Edited version of private advice

Authorisation Number: 1052217774188

Date of advice: 7 February 2024

Ruling

Subject: Employee share schemes - foreign employment

Question 1

Is the taxpayer a Temporary Resident of Australia pursuant to section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Reasons for Decision

You are a temporary resident if:

(a)  You hold a temporary visa granted under the Migration Act 1958; and

(b)  You are not an Australian resident within the meaning of the Social Security Act 1991; and

(c)  Your * spouse is not an Australian resident within the meaning of the Social Security Act 1991.

The taxpayer holds a temporary skill shortage visa (Subclass 482) granted under the Migration Act 1958 and the taxpayer is a resident of a foreign jurisdiction who has worked in another foreign jurisdiction for more than 10 years before arriving in Australia. The taxpayer does not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991.

Therefore, the taxpayer is a Temporary Resident for the purposes of the ITAA 1997.

Question 2

Will the deferred taxing point of the ESS interest received on X July 20XX be X August 20XX pursuant to section 83A-115 of the ITAA 1997?

Answer

Yes.

Detailed reasoning

The taxpayer's employer has provided an Employee Share Scheme statement for the year ending 30 June 20XX to the taxpayer indicating a discount was granted to the taxpayer in the year ending 30 June 20XX under a deferral scheme. ESS interests that are deferred for an income year have an alternate taxing point as indicated by section 83A-115 of the ITAA 1997.

The definition of 'ESS deferred taxing point' is determined with reference to section 83A-115(2) of the ITAA 1997 which is:

"The ESS deferred taxing point for the * ESS interest is the earlier of the times mentioned in subsections (4) and (6)."

Section 83A-115(4) provides that the first possible taxing point is the earliest time when: there is no real risk that, under the conditions of the *employee share scheme, you will forfeit or lose the *ESS interest (other than by disposing of it); and if, at the time you acquire the interest, the scheme genuinely restricted you immediately disposing of the interest - the scheme no longer restricts you.

The taxpayer acquired the ESS interests on X July 20XX, and they vested on X August 20XX. On the vesting date the beneficial ESS interests converted into shares that contained voting rights and paid dividends. There were no further restrictions from this point in time. For the purposes of section 83A-115(4) the deferred taxing point will be X August 20XX which occurs within the income tax year ending 30 June 20XX. This is the earliest point of the possible taxing points as provided by section 83A-120.

Question 3

Will the discounted ESS Interest be included in the taxpayer's assessable income pursuant to section 83A-110 of the ITAA 1997 to the extent that it relates to the taxpayer's employment in Australia?

Answer

Yes, XX.XX% of the ESS Interest relates to your employment in Australia.

Reasons for Decision

Section 83A-110 provides:

(1)           "Your assessable income for the income year in which the * ESS deferred taxing point for the * ESS interest occurs includes the * market value of the interest at the ESS deferred taxing point, reduced by the * cost base of the interest.

(2)           Treat an amount included in your assessable income under subsection (1) as being from a source other than an * Australian source to the extent that it relates to your employment outside Australia."

The taxpayer acquired the deferred ESS discount on X July 20XX whilst in the employ of an employer located in a foreign jurisdiction who was part of the ultimate parent entity group of companies. The taxpayer arrived in Australia and commenced employment with their employer on XX September 20XX. The ESS interest vested on X August 20XX. The period between the grant date of X July 20XX and XX August 20XX is XX days.

The discount received in relation to the ESS interests is non-assessable and non-exempt to the extent that it relates to employment outside Australia pursuant to section 768-910(3)(b) of the ITAA 1997. When there is employment both inside and outside Australia, it is necessary to apportion the income to determine the non-assessable non-exempt foreign component as indicated by both section 768-910(3)(b) and section 83A-110(2).In considering source of the derivation of the ESS interest, the ITAA 1997 does not contain specific provisions that address derivation. It is therefore necessary to consider the Explanatory Memorandum of the Act where Division 83A was inserted.

Division 83A was inserted into the ITAA 1997 by the Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009. The Explanatory Memorandum stated:

"1.352 The apportionment between foreign sourced and Australian sourced income is to be done in a manner consistent with Organisation for Economic Development and Cooperation (OECD) practice, as explained in the explanatory memorandum to the New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005.

And

1.354 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.

The explanatory memorandum to the New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005 states:

"4.6 The OECD commentary on the articles of the model tax convention is relevant in interpreting Australia's tax treaties. The revised commentary treats the benefit accruing up to the exercise of a right as an employment benefit to which Article 15 (Income from Employment) of the model tax convention applies. The commentary recognises that the facts and circumstances of the particular case will determine the period of employment to which the right relates. The number of days worked in a treaty country during this employment period then determines the extent of that country's source taxing rights

The OECD commentary on Article 15 (about employment) suggests three principles as an aid to determining the employment period.

In applying the first principle, the ESS interest granted to the taxpayer will not relate to periods after the vesting date, that is after X August 20XX. In applying the second principle The ESS interests will related to the period before the vesting date in that they are designed to remunerate or award the taxpayer for a specific period. In the current case the period would be deemed to be X July 20XX to X August 20XX being a total of XX days. In applying the third principle where there is doubt as to what period the ESS interest is granted in relation to, they are generally provided as an incentive for future performance. As the interest will not relate to periods beyond the vesting date in accordance with the first principle, it is reasonable to conclude that the ESS interest is designed to be awarded to the taxpayer for the period of X July 20XX to X August 20XX.

The OECD commentary on Article 15 (about employment) includes consideration as to how to apportion an ESS interest when it has been derived from employment exercised in more than one state. The commentary provides:

"12.14 Where, based on the preceding principles, a stock-option is considered to be derived from employment exercised in more than one State, it will be necessary to determine which part of the stock-option benefit is derived from employment exercised in each State for purposes of the application of the Article and of Articles 23 A and 23 B. In such a case, the employment benefit attributable to the stock option should be considered to be derived from a particular country in proportion of the number of days during which employment has been exercised in that country to the total number of days during which the employment services from which the stock option is derived has been exercised. For that purpose, the only days of employment that should be taken into account are those that are relevant for the stock-option plan, e.g., those during which services are rendered to the same employer or to other employers the employment by whom would be taken into account to satisfy a period of employment required to acquire the right to exercise the option."

It follows that as the ESS interest relates to the period between grant date and vest date, only the portion of this period where the taxpayer was employed in Australia will be subject to income tax as the ESS deferred taxing point in accordance with section 83A-110 of the ITAA 1997.

The portion of this period where the taxpayer was in the employ of their employer was XX days, or XX.XX% of the total period. With reference to section 83A-110(1) and considering the application of the extrinsic material referenced above, the assessable income for the income year in which the ESS deferred taxing point for the ESS interest occurs is only XX.XX% of the total market value of the interest at the ESS deferred taxing point, reduced by the cost base of the interest.

The remaining XX.XX% of the interest will be considered as being from a source other than an Australian source to the extent that it relates to the taxpayer's employment outside Australia.

Question 4

Will the cost base of the XX foreign shares beneficially sold on X August 20XX be valued at market value pursuant to section 112-20 of the ITAA 1997?

Answer

Yes.

Reasons for Decision

Section 112-20 of the ITAA 1997 provides:

"The first element of your *cost base and *reduced cost base of a *CGT asset you *acquire from another entity is its *market value (at the time of acquisition) if:

(a) you did not incur expenditure to acquire it, except where your acquisition of the asset resulted from:

(i) *CGT event D1 happening; or

(ii) another entity doing something that did not constitute a CGT event happening; or

(b) some or all of the expenditure you incurred to acquire it cannot be valued; or

(c) you did not deal at *arm's length with the other entity in connection with the acquisition."

Once an ESS interest under a deferral scheme reaches the ESS deferred taxing point there is no further risk of forfeiture and the shares become CGT assets in accordance with section 108-5 of the ITAA 1997. The ESS interest converted into a CGT asset at the deferred taxing point of X August 20XX and would therefore be subject to the CGT rules as contained in Division 104 of the ITAA 1997.

Of the ultimate XX units received on X August 20XX, XX units were sold to cover debits. The sale price was identical to the fair market valuation as at X August 20XX as provided by the agency holding the interests. The agency holding the interests had included an income and a capital gain calculation indicating that there was no capital gains tax to pay as a result of the sale.

The taxpayer did not incur expenditure to acquire the asset as it was received under an ESS scheme which is not a contractual right creation CGT D1 event. The acquisition did not result from another entity doing something that did not constitute a not constitute a CGT event happening.

Therefore, in accordance with section 112-20 of the ITAA 1997, it is appropriate to value the CGT asset at market value as at X August 20XX when the instrument came into existence for the taxpayer. As indicated by the agency holding the interest's statement, the units were sold as at X August 20XX at market value.

Question 5

Will the dividend received from the foreign company be considered as non-assessable non-exempt income pursuant to section 768-910 of the ITAA 1997?

Answer

Yes.

Reasons for Decision

The taxpayer received a dividend in relation to the remaining XX shares held in a foreign company on XX September 20XX in accordance with the statement provided by the agency holding the interests. The total dividend was paid into an Australian bank account in Australian dollars. Dividends paid from sources other than having an Australian source is considered to be ordinary income pursuant to section 6-5 of the ITAA 1997.

The taxpayer is a shareholder in a non-resident company as at XX September 20XX. The taxpayer is a temporary resident for the purposes of the ITAA 1997 and it is therefore necessary to consider the application of section 768-910 of the ITAA 1997.

Section 768-910 of the ITAA 1997 provides:

(1)          The following are * non-assessable non-exempt income:

(a)          the • ordinary income you * derive directly or indirectly from a source other than an * Australian source if you are a * temporary resident when you derive it;

(b)          your • statutory income (other than a * net capital gain) from a source other than an Australian source if you are a temporary resident when you derive it

The taxpayer received ordinary income in the form of a dividend paid by a non-resident company. The dividend was derived from a source other than an Australian source and the taxpayer is a temporary resident when they derived the income. Therefore, the dividend will be considered to be non-assessable non-exempt income in the hands of the taxpayer.

This ruling applies for the following period:

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The taxpayer is a citizen of a foreign jurisdiction who has previously lived and conducted employment in a foreign jurisdiction. The taxpayer was previously employed with a foreign company (and part of the ultimate foreign parent group of companies), they are a subsidiary to the ultimate foreign parent entity since 20XX.

On X July 20XX as part of the taxpayer's employment with the foreign parent group, the taxpayer was granted Restricted Stock Units (RSU) in the foreign parent entity as part of the relevant plan (RSU Plan) that governs the grant of Employee Share Scheme (ESS) interests.

In accordance with clause X.X of the plan, the RSU were awarded with a later vesting date of X August 20XX when they would convert to ordinary shares. The terms of the RSU included a condition that the taxpayer has continuous employment with the foreign parent group of companies from grant date being X July 20XX through till a vesting or qualifying date of X August 20XX. The grant of an RSU in the foreign parent is utilised as a retention tool for selected employees.

There were no further conditions in relation to the grant of the ESS interests and there was no condition in the RSU plan or otherwise that indicated the grant of the ESS interest was specific to an individual jurisdiction or performance of employment within a specified jurisdiction.

The RSUs granted on X July 20XX were for the grant of XX ordinary shares in the foreign parent to be vested on X August 20XX and the taxpayer's Australian employer recognises this scheme as a subsidiary of the foreign parent, being part of the foreign parent of companies.

Clause X.X of the RSU Plan provides that if employment with the foreign parent group companies is terminated before the vesting date of the ESS interest, those ESS interests are considered to be forfeited.

During the taxpayer's employment in a foreign jurisdiction the ESS interests did not vest into shares as such there was no tax payable in the foreign jurisdiction in relation to the ESS interests.

The taxpayer came to Australia on XX September 20XX and was provided with a Temporary Skill Shortage Visa (subclass 482) on X August 20XX which was sourced by his employer in Australia. The 482 Visa expires on X August 20XX.

The taxpayer commenced employment with their Australian employer on XX September 20XX. The taxpayer is an Accountant employed in Australia.

As a recognised participant in the RSU Plan, the taxpayer's Australian employer reported the deferred discount of the RSU in the taxpayer's ESS Statement for the year in which the deferred taxing point occurred being 30 June 20XX year end. The taxpayer received a deferred discount under an employee share scheme in the year ending 30 June 20XX from their Australian. The total units received amounted to XX units.

On X August 20XX XX units in the foreign parent entity held by the taxpayer were sold to cover other debits in accordance with clause X.X of the RSU Plan. The proceeds of the sale matched the market value of the units.

On XX September 20XX the taxpayer received a dividend in a foreign currency from the remaining XX units paid into a bank account owned by the taxpayer.

The taxpayer did not acquire the RSU under a salary sacrifice scheme. The RSU are deferred until the qualifying date on which the RSU vests into shares, they are not subject to any other real risk of forfeiture.

On XX August 20XX the agency who managed the transfer of the foreign parent units provided a statement confirming to sell XX units in the foreign parent to cover debits on behalf of the taxpayer. The sale price of the units matched the fair market value and provided by the agency who managed the transfer. The agency provided an income calculation and capital gain calculation for Australian Taxation purposes.

On XX September 20XX the agency provided a statement to the taxpayer confirming a cash dividend payment to the taxpayer for the total quantity of XX units in the foreign parent. The entitlement was valued in a foreign currency and converted to Australian dollars and deposited into an Australian bank account for the taxpayer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83A-110

Income Tax Assessment Act 1997 section 83A-120

Income Tax Assessment Act 1997 section 83A-125

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 section 768-910

Income Tax Assessment Act 1997 section 995-1

Migration Act 1958

New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005

Social Security Act 1991

Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009

Does IVA apply to this private ruling?

No.