Private ruling: Assessable income
Date of advice: 3 April 2018
Published: June 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you assessable on $X from your employee share scheme (ESS)? | A1: Yes.

Relevant facts and circumstances: Your employer made a payment to you via their ESS. The statement you received from the ESS shows a payment to you of X in a foreign currency. The ESS calculated the value of this in Australian dollars as $X based on the rate of exchange on statement date. You declare the amount on the ESS statement on your income tax return for the income year ended 30 June 20XX. You received the payment of X in foreign currency into Australia bank account. The bank converted this figure to Australian dollars on the same day. The exchange rate on this day meant you actually received $X in your bank account, a lower amount than the one on your ESS statement. The net amount you received in your bank account was $X. You declared $X on your income tax return for the income year ended 30 June 20XX. Due to transaction costs and an incorrect exchange rate you consider that the correct amount you should have been assessed on is $Y.


Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income from ordinary concepts derived from all sources whether in or out of Australia. The payment you received from your ESS for the income year ended 30 June 20XX is ordinary income and so is assessable under section 6-5 of the ITAA 1997. You are assessable on the actual amount you received into your Australian bank account after conversion to Australian dollars. You are assessable on the payment you received from your ESS. As your ESS is based in a foreign country, we need to consider the foreign exchange (forex) implications of transferring the amount you received from a foreign currency into Australian dollars. | Detailed Reasoning - Forex gains and losses for accounts opened after 1 July 2003: Division 775 of the ITAA 1997 relates to forex gains and losses and foreign denominated bank accounts. If you opened a foreign bank account after 1 July 2003, forex gains and losses made in respect of a foreign currency denominated bank account come under the provisions of Division 775 of the ITAA 1997. Forex realisation event 2 occurs when a taxpayer ceases to have a right, or part of a right, to receive foreign currency. A right to receive foreign currency includes a right to receive an amount of Australian currency that is calculated by reference to an exchange rate. The term right includes a right that is contingent upon something happening (section 775-45 of the Income Tax Assessment Act 1997 (ITAA 1997)). The right, or part of a right, must cease, and be one of the following 4 items: ● A right to receive income, or a right that represents ordinary income or statutory income (other than under the capital gains tax (CGT) provisions); ● A right created in return for ceasing to hold a depreciating asset; ● A right created or acquired for paying or agreeing to pay Australian or foreign currency; or ● A right created in return for a realisation event happening in relation to a CGT asset (section 775-45 of the ITAA 1997). The event happens when a taxpayer ceases to have the right commonly when a right to receive foreign currency is satisfied by the actual receipt of that currency. Every time money is deposited or withdrawn from an account, a forex gain or loss may occur. A taxpayer makes a forex realisation gain if the value of the foreign currency received when the event happens exceeds the forex cost base of the right, measured at the tax recognition time, to the extent that the gain is due to a currency exchange rate effect (subsection 775-45(3) of the ITAA 1997). A taxpayer will make a forex realisation loss to the extent that the value of the foreign currency they receive when the event happens is less than the forex cost base of the right, measured at the tax recognition time, because of a currency exchange rate effect (subsection 775-45(4) of the ITAA 1997). The forex cost base of a right is defined in section 775-85 of the ITAA 1997 as the money a taxpayer pays or is required to pay in respect of acquiring the right or part of a right. Therefore the forex cost base of a right to foreign currency which ceased is the total of the Australian dollar value of each amount deposited (that had not already been withdrawn), worked out by translating each relevant deposit at the exchange rate on the day it was made: item 11 of table in subsection 960-50(6) of the ITAA 1997. Alternatively, a taxpayer may choose to calculate the forex cost base of a right to receive foreign currency by translating the relevant amounts deposited using any of the applicable rules set out in Schedule 2 to the Income Tax Assessment Regulations 1997 (which include the choice to use a reasonable average exchange rate). Subsection 775-30(1) of the ITAA 1997 provides that you can deduct a forex realisation loss you make as a result of a forex realisation event that happens during the year. Subsection 775-30(2) of the ITAA 1997 provides for exemptions to deduction if: (a) it is a loss of private and domestic nature, (b) it is not covered by an item in the table. | Detailed Reasoning - Application to your circumstances: You received a deferred ESS amount from the sale of shares reported. The amount you received from the sale of your ESS shares was X foreign currency amount. For calculation purposes, the amount of X foreign currency amount was converted to Australia dollars at the conversion rate of $X = X foreign currency amount. From the X foreign currency amount a Commission and a levy were deducted, leaving you with sale proceeds of X foreign currency amount. Then the amount of X foreign currency amount was transferred to your Australian bank account denominated in a foreign currency. This gave rise to a deduction for a commission and a balance of X foreign currency amount. The X foreign currency amount was converted to Australia dollars at the conversion rate of $X = X foreign currency amount. This difference was because of fees and there was also a forex loss from Forex Event 2. You are assessable on the $Y as you are entitled to a forex loss and deduction for the fees. | Detailed Reasoning - Other information (this does not form part of the ruling): You can request an amended assessment to adjust the income you received form the ESS. The general rule is that the Commissioner may amend an assessment of an individual for a year of income within two years after the day on which the Commissioner gives notice of the assessment to the individual (two year period to amend).

Relevant legislative provision: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Division 775