Edited version of private advice

Authorisation Number: 1052185335439

Date of advice: 3 November 2023

Ruling

Subject: Employee share scheme

Question 1

Will your Employee Share Scheme (ESS) discounts for the 20XX and 20XX income tax years be included in your assessable income under subsection 83A-110(1) of the Income Tax Assessment Act 1997?

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 returns?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

The scheme commenced on:

1 June 2018

Relevant facts and circumstances

1.You are currently an Australian resident for tax purposes.

2.You were a resident of Country A for tax purposes while working for XXX (the Company) prior to moving to reside in Australia in XXXX 2019.

3.The Company is a resident of Country A.

4.You continue to work for the Company in Australia.

5.You received Employee Share Scheme (ESS) options as part of your remuneration package with the Company on XXXX 2017.

6.The unvested ESS were deemed to be vested under County A's exit tax 'Deemed Exercise Rule' prior to you moving to reside in Australia.

7.Prior to relocating from Country A, you lodged an income tax return with the tax authority of Country A.

8.The 'deemed' gains from options/shares were reported in your income tax return before departing Country A in XXXX 2019 under the 'Deemed Exercise Rule'. Country A tax was paid at this time.

9.The unvested ESS shares were then vested in the Australian income years 2019 to 2022 and have been included in your 2019 to 2022 income tax returns at Item 12 (label 12F Discount from deferral schemes).

10.Your employer has reported your annual ESS taxable amounts to the ATO.

Relevant legislative provisions

Income Tax Assessment Act 1997 division 83A

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

Income Tax Assessment Act 1997 subdivision 83A-C

Income Tax Assessment Act 1997 section 83A-110

Income Tax Assessment Act 1997 section 770-10

Reasons for decision

Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) contains the 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 (rights/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 . An employee is required to include the discount received on the ESS interest in their assessable income upon acquisition of that share or right, or at a later 'deferred' taxing point.

Taxing of ESS interest

Prior to your departure from Country A, you were subject to tax in Country A on the amount of the gains from the ESS interests based on the difference between the market value of the underlying shares one month prior to departure and the exercise price. You paid Country A tax 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 to you, Australia taxes the ESS interests granted under the plan in accordance with Division 83A of the ITAA 1997 of the ITAA 1997 of the ITAA 1997.

Your employer has reported the discounts for your ESS interests in the income years with the deferred taxing points. Section 83A-110 of the ITAA 1997 includes in your income the market value of the ESS interest at the deferred taxing point reduced by the cost base of the interest. Amounts relating to time you were employed outside Australia are treated as foreign-sourced income. However, as you were 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 at the deferred taxing point.

Entitlement to foreign income tax offsets (FITO) under Section 770-10 of the ITAA 1997.

To be entitled to a tax offset for foreign income tax under subsection 770-10(1) of the ITAA 1997, you must have paid an amount of foreign tax in relation to the gains from the ESS interests that are included in your assessable income.

Subsection 770-15(1) of the ITAA 1997 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 by you has been levied by Country A in accordance with the Country A Income Tax Act, a law other than an Australian law. Furthermore, the tax imposed by Country A is a tax on income, profits or gains. Accordingly, the tax paid by you in Country A 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 Country A taxes the gains from the ESS interests at a time when you are a resident of Country A for the purposes of the Country A tax law, such income has been taxed in accordance with the Country A tax agreement.

Therefore, the conditions in subsection 770-15(1) of the ITAA 1997 have been satisfied.

Exception for certain residence-based income taxes

Subsection 770-10(3) of the ITAA 1997 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 Country A for the purposes of the Country A tax law 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 Country A for tax purposes or not. Therefore, the tax was paid not because you were a resident of Country A and subsection 770-10(3) of the ITAA 1997 does not apply in this case.

Accordingly, the tax paid in Country A 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) of the ITAA 1997.

The gains from ESS interests acquired

The whole gain from the ESS interests acquired is included in assessable income. Therefore, the full amount of the tax paid in Country A 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 Country A 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 Country A (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

The whole of your ESS discount is taxable in Australia. A FITO is available for tax paid in Country A for income that has a foreign source.