Edited version of private advice

Authorisation Number: 1052143645229

Date of advice: 12 September 2023

Ruling

Subject: Employee share scheme

Question 1

Should the whole of the employee share scheme (ESS) discount be included in your Australian income tax return?

Answer

Yes.

Question 2

Will a foreign income tax offset be allowed in relation to the foreign sourced ESS discount included in your Australian income tax return?

Answer

Yes.

This private ruling applies for the following periods

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commenced on

January 20XX

Relevant facts and circumstances:

1.            You are an Australian citizen.

2.            You were a resident of another country for tax purposes for a period.

3.            You worked for a company in that country.

4.            You returned to Australia to reside and became an Australian resident for tax purposes.

5.            You continue to work for the same company in Australia.

6.            You received a share grant as part of their remuneration package with the company.

7.            The shares were actually, or deemed to be, vested when you left the country.

8.            Prior to relocating you lodged an income tax return in that country.

9.            The unvested ESS shares vested after you became an Australian resident.

Legislative references:

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subsections 83A-10, (1), (2)

Income Tax Assessment Act 1997 Section 83A-25

Income Tax Assessment Act 1997 Subsection 83A-25(1)

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Section 83A-105

Income Tax Assessment Act 1997 Section 770-10

Reasons for decision

Issue: Employee Share Scheme (ESS)

Summary

The whole of your ESS discount is assessable in Australia and a Foreign Income Tax Offset (FITO) is allowed for tax paid in relation to foreign sourced ESS discounts.

Detailed reasoning

Legislative framework - employee share schemes generally

Unless otherwise stated all legislative references in the decision refer to the Income Tax Assessment Act 1997.

Division 83A of the ITAA 1997 contains the Australian ESS rules that give employees a benefit such as:

•         shares in the employer at a discounted price, and

•         the opportunity to acquire shares in the employer in the future (right/options).

This benefit is called an 'ESS interest' and is defined in section 83A-10 of the ITAA 1997 as:

1)    An ESS interest, in a company, is a beneficial interest in:

a)    a share in the company; or

b)    a right to acquire a beneficial interest in a share in the company.

2)    An employee share scheme is a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of:

a)    the company; or

b)    subsidiaries of the company;

in relation to the employees' employment.

A discount from an ESS interest is included in the employee's assessable income under subsection 83A-25(1) of the ITAA 1997. An employee is required to include the discount received on the ESS interest in their assessable income upon acquisition of that share or right. at the 'default' taxing point.

The deferred taxing points

Under the ESS rules, the taxing point is deferred where there is a risk that the shares or rights might be forfeited or lost. If an ESS interest is issued to an employee under an ESS at a discount, then by default, Subdivision 83A-B of the ITAA 1997 (and subsection 83A-25(1)) applies to the ESS interest. However, subsection 83A-105(1) specifically states that Subdivision 83A-B does not apply to the ESS interest (and Subdivision 83A-C applies instead) if certain conditions are satisfied.

Subdivision 83A-C of the ITAA 1997 acts to delay or defer the inclusion of the discount on the ESS interest until a later point in time, when the risk of forfeiture (and other requirements) is no longer present. This is referred to as the 'ESS deferred taxing point'.

In this case, the taxation of the discount or benefit from the ESS interest falls within Subdivision 83A-C.

Taxing of ESS interest

Prior to your departure from the other country, you were subject to tax in that country on the amount of the gains from the ESS interests based on the difference between the market value and the exercise price. Tax was paid at that point in respect of the amount of the gains from the ESS interests.

Depending on the point in time at which the ESS interests were granted, Australia taxes the ESS interests granted under the plan in accordance with either former Division 13A of the ITAA 1936 or Division 83A.

In this case the ESS interests were granted after 30 June 2009 and meet the conditions for deferred taxation under Subdivision 83A-C. Consequently, there will be no tax payable on the discount until the earliest deferred taxing point. As you are a resident of Australia at the time of the deferred taxing point, your assessable income in Australia includes the whole gain on the ESS interests as at the deferred taxing point.

Entitlement to foreign income tax offsets (FITO) under Section 770-10.

To be entitled to a tax offset for foreign income tax under subsection 770-10(1), you must have paid an amount of foreign tax in relation to the gains from the ESS interests that are included in their assessable income.

Subsection 770-15(1) defines 'foreign income tax' to mean, for present purposes, tax that is imposed by a law other than an Australian law and is a tax on income.

The tax paid has been levied under the law of another country, a law other than an Australian law. Furthermore, the tax imposed by that country is a tax on income, profits or gains. Accordingly, the tax paid is 'foreign income tax' as defined.

Where the foreign jurisdiction has a tax treaty with Australia, the foreign income tax includes only the tax that has been correctly imposed in accordance with that tax treaty. As the other country taxes the gains from the ESS interests at a time when you are a resident for tax purposes of that country, such income has been taxed in accordance with the relevant double tax agreement.

Therefore, the conditions in subsection 770-15(1) have been satisfied.

Exception for certain residence-based income taxes

Subsection 770-10(3) provides that foreign income tax does not count toward the tax offset for the year if that tax is paid to a foreign country because the taxpayer is a resident of that country for tax purposes and in respect of amounts sourced outside that country.

While you were a resident of that country for tax purposes when the tax is paid, the tax on the gains from the ESS interests would be payable regardless of whether you are a resident of that country for tax purposes or not. Therefore, the tax was paid not because you were a resident of another country and subsection 770-10(3) does not apply in this case.

Accordingly, the tax paid in the other country on the gains from the ESS interests which is included in your assessable income in Australia for the income year will count towards the foreign income tax offset for the purposes of subsection 770-10(1).

The gains from ESS interests acquired post 1 July 2009

The whole gain from the ESS interests acquired after 1 July 2009 is included in assessable income. Therefore, the full amount of the tax paid in the other country on the gains on the ESS interests will count towards the foreign income tax offset. However, where the market value of the underlying shares at the taxing point in that country exceeds the market value of the underlying shares used to calculate the gain on the ESS interests in Australia, only a proportionate share of the tax paid in that country (the share that corresponds to the part that is included in assessable income) will count towards foreign income tax offset.

Foreign income tax offset limit

The amount of the foreign income tax that counts towards the FITO is subject to the FITO limit.

If you are claiming FITO of more than $1,000 you must calculate your FITO limit. If the amount of the FITO exceeds the limit, then the tax offset must be reduced by the amount of the excess to the amount of the limit. Any foreign income tax paid in excess of the limit is not available to be carried forward to a later income year and cannot be refunded to you.

CONCLUSION

Whilst the whole of your ESS discount is taxable in Australia a FITO is available for tax paid in the other country for income that has a foreign source.