Edited version of private advice

Authorisation Number: 1052302404808

Date of advice: 20 September 2024

Ruling

Subject: Residency, employee share scheme, tax treaty

Question 1

Are you an Australian resident for tax purposes under subsection 6(1) of the Income Tax Assessment Act 1936 for the income year ended 30 June XXXX?

Answer

No. You do not meet any of the residency tests.

Question 2

Does your Employee Share Scheme (ESS) deferred scheme amount of $XXX have an Australian source and taxable in Australia for the income year ended 30 June XXX?

Answer

Yes.

Question 3

Do the employment remuneration articles in the tax treaties with countries A and B allow Australia to tax your ESS discount from the deferral scheme?

Answer

Yes.

This ruling applies for the following period:

30 June XXXX

The scheme commenced on:

1 July XXXX

Relevant facts and circumstances

You were born in country A.

You are a citizen of the country A and Australia.

On XX XX XXXX you were granted a visa which allowed you to reside in Australia permanently. Before this time, you were in Australia on a temporary visa granted on XX XX XXXX.

Prior to leaving Australia you had been living in State AA with your family. The property was leased in your spouse's name and ended on 30 April 20XX.

In the XXXX to XXXX income years, you lived in Australia and travelled twice to the country A for approximately 40 days, in XX to XX and XX to XX XXXX to visit family. You declared you were a tax resident of Australia for these years on your tax returns.

In XX XXXX, you were hired by company M (the employer), an operating company owned by company O, a foreign corporation.

When hired you received a grant through company O, designed for country A citizens, called the XX Plan a Restricted Stock Unit (RSU) Agreement (RSU Agreement). You were a tax resident of Australia at this time.

The RSU Agreement states for Australian income tax purposes, Subdivision 83A-C of the Income Tax Assessment Act 1997 applies to RSUs granted under this Agreement and the Plan, such that the RSUs are intended to be subject to deferred taxation.

The Grant Notice and Agreement included the following:

... On each Vesting Date, the Company shall deliver one share of Common Stock with respect to each RSU that vests on such Vesting Date. Unless and until an RSU vests, the Participant will have no right to settlement in respect of any such RSU. Prior to actual settlement in respect of any vested RSU, such RSU will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company.

... Vesting and Forfeiture:

(a) Subject to Sections 3(b) and 3(c) below, the RSUs shall vest in accordance with the Vesting Schedule set forth in the Grant Notice.

(b) Notwithstanding the foregoing, in the event the Participant experiences a Termination of Service for any reason, allRSUs that have not satisfied the Service-Based Requirement on or prior to the date of such termination shall be immediately forfeited by the Participant as of the date of such termination without any payment of consideration therefor.

(c) Further notwithstanding the foregoing, in the event that the Liquidity Event Requirement is not satisfied prior to the Expiration Date set forth in the Grant Notice, then the RSUs shall be forfeited by the Participant as of the Expiration Date without any payment of consideration therefor ( even if some or all of the Service Based Requirement has been satisfied).

The RSU had two requirements to vest: time-based while working for the employer with a one year cliff, and a liquidity event.

You became an Australian citizen on XX XX XXXX.

In XX XXXX, you terminated your employment with company M while living in Australia, with 18 months of RSU's meeting the first condition.

On XX XX XXXX, you moved to country B and became a country B tax resident.

You intend to return to Australia to visit your spouse's family but are unlikely to ever move back.

You intend to apply for country B citizenship.

In XX XXXX, you purchased a home in country B for your family to live in. You have a number of bank accounts in country B.

On XX XX XXXX, company O had a liquidity event in a secondary market where you were able to, and did sell, X% of your RSUs converted to shares.

You received an ESS statement from company M for the income year ended 30 June XXXX showing your discount from a deferral scheme of $XXX.

Your spouse and your youngest dependent are citizens of country B, your oldest dependent is an Australian citizen.

Your spouse and 2 dependents accompanied you to country B.

You moved to country B to be closer to your spouse's family.

You do not have asset in Australia. You have an Australian bank account containing a nominal sum. You have notified the bank of your change in residence. You also have an account with a superannuation fund.

Since leaving Australia, you did not have any property permanently available in Australia for you to live in.

You do not maintain any professional, social or sporting connections in Australia, except for family connections your spouse's relatives.

You have country B driver's license.

You do not currently have employment in country B.

You informed the Australian Electoral Commission and your private health insurance provider that you departed Australia.

You are not a member of the Public Sector Superannuation Scheme.

You are not an eligible employee in respect of the Commonwealth Superannuation Scheme.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 subsection 6-10(4) and 6-10(5)

Income Tax Assessment Act 1997 subsection 82A-25(1)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 subsection 83A-110(1)

Income Tax Assessment Act 1997 subsection 83A-110(2)

Income Tax Assessment Act 1997 subsections 83A-120(3) to (7)

Income Tax Assessment Act 1997 Subsection 995-1(1)

International Tax Agreements Act 1953 section 4 and 5

Reasons for decision

Tax residency

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines an Australian resident for tax purposes as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

The terms 'resident' and 'resident of Australia', as applied to an individual, are defined in subsection 6(1) of the ITAA 1936.

The definition offers four tests to ascertain whether each individual taxpayer is a resident of Australia for income tax purposes. These tests are:

•         the resides test (also referred to as the ordinary concepts test)

•         the domicile test

•         the 183-day test, and

•         the Commonwealth superannuation fund test.

The resides test is the primary test for deciding the residency status of an individual. This test considers whether an individual resides in Australia according to the ordinary meaning of the word 'resides'.

Where an individual does not reside in Australia according to ordinary concepts, they will still be an Australian resident if they meet the conditions of one of the other tests (the domicile test, 183-day test and Commonwealth superannuation fund test).

Our interpretation of the law in respect of residency is set out in Taxation Ruling TR 2023/1 Income tax: residency tests for individuals.

We have considered the statutory tests listed above in relation to your situation as follows:

The resides test

The ordinary meaning of the word 'reside' has been expressed as 'to dwell permanently or for a considerable time, to have one's settled or usual abode, to live, in or at a particular place': See Commissioner of Taxation v Miller (1946) 73 CLR 93 at 99 per Latham CJ, citing Viscount Cave LC in Levene v Inland Revenue Commissioners [1928] AC 217 at 222, citing the Oxford English Dictionary. Likewise, the Macquarie Dictionary defines 'reside' as 'to dwell permanently or for a considerable time; have one's abode for a time'.

The observations contained in the case of Hafza v Director-General of Social Security (1985) 6 FCR 444 are also important:

Physical presence and intention will coincide for most of the time. But few people are always at home. Once a person has established a home in a particular place - even involuntarily: see Commissioners of Inland Revenue v Lysaght [1928] AC 234 at 248; and Keil v Keil [1947] VLR 383 - a person does not necessarily cease to be resident there because he or she is physically absent. The test is whether the person has retained a continuity of association with the place - Levene v Inland Revenue Commissioners [1928] AC 217 at 225 and Judd v Judd (1957) 75 WN (NSW) 147 at 149 - together with an intention to return to that place and an attitude that that place remains "home": see Norman v Norman (No 3) (1969) 16 FLR 231 at 235... here the general concept is applicable, it is obvious that, as residence of a place in which a person is not physically present depends upon an intention to return and to continue to treat that place as "home", a change of intention may be decisive of the question whether residence in a particular place has been maintained.

The Commissioner considers the following factors in relation to whether a taxpayer is a resident under the 'resides' test:

•         period of physical presence in Australia

•         intention or purpose of presence

•         behaviour while in Australia

•         family and business/employment ties

•         maintenance and location of assets

•         social and living arrangements.

It is important to note that no one single factor is decisive, and the weight given to each factor depends on each individual's circumstances.

Because the resides test is about whether an individual resides in Australia, the factors focus on the individual's connection to Australia. Having a connection with another country, or being a resident of another country, does not diminish any connection to Australia. The ordinary meaning of reside does not require an individual to have a principle or usual place of residence in Australia.

Application to your situation

You are not a resident of Australia under the resides test for the period XXXX income yearbased on the following:

•         you moved to country B, becoming a tax resident in country B in XX XXXX

•         you were not in Australia for the XXXX income year

•         your family accompanied you to country B

•         you do not have intention to move back to Australia

•         you do not have any assets in Australia

•         you remain a bank account with minimum amount in Australia but have notified them of your change in residence

•         you purchased a home in country B in XXXX

•         you informed the Australian Electoral Commission and your private health insurance provider that you departed Australia.

You may still be an Australian resident if you meet the conditions of one of the other tests (the domicile test, 183 day test and Commonwealth superannuation fund test).

Domicile test

Under the domicile test, you are a resident of Australia if your domicile is in Australia unless the Commissioner is satisfied that your permanent place of abode is outside Australia.

Domicile

Whether your domicile is in Australia is determined by the Domicile Act 1982 and the common law rules on domicile.

Your domicile is your domicile of origin (usually the domicile of your father at the time of your birth) unless you have a domicile of dependence or have acquired a domicile of choice elsewhere. To acquire a domicile of choice of a particular country you must be lawfully present there and hold the positive intention to make that country your home indefinitely. Your domicile continues until you acquire a different domicile. Whether your domicile has changed depends on an objective consideration of all relevant facts.

Application to your situation

In your case, you were born in country A and your domicile of origin is country A.

On XX XX XXXX you were granted a visa which allowed you to reside in Australia permanently.

You became an Australian citizen on XX XX XXXX.

You moved to country B in XX XXXX.

It is considered that you did abandon your domicile of origin in country A and acquired a domicile of choice in Australia.

This is because you were granted an Australian permanent visa on XX XX XXXX and became and Australian citizen on XX XX XXXX.

You commenced living in country B on XX XX XXXX, intend to live there indefinitely and are unlikely to move back to Australia.

Therefore, your domicile of choice is Australia.

Permanent place of abode

If you have an Australian domicile, you are an Australian resident unless the Commissioner is satisfied that your permanent place of abode is outside Australia. This is a question of fact to be determined in light of all the facts and circumstances of each case.

'Permanent' does not mean everlasting or forever, but it is to be distinguished from temporary or transitory.

The phrase 'permanent place of abode' calls for a consideration of the physical surroundings in which you live, extending to a town or country. It does not extend to more than one country, or a region of the world.

The Full Federal Court in Harding v Commissioner of Taxation [2019] FCA 29 held at paragraphs 36 and 40 that key considerations in determining whether a taxpayer has their permanent place of abode outside Australia are:

•         whether the taxpayer has definitely abandoned, in a permanent way, living in Australia

•         whether the taxpayer is living in a town, city, region or country in a permanent way.

The Commissioner considers the following factors relevant to whether a taxpayer's permanent place of abode is outside Australia:

•         the intended and actual length of the taxpayer's stay in the overseas country

•         whether the taxpayer intended to stay in the overseas country only temporarily and then to move on to another country or to return to Australia at some definite point in time

•         whether the taxpayer has established a home (in the sense of dwelling place; a house or other shelter that is the fixed residence of a person, a family, or a household), outside Australia

•         whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence

•         the duration and continuity of the taxpayer's presence in the overseas country

•         the durability of association that the person has with a particular place in Australia, i.e. maintaining assets in Australia, informing government departments such as the Department of Social Security that he or she is leaving permanently and that family allowance payments should be stopped, place of education of the taxpayer's children, family ties and so on.

As with the factors under the resides test, no one single factor is decisive, and the weight given to each factor depends on the individual circumstances.

Application to your situation

The Commissioner is satisfied that your permanent place of abode is outside Australia because:

•         you lived in Australia until mid-XXXX in a property leased in your spouse's name

•         you then departed Australia to live in country B

•         since leaving you do not have a permanent place to live or stay in Australia

•         you and your spouse purchased a home in country B in XX XXXX, settling the property on XX XX XXXX

•         you live in the property with your spouse and children.

Therefore, you are not a resident of Australia under the domicile test.

183-day test

Where a person is present in Australia for 183 days or more during the year of income the person will be a resident, unless the Commissioner is satisfied that both:

•         the person's usual place of abode is outside Australia, and

•         the person does not intend to take up residence in Australia.

Application to your situation

You have not been present in Australia for 183 days or more during the XXXX income year. Therefore, you are not a resident under this test.

Superannuation test

An individual is a resident of Australia if they are either a member of the superannuation scheme established by deed under the Superannuation Act 1990 or an eligible employee for the purposes of the Superannuation Act 1976, or they are the spouse, or the child under 16 of such a person.

Application to your situation

You are not a member on behalf of whom contributions are being made to the Public Sector Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS) or a spouse of such a person, or a child under 16 of such a person. Therefore, you are not a resident under this test.

Residency conclusion

As you do not satisfy any of the four tests of residency, you are not a resident of Australia for income tax purposes for the income year ended 30 June XXXX.

Employee Share Scheme (ESS)

The ESS provisions are contained in Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997).

Subsection 82A-25(1) of the ITAA 1997 provides that assessable income for the income year in which you acquire the ESS interest includes the discount given in relation to the interest.

ESS interests acquired under a tax-deferred ESS will be assessed for tax purposes in the year in which the deferred taxing point occurs. In accordance with subsection 83A-110(1) of the ITAA 1997, the amount assessed will be the market value of the ESS interests at the deferred taxing point, reduced by the cost base of the ESS interests.

For an ESS interest that is a right to acquire a share that is granted on or after 1 July 2015, the deferred taxing point will be the earliest of the times provided in subsections 83A-120(4) to (7) of the ITAA 1997, summarised as follows:

•         The first possible taxing point is when there is no real risk of forfeiting the right and the scheme no longer genuinely restricts disposal of the right (subsection 83A-120(4) of the ITAA 1997)

•         The second possible taxing point is when the employment ends in respect of which the right was acquired (subsection 83A-120(5) of the ITAA 1997)

•         The third possible taxing point is fifteen years from the grant date (when you acquired the ESS interest) (subsection 83A-120(6) of the ITAA 1997)

•         The fourth possible taxing point is, exercise the right, and the resulting share is not at a real risk of forfeiture or subject to genuine selling restrictions (subsection 83A-120(7) of the ITAA 1997).

Note, the second possible taxing point was repealed with effect from 30 June 2022.

Operation of subsection 83A-120(3) of the ITAA 1997 can change the deferred taxing point if an ESS interest (or the share acquired on exercise of the right) is sold within 30 days of the deferred taxing point.

The deferred taxing point will instead be the date of that disposal. That is, the deferred taxing point is moved to the sale date if this occurs within 30 days of the date identified by the provision. This is called the 30-day rule.

You disposed of your ESS interest on XX XX XXXX, when company O had a liquidity event, after earlier satisfying the XX vesting period. As a result, the deferred taxing point was XX XX XXXX.

Subsection 83A-110(2) of the ITAA 1997 attributes the source to a gain that is assessable under subsection 83A-110(1).

The assessability of the gain to be included in assessable income is determined by tax residence and source rules.

Paragraphs 1.347 to 1.357 of the Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 provides the following with respect to the source of an ESS interest.

1.347 Consistent with the treatment of most other types of income, whether an amount is included in a taxpayer's assessable income under the new employee share scheme rules will depend on the taxpayer's residency status and the source of the income.

1.348 Under the core rules of the Australian income tax system, an Australian resident taxpayer is subject to income tax on their worldwide income. A foreign resident taxpayer is only subject to Australian income tax on their Australian sourced income.

1.349 Under the existing law, this outcome is achieved by excluding discounts from interests acquired under employee share schemes from tax under the employee share scheme tax rules, to the extent that they relate to foreign service of a taxpayer.

1.350 This mechanism operates in a manner inconsistent with core rules. The new rules use the core rules to achieve the desired outcome. The new rules instead include source rules and rely on the core rules to the exclude foreign sourced income of foreign residents from Australian income tax. That is, the employee share scheme rules attribute a source to discounts received on securities acquired under employee share schemes.

1.351 To the extent that a discount on an ESS interest relates to employment outside Australia, the discount is taken to be from a foreign source. In the case of an ESS interest that is subject to a deferred taxing point, it is the amount included in your assessable income that is attributed a source (that is, both the discount and subsequent gains are attributed with a source). The attribution is done in manner consistent with the rule applying to discounts. [Schedule 1, item 1, subsections 83A-25(2) and 83A-110(2)]

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.

1.353 Source is attributed to amounts 'included' in assessable income either upfront or under the deferral method at the ESS deferred taxing point. The inclusion in assessable income is merely notional as all amounts included in assessable income must pass through the core rules before being taken into account in the calculation of taxable income. At this time foreign sourced income of foreign residents will be removed from the calculation of taxable income.

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.

1.355 Australian resident taxpayers are subject to Australian income tax on all discounts they receive under employee share schemes regardless of whether they received it in relation to employment in Australia or outside Australia. However, this may be affected by Australia's double tax treaties and the temporary residents rules.

1.356 Foreign resident taxpayers are only subject to Australian income tax on discounts they receive under employee share schemes to the extent that the discount relates to the employment in Australia. The core rules are contained in sections 6-5 and 6-10 of the ITAA 1997.

1.357 The outcome effectively mirrors the tax treatment of employment income. It has been necessary to modify the treatment of employee share scheme discounts received in respect of employment outside Australia in order to bring the employee share scheme rules into closer alignment with the ordinary treatment of salary and wage income and to prevent taxpayers avoiding the recent changes to section 23AG of the ITAA 1936 (exemption for foreign employment income).

As your ESS relates to your employment performed in Australia, it has an Australian source.

The documents provided state that company O believed that the Restricted Stock Units (RSUs) would be subject to the ESS provisions as a deferral scheme (Subdivision 83A-C of the ITAA 1997).

The documents also state that on the vesting date, company • will deliver one share for each RSU that vests. This means that the RSUs were exercised on the vesting date (you mentioned there was no exercise price).

Furthermore, the shares issued to you were subject to continuing selling restrictions.

The reporting by company M for the year ended 30 June XXXX indicates to us that:

•         the sale of your company O shares is the deferred taxing point for ESS purposes

•         these company O shares were related to your employment in Australia, and

•         company M has calculated the amount that you must declare in your Australian income tax return.

ESS is statutory income with the amount to be included in assessable income determined by either subsection 6-10(4) of the ITAA 1997 for Australian residents and subsection 6-10(5) of the ITAA 1997 for foreign residents.

Therefore, the discount amount of your ESS has an Australian source, and the deferred taxing point is assessable in Australia even though you were a tax resident of country B when they were sold.

ESS conclusion

You are required to lodge an Australian tax return, as a non-resident for tax purposes for the income year ended 30 June XXXX and declare at question 12 of the return the amount of your discount from the deferred scheme at label F on your ESS statement.

Tax Treaties

It is possible to be a resident for tax purposes of more than one country at the same time in respect of an income year or part of an income year. If this is the case, in determining your liability to pay tax in Australia it is necessary to consider any applicable double tax agreements. Sections 4 and 5 of the International Tax Agreements Act 1953 (Agreements Act) incorporate that Act with the ITAA 1936 and the ITAA 1997 and provide that the provisions of a double tax agreement (tax treaty) have the force of law.

Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreementsdiscusses the Commissioner's views about interpreting double tax agreements. Paragraph 104 provides that the OECD Model Tax Convention and Commentary will often need to be considered in interpreting double tax agreements.

At the ESS deferred taxing point on XX XX XXXX you were a non-resident of Australia for tax purposes and told us you were a country B tax resident, as well as a country A tax resident because of your citizenship, but with tax treaty protection.

In relation to ESS and tax treaties, paragraphs 4.5 and 4.6 of the EM explains:

4.5 Employee shares or rights provided at a discount can be seen as a substitute for employment income. The discount may relate to employment over a long period. Hence problems can arise in respect of individuals who acquire such shares or rights and who subsequently change their country of residence, work in more than one country, or work in one country while resident of another. Many of these problems arise as countries tax employee shares or rights in many different ways. To help address these problems, the OECD recently approved revisions to the Commentary to its Model Tax Convention on Income and on Capital clarifying the tax treaty treatment of employee rights.

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.

Accordingly, your ESS interest is considered an employment benefit and a form of remuneration.

Country B Tax Treaty

Article X of country B's tax treaty on employment remuneration states:

Subject to the provisions of Articles X, X and X, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

Therefore, your employment remuneration, which includes your ESS deferred scheme amount that relates to your employment performed in Australia as a tax resident of Australia, is taxable only in Australia.

Country A Tax Treaty

Article X on employment renumeration provides:

Subject to the provisions of Articles X and X, salaries, wages and other similar remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment or ... shall be taxable only in that State unless the employment is exercised or the services performed in the other Contracting State. If the employment is so exercised or the services so performed, such remuneration as is derived from that exercise or performance may be taxed in that other State.

Therefore, your employment remuneration which includes your ESS deferred scheme amount relating to your employment performed in Australia as a tax resident of Australia, is taxable only in Australia unless the country A also elects to tax the amount on the basis that you are a citizen.

In circumstances where you are liable to tax in country A on your ESS deferred scheme amount which has been taxed in Australia, Article X may allow you to claim a credit of income tax paid to Australia in country A with respect to your ESS deferred scheme amount.