Private ruling: PAYG withholding and reporting requirements for shares and bonuses issued to a foreign resident seconded to Australia
Date of advice: 6 October 2015
Published: November 2015
Ruling period: 1 July 2015 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: In order to determine Company A's reporting obligations, are the Company A shares expected to be issued to X in 20XX as part of the Company A 'all employees' share plan, Australian source income? | A1: Yes | Q2: In order to determine Company A's reporting obligations, is the bonus payment expected to be paid to X in 20XX as a result of the Company C Employee Incentive Scheme, subject to PAYG withholding? | A2: No.

Relevant facts and circumstances: Background During the foreign financial years ending 31 December 20XX to 31 December 20XX, X was/is employed by Company C, a business unit of Company A, which is a foreign entity. From January 20XX to January 20XX, X was in Australia on secondment to Company B, an entity of Company A. While in Australia, X's pay was split. Some was paid overseas by Company A, and some was paid to X's Australian bank account by Company B. X entered Australia on a 457 visa. Upon X's permanent departure in January 20XX, X's 457 visa was cancelled, and X's superannuation and bank accounts were closed. During the Australian financial year ending 30 June 20XX, X was in Australia for greater than 183 days. The Share Scheme Company A is the global parent of the Company A business and is listed on a foreign stock exchange. Company A operate an 'all employees' employee share scheme (the Share Scheme), in which eligible employees are invited to participate. Until 20XX, if an employee opted to participate, they would automatically remain in the Share Scheme until they withdrew. From 20XX onwards, an employee needs to opt in annually in order to participate. X was/is a participant in the Share Scheme (at a minimum), for the foreign financial years ending 31 December 20XX to 31 December 20XX. In or around March each year, a decision is made regarding whether there will be an allocation of Company A shares to participants of the Share Scheme. Whether shares are issued is dependent on a number of conditions including Company A's financial performance both locally and globally in the prior foreign financial year. Shares vest on or around March each year. For a participant to remain eligible for an allocation of shares under the Share Scheme (should they be allocated), the employee must be employed by a Company A entity as at 31 March of the year following the relevant financial year to which the share issue relates, and have been employed by a Company A entity in the prior financial year. The amount allocated to each participant is based on whether they were employed by a Company A entity for the full prior financial year, or for more than six months leading up to 31 December. For the foreign financial year ending 31 December 20XX, the decision was made to issue an allocation of shares under the Share Scheme. Should a similar decision be made in relation to the foreign financial year ending 31 December 20XX, X is likely to receive a similar allocation of shares on or around 31 March 20XX. It is expected that X will be overseas at the time of the allocation. Annual Employee Incentive Scheme (EIS) arrangement (bonus) Company C operates an 'all employees' Annual Employee Incentive Scheme (the Bonus Scheme). Whether a bonus is paid under the Bonus Scheme is solely determined by the financial performance of Company C overseas in the preceding financial year, which includes meeting set profit targets. Where a bonus is paid, it is paid in March following the relevant financial year (the March payroll). To be eligible for a bonus (should one be paid), an employee must be employed by Company C (and not by any other Company A entity): • at year end (31 December), and • the date the bonus is to be paid, being March of the following financial year (the March payroll). Employees who transfer from Company C to another Company A entity may be considered eligible for a pro-rata payment in certain circumstances. For example, where a Company C employee transfers (as opposed to being seconded) from Company C to another Company A Entity mid-year, they will receive no bonus at all as they will not be employed by Company C as at 31 December. However, if an employee transfers to/commences employment with Company C mid-year, and is employed by Company C as at year end and at the date the bonus is paid; they will receive half the bonus. X was on secondment to Company B while in Australia. X did not transfer to another Company A entity and X continued to be considered an employee of Company C for the duration of their time in Australia. X received bonuses from Company C due to X's employment with them in the years ending 31 December 20XX and 31 December 20XX. For the avoidance of doubt, the bonuses paid to X during their time in Australia were not based on Company B 's financial (or other) performance, nor will Company B make any reimbursement/contribution toward any Company C bonus paid to X during this time. It is expected that X will receive a bonus in March 20XX in respect of their employment with Company C during the foreign financial year ending 31 December 20XX. Again this bonus will be based on Company C's financial performance results for this period, and the bonus will not be apportioned for any of the time X spent in Australia.

Relevant legislative provisions: Paragraph 83A-10(1)(a) of the Income Tax Assessment Act 1997 Subsection 83A-10(2) of the Income Tax Assessment Act 1997 | Subsection 83A-25(1) of the Income Tax Assessment Act 1997 | Subsection 83A-25(2) of the Income Tax Assessment Act 1997 | Section 83A-35 of the Income Tax Assessment Act 1997 | Subsection 3(AAA) of the International Tax Agreements Act 1953 | Subsection 4(1) of the International Tax Agreements Act 1953 | Subsection 4(2) of the International Tax Agreements Act 1953 | Section 5 of the International Tax Agreements Act 1953 | Subsection 5(1) of the International Tax Agreements Act 1953 | Article 14 of the United Kingdom Convention | Article 15 of the United Kingdom Convention | Subsection 392-5(1) of the Tax Administration Act 1953

Reasons for decision: Summary: All legislative references in this Ruling are to the ITAA 1997 unless otherwise stated. When determining a person's liability to pay tax in Australia, it is necessary to consider the domestic income tax laws as well as any applicable double tax agreements. Domestic law Generally, a discount received on shares, rights or stapled securities acquired under an employee share scheme is included in an employee's assessable income when the employee acquires the beneficial interest in those shares, rights or securities. Relevantly, paragraph 83A-10(1)(a) provides that an 'ESS interest' in a company is a beneficial interest in a share in the company, while subsection 83A-10(2) defines an 'employee share scheme' as a scheme under which ESS interests in a company are provided to employees of the company in relation to their employment. In relation to the taxation of ESS interests, subsection 83A-25(1) provides that the discount given in relation to the interest is included in the assessable income of an employee who acquires an ESS interest in an income year. However, to the extent that the ESS interest relates to their employment outside Australia, the ESS interest should be treated as being from a source other than an Australian source (subsection 83A-25(2)). Some ESS interest recipients are entitled to reduce the amount included in their assessable income if they meet certain conditions which seek to limit the concession. For example, the discount amount may be reduced by $1000 in certain circumstances, where, amongst other things, the employee's taxable income does not exceed certain thresholds (see section 83A-35 for more information). Applicable double tax agreements Subsection 4(1) of the International Tax Agreements Act 1953 (the Agreements Act), incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. However, subsection 4(2) overrides both other Acts where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act provides that Agreements listed within that section have the force of law according to its tenor. On the facts, the relevant Agreement to consider is an Agreement which is listed in subsection 5(1). Subsection 3(AAA) defines the Agreement as including 'the exchange of notes relating to that convention.' An Article of the Agreement deals with income from employment and provides that: 1) Subject to the provisions of Articles 17 and 18 of this Convention, 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 from that exercise may be taxed in that other State. 2) Notwithstanding the provisions of paragraph 1 of this Article, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: (a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year or year of income of that other State; and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and (c) the remuneration is not deductible in determining taxable profits of a permanent establishment which the employer has in the other State. (emphasis added). Note 8 of the Exchange of Notes signed between the relevant foreign and Australian Government as part of the signing of the Convention specifically addresses the term 'other similar remuneration' as follows: 8. With reference to Article 14 (Income from employment), the Contracting States agree that: (a) income or gains derived by employees in relation to share option schemes shall be treated as "other similar remuneration" for the purposes of Article 14; (b) unless the facts otherwise indicate, the period of employment to which the option relates shall be taken to be the period between the grant of the option and the date on which all the conditions for its exercise have been satisfied (the vesting of the option); and (c) where a resident of a Contracting State derives such income or gains, and (i) the period of employment to which the share option relates is the period between grant and vesting of the option; (ii) the employee remains in that employment at the date of alienation or exercise of the option; and (iii) that employment has been exercised by the employee in the other Contracting State during all or part of the period between grant and vesting of the option; the proportion of the income or gain which shall be attributable to employment exercised in the other Contracting State shall be determined in accordance with the ratio of the number of days of employment exercised in that State between grant and vesting of the option to the total number of days of employment exercised between grant and vesting of the option.(emphasis added) When interpreting tax treaties, the Commissioner has expressed the view that the OECD Model Tax Convention and the associated commentary (the OECD Commentary) may be considered (see paragraph 104 of Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements (As at 19 December 2001) . The relevant OECD Commentary provides the following; 2.1 Member countries have generally understood the term "salaries, wages and other similar remuneration" to include benefits in kind received in respect of an employment (e.g. stock-options, the use of a residence or automobile, health or life insurance coverage and club memberships). Paragraph 2.3 includes an acknowledgment that where an employee exercises their employment in different states it can be difficult to determine which part of salaries, wages and other similar remuneration is derived from the exercise of employment in a given state. Paragraph 12 confirms that 'while many of these problems arise with respect to other forms of employee remuneration, particularly those that are based on the value of shares of the employer… they are particularly acute in the case of stock-options' (emphasis added). The OECD Commentary accordingly dedicates a lengthy discussion to this issue with respect to the granting of stock options (see paragraphs 12.6 to 12.13). The Explanatory Memorandum to the New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005, (EM to the New International Tax Arrangements Bill) also provides some guidance on Cross-border employee shares or rights, and the interpretation of the OECD Commentary. The amendments introduced by the Bill were in response to the Board of Taxation's report to the Treasurer on international taxation and are designed to reduce the potential for double or nil taxation of income from 'employee shares or rights' in the international context. The amendments were in relation to former Division 13A of the ITAA 1936, however its subsequent repeal does not change the context in which the amendments were made and their relevance to Division 83A of the ITAA 1997, nor the relevance of its interpretation of the OECD Commentary as follows: 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…. 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 fact 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 right. 4.7 These amendments do not seek to incorporate the OECD approach into Australian domestic law. Rather, the amendments align the domestic law more closely with the OECD approach by emphasising the employment income nature of employee shares or rights , clarifying resident and source country taxing arrangements, and improving the interaction of the employee share scheme and CGT provisions. (emphasis added). Application of the law to the facts The allocation of shares under the Share Scheme for the foreign financial year ending 31 December 20XX will be dependent on Company A's financial performance during that year. To be eligible for an allocation of shares (should there be one), an employee must be a participant in the Share Scheme, have been employed by a Company A entity during that financial year, and still be employed by a Company A entity as at 31 March 20XX. X was a participant in the Share Scheme during the 20XX foreign financial year, and was employed by a Company A entity for the entire year. For X days of that year, X was in Australia on secondment to Company B. It is anticipated that X will still be employed by a Company A entity (i.e. Company C) as at 31 March 20XX. Accordingly, if Company A allocates shares to participants of the Share Scheme for that financial year, X will receive an allocation of shares. The Company A shares issued under the Share Scheme are beneficial interests in a company and are therefore ESS interests in that company according to paragraph 83A-10(1)(a). The Share Scheme itself is an 'employee share scheme' according to subsection 83A-10(2) as it is a scheme under which ESS interests in a company are provided to employees of the company in relation to their employment. Where ESS recipients receive a discount on shares acquired under an employee share scheme, the discount is included in their assessable income when they acquire that beneficial interest (subsection 83A-25(1)). However, to the extent that the ESS interest relates to their employment outside Australia, the ESS interest should be treated as being from a source other than an Australian source (subsection 83A-25(2)). If X receives Company A shares under the Share Scheme at a discount in March 20XX, X will need to include the discount in his/her assessable income to the extent it is Australian source income and relates to his/her employment inside Australia (see section 83A-25). Any discount included may also be reduced by up to $1,000 subject to the tests in section 83A-35. Salaries, wages or other similar remuneration The employment Article of the Convention is relevant in considering whether the value of the shares (or any part thereof) that X may receive is Australian source income. To that end, it is necessary to determine whether the shares are considered 'salaries, wages or other similar remuneration'. The Commissioner considers that on the general meaning of the words found in the employment Article, the shares that X may receive in March 20XX as part of an employee share scheme will be 'other similar remuneration' received in respect of his/her employment. Although the Commissioner does not consider it necessary to refer to extrinsic material where the legislative meaning is clear on its face, for the avoidance of doubt the Commissioner further relies on the OECD Commentary, which relevantly provides; 2.1 Member countries have generally understood the term "salaries, wages and other similar remuneration" to include benefits in kind received in respect of an employment (e.g. stock-options, the use of a residence or automobile, health or life insurance coverage and club memberships). The Commissioner considers that the above Commentary contemplates a broad range of in kind benefits (including shares) received in respect of an employment, not all of which are similar to salary and wages in terms of their periodicity, or the reliance an employee may place on them. The Commissioner additionally relies on the EM to the New International Tax Arrangements Bill. Chapter 4 deals with Cross-border employee shares or rights, and the Commissioner considers that paragraphs 4.5 to 4.7 are very clear in including shares and rights as employment income in a cross-border context. For completeness, the Commissioner considers that the discussion of stock options which begins in paragraph 12 of the Commentary, has not been included to justify the inclusion of 'stock options' as 'other similar remuneration', and he does not interpret the inclusion of the term 'stock options' in this paragraph to mean that shares are excluded; rather, the Commissioner considers that those paragraphs have been included to explain and highlight the difficulty (see paragraph below) of determining the relevant taxing rights and amounts in respect of stock options relative to shares. The effect is that their proper inclusion as 'other similar remuneration' is assumed and does not need to be discussed - as the Commissioner believes it is for shares. Period of employment and apportionment Regarding the period of employment to which a share or option benefit relates, the Commissioner notes that given that the vesting period for options can require employment over several years, it is considered that both parties would not have wanted the taxing right over the value of the option on exercise to be solely determined by the point in time that the benefit is provided to the employee. Rather, the parties would have preferred the taxing right to be allocated under the employment Article which makes it referrable and apportionable to the period of employment over which the benefit is earned. (This would be particularly so in the case of the Share Scheme where an employee must opt into the plan annually to continue being a participant). The parties affirmed this in Note 8 in the Exchange of Notes on signing the Convention. FBT and the specific reference to ESS interest In regards to the drafter's decision to include specific reference to ESS interests in the FBT Article but not in the employment Article, the Commissioner considers that there is an important reason for their mention in the FBT Article (which provides "…fringe benefit…does not include a benefit arising from the acquisition of an option over shares under an employee share scheme;.."(emphasis added)). It is the recognition that conceptually there can be two different benefits obtained by an employee when they receive an option (as opposed to a share). When first provided in relation to their employment (that is, on the immediacy of their grant), it is well understood to be an element of their remuneration. However, the second potential benefit is the value that may, with the passing of time, be derived from holding and exercising that option. This second (potential) benefit is the value that may be derived from holding and exercising that option and is less clearly related to employment . If the tax regime does not explicitly include this second aspect for taxation as remuneration via Div 13A of the ITAA 1936 and 83A for example, it can fall out of the scope of taxation (see Federal Commissioner of Taxation v. McArdle 89 ATC 4051; (1988) 19 ATR 1901). At the time of negotiating and signing the Convention, Australia taxed ESS interests under Division 13A of the 1936 Act, which did provide for the taxing of options at a time after grant and in a way that can include the value of that second benefit. The 'options' text in the FBT Article and Note 8 is therefore seen to have been included to put beyond doubt the right to tax this secondary value via Division 13A (and now) Division 83A, as remuneration under the employment Article. Given this context the Commissioner does not consider that the inclusion of specific relevant language in the FBT Article can be used to imply meaning in the exclusion of the same language in the employment Article. In conclusion, the Commissioner considers that on the general meaning of the words found in the employment Article, the shares that may be received by X in March 20XX as part of an employee share scheme will be 'other similar remuneration' received in respect of an employment. The Commentary supports this conclusion by specifying that the term includes an in kind benefit received by an employee directly in respect of an employment. The EM to the New International Tax Arrangements Bill further supports this conclusion by stating that employee shares provided at a discount can be seen as a substitute for employment income. Are any of X's ESS interests taxable in Australia? If X does receive Company A shares in March 20XX, then he/she will have derived wages in respect of an employment exercised partly in Australia. According to paragraph 1 of the employment Article, so much of the remuneration as is derived from that exercise may be taxed in Australia. Paragraph 2 of the employment Article provides an exception to this if certain conditions are met. The first is that the relevant recipient is not present in Australia for more than 183 days in any 12 month period of Australia's fiscal year. In the Australian financial year ending 30 June 20XX, X was in Australia for over 183 days and therefore fails this condition. As X must meet all conditions in paragraph 2 of the employment Article for the exception to apply, it is not necessary to address the other two requirements. As X was in Australia for a period exceeding 183 days in the relevant period, he/she does not meet the exception in paragraph 2 of the employment Article. Accordingly, any shares X receives in respect of his/her employment exercised in Australia is taxable in Australia and not overseas. Other matters Generally, a 'provider' of an ESS interest is required to comply with the ESS reporting requirements (see subsection 392-5(1) of the TAA 1953). However the 'provider' may use an agent to fulfil those reporting obligations on their behalf in certain circumstances. For example, where the provider is a foreign holding company, the Australian subsidiary can assist by reporting on their behalf (see example 1.43 in the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009) ('the EM'). For internationally mobile employees, employers have a choice as to how ESS income is to be reported. Where only a portion of an employee's ESS income is subject to Australian income tax, the employer may choose to report either: • the actual assessable amount of the discount (after taking into account the foreign service), or • the gross discount. Section 83A-35 should be taken into account (e.g. the $1,000 exemption) when determining a specific employee's assessable amount for reporting purposes. Paragraph 1.352 of the EM provides that the apportionment between foreign sourced and Australian sourced income is to be done in a manner consistent with OECD practice. OECD practice is discussed in paragraph 4.6 of the EM to the New International Tax Arrangements Bill: 4.6 The OECD commentary on the articles…. is relevant in interpreting Australia's tax treaties…The number of days worked in a treaty country during this employment period then determines the extent of that country's source taxing right. It further provides: 4.42 The revised OECD commentary does, however, set out a number of principles that offer guidance as to what outcome the facts and circumstances would typically point to. Those principles suggest that a generally reasonable approach would look at the time worked in the relevant foreign or qualifying service as a proportion of the total period of employment to which the right relates. Accordingly, a time basis is an acceptable method of allocation. However, it should be noted that where a requirement of earning an ESS interest is continued employment for a specific time period, that full time period becomes relevant to determining the apportionment amount. For example, where an employee must be employed for a full calendar year, but must remain in the same employment for an additional 3 months (i.e. January through March inclusive) in order to become eligible for ESS interests, the relevant starting point for any apportionment calculation would be 455 days (the total the employee must remain employed in order to receive the ESS interest). This is demonstrated by example 1.51 in the EM. For income tax purposes, paragraph 4 of Taxation Ruling IT 2354 Taxation Treatment of Directors fees, bonuses, etc. provides that a bonus paid to an employee is derived at the time it is paid or otherwise made available to the employee. So far as the point in time when income such as directors fees, bonuses, etc., are considered to have been derived for income tax purposes, the law is settled that salary or wages and other similar types of income are derived for income tax purposes at the time the income is paid or otherwise made available to the employee. This is so notwithstanding that the services giving rise to the income may have been rendered or performed in a previous year of income. Accordingly, the practice of including these items in the assessable income of the director for the year preceding that in which the income is actually paid or otherwise made available is not acceptable for income tax purposes. Taxation Ruling TR IT 2354A explains an employer's PAYG obligations in relation to amounts covered in the ruling, including bonuses, from 1 July 2000: The obligation to withhold from these amounts arises at the time the amounts are paid or otherwise made available to the director or employee. When determining a person's liability to pay tax in Australia, it is necessary to consider the domestic income tax laws as well as any applicable double tax agreements. In relation to any potentially relevant double tax agreements, the employment Article of the Convention is set out in full in the answer to question 1. Application of the law to the facts Whether Company C will pay a bonus under the Bonus Scheme for the foreign financial year ending 31 December 20XX is solely dependent on Company C's financial performance during that income year. To be eligible to receive a payment (should there be one), an employee must be employed by Company C at 31 December 20XX and on the date the bonus is paid (in March 20XX). X was employed by Company C during the 20XX foreign financial year. For 13 days of that year, X was in Australia on secondment to Company B, however this did not change his/her employment status with Company C. It is anticipated that he/she will still be employed by Company C in March 20XX. Accordingly, if Company C pays bonuses to its employees for the year ending 31 December 20XX, X will receive one. According to the tax law principles outlined in TR IT 2354, should X be paid the relevant bonus in March 20XX, he/she will derive it during the Australian financial year ending 30 June 20XX. During that financial year, X: • will not be an Australian resident for tax purposes; • will not have entered Australia; • will not have done any work for any Australian company, and • will be paid the bonus by a resident company into a bank account. Prima facie, no Australian tax liability appears to arise in relation to the bonus. For completeness however, the Commissioner has considered whether the employment Article of the Convention may be applicable. Paragraph 1 provides that: Subject to the provisions of Articles 17 and 18 of this Convention, 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 from that exercise may be taxed in that other State. For the reasons set out in the answer to question 1, paragraph 2 of the employment Article would not apply to the bonus paid under the Bonus Scheme in X's circumstances. It is not in dispute that a bonus paid under the Bonus Scheme is considered 'salaries, wages or other similar remuneration'. The relevant issue becomes whether the relevant employment to which the bonus relates was exercised in Australia. The Commissioner considers that the requirement for an employee to still be employed by Company C as at the date payment is made (in March of the following financial year), indicates that the bonus is actually derived in respect of employment undertaken in 20XX (unlike in the case of the Share Scheme, where the payment is much more clearly referable to a past, specific period of employment and under which an employee must choose to participate at the beginning of the relevant period). That is, had X worked the entire year ending 31 December 20XX for Company C but left its employment in January 20XX, he/she would not have received the bonus in March 20XX. Additionally and importantly, the Bonus Scheme (for which employees are not required to 'opt in', unlike the Share Scheme) is paid on the basis of the performance of one entity only to the exclusion of all others. Significantly in this case, that exclusion includes Company B, its employees and its specific performance (and hence the performance of X during the 13 days he/she was still on secondment in January 20XX). Accordingly, the bonus is not in any real sense referable to the exercise of an employment in Australia during the 20XX year, and the employment Article of the Convention does not apply to the bonus. As no Australian tax liability will arise in relation to the bonus, no PAYG is required to be withheld in relation to the bonus expected to be paid to X in March 20XX.