferred to Country X by your employer in March 20XX.

You were a resident of Country X under Country X tax law until December 20XX.

You were taxed in Country X on worldwide income and capital gains as a resident of Country X for the calendar years from March 20XX to December 20XX.

You returned to Australia during the Covid pandemic.

You remained on the Country X payroll of your company whilst still working for a Country X business unit in Australia whilst your business unit determined your future place of employment.

Your 20XX Country X tax return treated all your worldwide income and capital gains as Country X sourced.

Some time after returning to Australia you were terminated from the Country X division of your company's payroll.

You were confirmed to start on to the Australian division of your company's payroll the following day.

You did not include any capital gain or loss in your 20XX income tax return related to ceasing residency (CGT event I1).

You exercised most of the options before leaving Australia. You exercised the remainder of the options while you were living in Country X.

You sold some of the shares while you were living in Country X.

You sold some of the shares from the previously exercised stock options after becoming an Australian resident.

You are not currently considered to be a tax resident of any foreign country.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 855

Income Tax Assessment Act 1997 Section 855-10

Income Tax Assessment Act 1997 Section 855-15

Income Tax Assessment Act 1997 Section 855-45

Income Tax Assessment Act 1997 Section 104-160

Income Tax Assessment Act 1997 Section 104-165

International Tax Agreements Act 1953Section 4

Reasons for decision

Acquisition date of the shares

Subdivision 130-B of the Income Tax Assessment Act 1997 (ITAA 1997) deals with the exercise of rights. Subsection 130-50 of the ITAA 1997 further provides that the Subdivision applies to options in the same way that it applies to rights.

Subsection 130-40(7) of the ITAA 1997 provides that you disregard a capital gain or capital loss you make from the exercise of rights to acquire shares or options, which would normally be an example of CGT event C2. Subsection 130-45(2) of the ITAA 1997 provides that you are taken to have acquired shares or options when you exercise the rights or options to acquire them.

In your case, you are taken to have acquired the options to purchase the shares on the date you exercised those rights, that is on the dates the options vested. You disregard any capital gain or loss you made by exercising the rights. Because Subdivision 130-B also apples to options in the same manner, you are taken to have acquired the shares on the dates you exercised those options. Any capital gain or loss you made by exercising the options is also disregarded.

Note: subsection 130-40(6) of the ITAA 1997 provides that when you exercise a right or option to acquire shares or options, the first element of the cost base of the shares or options you acquire is the cost base of the rights or options you exercised, plus any amount you paid to exercise those rights or options. In your case this means the cost base of the shares will be the cost base of the options, which in turn will be the cost base of the rights. Because you acquired the rights through an ESS scheme where you immediately included the discount in your assessable income, you are taken to have acquired the rights at market value under section 83A-30 of the ITAA 1997.

Capital gains tax and changing residency status

Section 104-160 of the ITAA 1997 states that CGT event I1 happens if you stop being an Australian resident. However, section 104-65 of the ITAA 1997 states that if you are an individual, you can choose to disregard making a capital gain or a capital loss from all CGT assets covered by CGT event I1.

If you choose to disregard the capital gain or loss, each of those assets is taken to be taxable Australian property until the earlier of:

(a) a CGT event happening in relation to the asset, if the CGT event involves you ceasing to own the asset;

(b) you again becoming an Australian resident.

In your case you chose not to include a capital gain or loss in your income tax return when you ceased to be an Australian resident, so you are taken to have chosen to disregard any capital gain or loss you may have made under CGT event I1.

Question 1

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (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.

Article Z of the Country X Convention sets out provisions dealing with the alienation of property.

In your case, you chose to defer taxation on your shares that would have been payable on ceasing to be a resident under CGT event I1. When you subsequently sold some of those shares while you were a resident of Country X, article Z means that tax on any capital gain will only be payable in Country X.

Any capital gain from the sale of shares while you were a resident in County X will be exempt in Australia under the double tax agreement between Australia and Country X.

Question 2

Section 855-45 of the ITAA 1997 gives rules that are relevant to each CGT asset that you owned just before you became an Australian resident. However, taxable Australian property is excepted from these rules.

When you choose to disregard any capital gain or loss from CGT event I1 when you cease to be a resident, any assets you hold are considered to be taxable Australian property until you dispose of them or become an Australian resident again.

In your case, you chose to disregard your capital gain or loss when you ceased to be an Australian resident. Therefore, your shares you held when you ceased to be an Australian resident became taxable Australian property and were still taxable Australian property just before you became an Australian resident.

As such the rules in section 855-45 of the ITAA 1997 do not apply to those shares and you are taken to have acquired them under the general CGT rules relating to acquisition dates. As discussed above, in your case you are taken to have acquired those shares on the day you exercised the options to acquire the shares.

Question 3

Section 855-45 of the ITAA 1997 gives rules that are relevant to each CGT asset that you owned just before you became an Australian resident. Where you exercised options while resident of Country X you did not acquire the shares before you ceased Australian residency and they are not considered taxable Australian property.

Subsection 855-45(3) of the ITAA 1997 provides that for the purposes of the CGT provisions, you are taken to have acquired the asset at the time you became an Australian resident.

As such for those shares you acquired by exercising options while you were a resident of Country X you are taken to have acquired them at the time you became an Australian resident.

Note: Subsection 855-45(2) of the ITAA 1997 provides that the cost base of the shares will be their market value at the time you became an Australian resident.