Edited version of private advice

Authorisation Number: 1052230219668

Date of advice: 25 March 2024

Ruling

Subject: Temporary resident of Australia

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

Question 2

Will the taxpayer's receipt of Restricted Cash Units during the 2022 to 2024 income tax years be apportioned according to source of payment and be considered to be non-assessable non-exempt ordinary income pursuant to section 768-910 of the ITAA 1997?

Answer

Yes, the portion that relates to the taxpayers employment in a foreign jurisdiction before their arrival date in Australia on XX November 20XX will be considered to be from a foreign source and be non-assessable non-exempt income.

This ruling applies for the following period:

1 July 20XX - 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The taxpayer is a resident of a foreign jurisdiction who travelled to Australia on XX November 20XX on a temporary Visa. You have a spouse who was also granted a temporary Visa on entry to Australia. The taxpayer currently works for the Company B subsidiary in Australia

During 20XX the taxpayer was employed by Company A in a foreign jurisdiction who had provided the taxpayer with Employee Share Scheme (ESS) interests. During 20XX Company A was sold to Company B in a foreign jurisdiction.

The original ESS interests issued by Company A were converted into Restricted Stock Units (RSU) during the sale to Company B. The converted RSU's had their value decreased based on the based on the option cost at the time that Company B acquired Company A.

Company B provided the taxpayer with additional RSU's that were not linked to the original Company A interests.

Company B was acquired by a Limited Partnership in a foreign jurisdiction during September 20XX. As part of the acquisition the Limited Partnership converted the existing RSU's into Restricted Cash Units (RCU's) which were paid to employees as lump sum cash payments on the prescribed vesting date on the RCU issue instead of equity interests (such as shares). The treatment of the RSU's was detailed in Form 8K lodged with the Securities and Exchange Commission of the United States of America. Relevantly the form indicates that for each RCU that was converted from an RSU prior to the acquisition will be subject to the holders continued service with its Parent and affiliates.

The RCU was provided as a lump sum payment that was disbursed through an Employee Stock Ownership (ESOP) agency and some portion of the RCU payment was paid as a lump sum through a pay check that was classified as 'Original Income'.

The taxpayer arrived in Australia before some of the RCU's have vested. During the period from April 20XX to May 20XX a number of RCU's had vested and the distributions were taxed in a foreign jurisdiction before they were deposited to the taxpayer. The taxpayer received a net amount of $XX AUD for the RCU's that vested in the income tax year ending 30 June 20XX.

On XX December 20XX the Director of Payroll from Company B advised the taxpayer that Company B has already remitted the tax payable with respect to the RCU's and requests a back payment from the taxpayer to facilitate the Australian tax liability. On XX December 20XX the Director of Payroll from Company B further explained to the taxpayer that the payment is submitted along with normal payroll processing, along with normal payroll tax payments. Company B has not supplied the taxpayer with an Employee Share Scheme Statement for the income year ending 30 June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 768-910

Income Tax Assessment Act 1997 section 995-1

Migration Act 1958

Social Security Act 1991

Does IVA apply to this private ruling?

No

Reasons for decision

Question 1

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 visa granted under the Migration Act 1958 and you are a resident of a foreign jurisdiction who has worked for Company A and Company B 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

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

Ordinary income has the meaning given by subsection 6-5(1) of the ITAA 1997 which provides:

Your assessable income includes income according to ordinary concepts, which is called ordinary income.

The taxpayer provided in their response to our request for information dated XX February 20XX that they received the RCU's on their vest date in the form of a lump sum from an ESOP agency. The taxpayer indicated that they would continue to receive the RCU's in this form for the year ending 30 June 20XX.

Although lump sum payments are normally treated as capital and taxable under the capital gains tax provisions of the ITAA1997, the lump sum in this instance will be considered to be ordinary income as the amount represents an inducement to continue to provide services to the taxpayers employer, Company B.

Lump sum payments made to compensate for benefits foregone under a former employer's ESS has been held to be assessable as ordinary income in Pickford v FC of T (1998) 98 ATC 2268 where at 15:

"irrespective of the description furnished to the amount in contention, it represented a straightforward inducement for the applicant to enter the employment... Furthermore, the Tribunal is satisfied that the source of the payment is to be found in the service to be rendered by the applicant ...and that it was in the nature of a benefit for future service."

The RCU's represent an interest in a former ESS scheme by both Company A and Company B. When the foreign Limited Partnership acquired Company B they submitted form 8K to the United States Securities and Exchange Commission. Form 8K details how the assets, liabilities and equity instruments of the merging companies are to be treated following the acquisition. The form 8K indicates that for each RCU that was converted from an RSU prior to the acquisition will be subject to the holders continued service with its Parent and affiliates.

The form 8K indicates that the character of the RCU's is to be identical to what would have been RSU's prior to the acquisition. While receipt of the lump sum will be considered to be ordinary income for the purposes of section 6-5 of the ITAA 1997, it is also necessary to consider that lump sum as representative of the ESS interests that existed immediately prior to the Limited Partnership acquiring Company B.

The RCU's received in relation to the former RSU interests is non-assessable and non-exempt to the extent that it relates to employment income from a source other than an Australian source pursuant to 768-910(1)(a) 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 and assessable component under section 6-5 of the ITAA 1997.

As the Form 8K makes the provision that the RCU's are to take the character of an ESS interest as it did immediately prior to acquisition, it is necessary to consider the derivation of what would be an ESS interest under Division 83A of the ITAA 1997. 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.

"12.7 The first principle is that, as a general rule, an employee stock-option should not be considered to relate to any services rendered after the period of employment that is required as a condition for the employee to acquire the right to exercise that option.

...

12.11 The second principle is that an employee stock-option should only be considered to relate to services rendered before the time when it is granted to the extent that such grant is intended to reward the provision of such services by the recipient for a specific period.

...

12.13 Finally, there may be situations in which some factors may suggest that an employee stock-option is rewarding past services, but other factors seem to indicate that it relates to future services. In cases of doubt, it should be recognised that employee stock-options are generally provided as an incentive to future performance or as a way to retain valuable employees."

In applying the first principle, the RCU's granted to the taxpayer will not relate to periods after the vesting date. In applying the second principle The RCU's will relate to the period before the vesting date in that they are designed to remunerate or award the taxpayer for a specific period.

In applying the third principle where there is doubt as to what period the RCU interest is granted in relation to, they are generally provided as an incentive for future performance. As the RCU's will not relate to periods beyond the vesting date in accordance with the first principle, it is reasonable to conclude that the RCU's are designed to be awarded to the taxpayer for the period from the grant date until the vesting date.

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 only the portion of this period where the taxpayer was employed in Australia (that is the period from XX November 20XX) will be subject to income tax in accordance with section 6-5 of the ITAA 1997.

For the period where the taxpayer received RCU's prior to their arrival date in Australia, the RCU lump sum income will be considered to be from a source other than Australia and will be considered as non-assessable non-exempt income pursuant to 768-910(1)(a) of the ITAA 1997 as the taxpayer is a temporary resident receiving ordinary income from a source other than an Australian source.