Private ruling: Employee Share Scheme (ESS) - Assessable discount - Non-resident
Published: August 2012
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011
Date scheme commenced: At some time prior to 1 July 2009

Ruling: Q1: Can you exclude a portion of the discount on share parcels A to D from your assessable income? | A1: Yes. | Q2: Can you exclude a portion of the discount on parcel E shares from your assessable income? | A2: No. | Q3: Can you exclude a portion of the discount on parcel F shares from your assessable income? | A3: No.

Relevant facts and circumstances: While working for Company A in Country A and Australia you were granted deferred stock (your shares) under an Employee Share Scheme (ESS) agreement. Share parcels A to E were granted prior to 1 July 2009, parcel F shares were granted after 1 July 2009. The shares vested over several years according to your ESS agreement. Vesting dates were provided. You were a non-resident when you were granted share parcels A to D. You became an Australian resident at some time after parcel D shares were granted but before parcel E shares were granted and continued to work for Company A. You did not pay any consideration for any of your shares. Share parcels A to E are qualifying shares according to section 139CD of the Income Tax Assessment Act 1936 (ITAA 1936). Parcel F shares are ESS interests according to section 83A-10 of the Income Tax Assessment Act 1997 (ITAA 1997). You will make an election under subsection 139E(3) of the ITAA 1936 for the 2008-09 income year. No other elections will be made. You have not lodged income tax return for the 2008-09 income year. Your ESS agreement provides the following: · the ESS interests are received by employees as part of their discretionary incentive and retention award package. The plan is intended to promote future performance and to encourage you to remain with the Company. · your unvested shares will be cancelled if you voluntarily leave Company A or fail to meet other conditions to vesting by a scheduled vesting date. · prior to vesting, your shares may not be sold, transferred or assigned as collateral. Your shares are subject to cancellation if vesting conditions are not satisfied and are at real risk of forfeiture until the vesting date.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 139B | Income Tax Assessment Act 1936 Subsection 139B(1A) | Income Tax Assessment Act 1936 Subsection 139C(1) | Income Tax Assessment Act 1936 Subsection 139CA(2) | Income Tax Assessment Act 1936 Subsection 139E(3) | Income Tax Assessment Act 1997 Section 83A-10 | Income Tax Assessment Act 1997 Section 83A-25 | Income Tax Assessment Act 1997 Section 83A-105 | Income Tax Assessment Act 1997 Section 83A-110 | Income Tax Assessment Act 1997 Section 83A-115 | Income Tax (Transitional Provisions) Act 1997 Section 83A-5

Reasons for decision: Summary: You acquire shares under an employee share scheme (ESS) if the shares are acquired, whether directly or indirectly, in relation to your employment or in relation to any services you provide. If you pay any money, or provide any other consideration, to acquire the shares, the consideration must be less than the market value of the rights at the time you acquire them. Generally, your shares will be acquired from an ESS when your employment contract is entered into or when you accept an offer received under an employee share plan. However, if you are a non-resident at the time of acquisition your shares will be acquired when you become an Australian resident. Individuals will need to examine their circumstances and specific employee share plan to determine whether the period after becoming an Australian resident is relevant to the acquisition of the employee shares. The period of employment after becoming an Australian resident will generally not be relevant if no forfeiture conditions remain at the time an individual becomes an Australian resident. Where you are granted ESS shares at a discount before or after coming to Australia and where part of the qualifying employment is performed outside Australia, only part of the discount is taxed in Australia. That is, the discount assessable in Australia would be attributed based on the number of days you were an Australian resident between date of grant and vesting date. Your shares may be assessed: · in the year you become an Australian resident; · for shares acquired before 1 July 2009 - at a cessation time for qualifying shares - where a section 139E election was not made (when you first became an employee in Australia); or · for shares acquired after 30 June 2009 - at a deferred taxing point. If your shares are assessed in the year you became an Australian resident, the discount will be calculated by reference to the market value at the time you became an Australian resident. | Detailed Reasoning - Shares acquired prior to 1 July 2009: Prior to a law change in 1 July 2009 under the former ESS provisions you could make an election to be taxed up-front on shares acquired prior to 1 July 2009. You may make this election under subsection 139E(3) of the ITAA 1936 to include the discount in the year when you first become both an employee of the Company and Australian resident (the employment year). An election under subsection 139E(3) of the ITAA 1936 must be made in your return of income for the employment year. However, if you do not make an election, the discount will not be included in your assessable income until the income year in which an event, known as a 'cessation time', occurs. For shares that have no restrictions preventing their disposal and no conditions that may result in you forfeiting the share, the cessation time is when you acquire the shares. For shares that do have such restrictions or conditions, the cessation time is the earliest of the following: · when you dispose of the shares · the later of when the disposal restrictions cease to have effect and the forfeiture conditions cease to have effect in relation to the shares (vesting date) · when your employment in respect of which the shares were acquired ceases · ten years from the date you acquired the shares. Paragraph 83A-5(2)(a) of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) provides that Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies where: · shares were granted under an employee share scheme before 1 July 2009 · the shares were to be assessable in the year that the cessation time occurs; and · the cessation time did not occur before 1 July 2009. Subsection 83A-110(1) of the ITAA 1997 provides that your assessable income for the year that the deferred taxing point occurs includes the market value (calculated at the deferred taxing point) of shares that were granted under an employee share scheme reduced by their cost base. Paragraph 83A-5(4)(b) of the ITTPA 1997 ensures that the ESS deferred taxing point is determined using the cessation time from Division 13A of Part III of the ITAA 1936 (see the reference to cessation time above). | Detailed Reasoning - Shares acquired after 1 July 2009: Since the law change in 1 July 2009, where you acquire ESS interests that are at a real risk of forfeiture and the scheme meets certain other conditions, the tax on the discount will be deferred until the deferred taxing point occurs. 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. The deferred taxing point for a share is the earliest of the following times: · seven years after you acquired the share · when you cease the employment in respect of which you acquired the share · when there is no real risk of forfeiture and the scheme no longer genuinely restricts the disposal of the share. | Detailed Reasoning - Share parcels A to D: As you were a non-resident at time of grant, share parcels A to D will be acquired when you became an Australian resident. A condition of your employee share plan was that your unvested shares will be cancelled if you voluntarily leave Company A or fail to meet other vesting conditions by a scheduled vesting date. This indicates that your shares were granted subject to forfeiture conditions. As forfeiture conditions exist, the period after becoming an Australian resident becomes relevant to determining when you earned your shares. The following terms and conditions of your ESS agreement indicate that your shares relate to future work rather than work you completed in the past: · the name of the plan indicates the nature of the agreement is a long-term incentive plan to retain employees. · the purpose of your ESS agreement -the ESS interests are received by employees as part of their discretionary incentive and retention award package. The overview section of your agreement states that the plan is intended to promote future performance and to encourage you to remain with the Company. · vesting conditions - the existence of vesting conditions indicates your shares relate to the performance of future work and if these conditions are not satisfied the right to acquire shares will be lost. · forfeiture conditions - a plan solely related to past work would be unlikely to have forfeiture conditions relating to continuous employment. The above factors and specifically the requirement of continuous employment determine that the time after your shares were granted is relevant. Although you were a non-resident for a period prior to date of grant, you became an Australian resident during the vesting period. Therefore, as you were a resident for part of the vesting period the discount assessable in Australia would be attributed based on the number of days you were an Australian resident between date of grant and vesting date. As you have not lodged your 2008-09 income tax return and have elected to include the discount on your shares when you became an Australian resident you will need to include the assessable portion of the discounts on parcels A to D in your 2008-09 income tax return. Note: To make the election under subsection 139E(3) of the ITAA 1936 in your 2008-09 tax return you must include the assessable discount amount for all qualifying shares you acquired before the employment year at question 24 'Other Income'. However, you do not need to indicate 'yes' that you want to make an election, as this tick box relates to an election made under section 139E(1). | Detailed Reasoning - Parcel E shares: As you did not make an election to be taxed up-front, parcel E shares will be assessed at the deferred taxing point. The deferred taxing point will be the vesting dates for your shares: As you were an Australian resident for the entire vesting period the full assessable discount on your parcel E shares is to be included in your 2009-10 and 2010-11 income tax returns. | Detailed Reasoning - Parcel F shares: Your parcel F shares meet the real risk of forfeiture and other conditions to be granted under a deferred scheme. The tax on the discount will be deferred until the deferred taxing point occurs. 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. The deferred taxing point for your parcel F shares is the vesting date. As you were an Australian resident for the entire vesting period the full assessable discount on your parcel F shares is to be included in your 2010-11 income tax return.

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