Private ruling: Assessability of an employee share scheme discount
Date of advice: 23 August 2017
Published: December 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Questions and answers | 1. Does your assessable income include the proportion of the discount on your employee share scheme interest that relates to your employment services provided outside Australia? | No. | 2. Does your assessable income include the proportion of the discount on your employee share scheme interest that relates to your employment services provided in Australia? | Yes. | 3. Is the first element of the cost base of your employee share scheme interest nil? | Yes.

Relevant facts and circumstances: In 20XX, you were granted options to acquire shares in a foreign company as part of your employment remuneration. The options to acquire the shares were granted under a deferred taxing point employee share scheme (ESS). You were not a resident of Australia at the time the options were granted. The options were issued at full market value and you did not pay anything to acquire the options. Your rights under the ESS were ‘qualifying rights’ for the purposes of section 139CD of the ITAA 1936. You did not make an election under section 139E of the ITAA 1936 in the year the options were granted. You arrived in Australia on a temporary visa in 20XY and commenced work with an Australian subsidiary of the foreign company. You were a temporary resident of Australia until you were subsequently granted permanent residency. The options vested several years later and on vesting you acquired the shares and disposed of them within 30 days. You received an ESS statement from your Australian employer which listed an amount under ‘Discount on ESS interests acquired pre 1 July 2009 and cessation time occurred during the financial year’. The amount of the discount on the options in the ESS statement was calculated based on the market value of the options on the date they were originally granted.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 13A | Income Tax Assessment Act 1936 subsection 139B(3) | Income Tax Assessment Act 1936 subsection 139CB | Income Tax Assessment Act 1936 section 139E | Income Tax (Transitional Provisions) Act 1997 | Income Tax (Transitional Provisions) Act 1997 Paragraph 83A-5(2)(a) | Income Tax (Transitional Provisions) Act 1997 Subsection 83A-5(4) | 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 section 83A-120 | Income Tax Assessment Act 1997 subsection 83A-120(4) | Income Tax Assessment Act 1997 subsection 83A-120(7) | Income Tax Assessment Act 1997 section 112-20 | Income Tax Assessment Act 1997 subsection 130-80(4) | Income Tax Assessment Act 1997 section 768-955 | Income Tax Assessment Act 1997 subsection 768-955(4)

Reasons for decision: Summary: An ESS interest is a beneficial interest in a share in a company or a right to acquire a beneficial interest in a share in a company. Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) relates to the taxation of discounts received and gains made on interests acquired under employee share schemes on or after 14 December 2009. Division 13A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) provided for the taxation treatment of shares and rights acquired under employee share schemes up until 14 December 2009. Transitional provisions apply to some ESS interests and are contained in Division 83A of the Income Tax (Transitional Provisions) Act 1997 IT(TP)A 1997. Paragraph 83A-5(2)(a) of the IT(TP)A 1997 states that subdivision 83A-C of the ITAA 1997 will apply to an ESS interest where: I. former subsection 139B(3) of the ITAA 1936 applied in relation to the interest before Division 83A was introduced; II. the interest was acquired before 1 July 2009; and III. the cessation time mentioned in former subsection 139B(3) of the ITAA 1936 did not occur before 1 July 2009. Former subsection 139B(3) of the ITAA 1936 provides that where a section 139E election has not been made, the discount on a qualifying right is included in assessable income in the financial year in which the cessation time occurred. Former subsection 139CB of the ITAA 1936 states that the cessation time can be the time when the right is exercised. Subdivision 83A-C of the ITAA 1997 includes sections 83A-110 and 83A-120 of the ITAA 1997 which contain the rules relating to the ‘ESS deferred taxing point’. Subsection 83A-110(1) of the ITAA 1997 provides that assessable income for the income year in which the ESS deferred taxing point for the ESS interest occurs includes the market value of the interest at the ESS deferred taxing point, reduced by the cost base of the interest. Section 83A-120 of the ITAA 1997 states that where the right to acquire shares is exercised, the ESS deferred taxing point is the time that the beneficial interest in the share is disposed of if it is done within 30 days of the earliest of the times in subsections 83A-120(4) to 83A-120(7) of the ITAA 1997. The times in subsections 83A-120(4) to 83A-120(7) of the ITAA 1997 include the situation where you exercise the right and the scheme no longer restricts exercising the right or disposing of the resulting share and there is no risk of forfeiting the right or underlying share. Subsection 83A-110(2) of the ITAA 1997 explains that an amount included in assessable income under subsection 83A-110(1) is treated as being from a source other than an Australian source to the extent that it relates to employment outside Australia. Further, subsection 83A-5(4) of the IT(TP)A 1997 specifically provides that where subdivision 83A-C of the ITAA 1997 applies to an ESS interest, an amount is not included in the taxpayer's assessable income under subsection 83A-110(1) of the ITAA 1997 to the extent that the amount relates to the taxpayer's employment outside Australia. The first element of the cost base of a capital gains tax (CGT) asset includes the amount paid to acquire the asset. Where you did not incur any expenditure to acquire the asset, section 112-20 of the ITAA 1997 modifies the first element of the cost base to include the market value of the asset at the time of acquisition. However, subsection 130-80(4) of the ITAA 1997 provides that the market value substitution rule does not apply where you acquire an ESS interest to which subdivision 83A-C of the ITAA 1997 applies. In your case: ● you acquired share options in a foreign company under an employee share scheme while were a foreign resident; ● you did not pay anything to acquire the options; ● the rights were qualifying rights and you did not make an election under section 139E of the ITAA 1936; ● you arrived in Australia to work for the Australian subsidiary of the foreign company; ● you arrived in Australia under a temporary resident visa and were later granted permanent residency; and ● the share options vested several years later and you disposed of the shares within 30 days. From the information provided, you meet the conditions in subsection 83A-5(2) of the IT(TP)A 1997 in regard to the options granted to you. This means that subdivision 83A-C of the ITAA 1997 applies so that the discount given on the granting of your ESS interest is included in your assessable income under section 83A-110 of the ITAA 1997, but only to the extent that the amount relates to your employment services provided in Australia. That is, the proportion of the discount that relates to your employment overseas from the grant date to when you arrived in Australia is not assessable in Australia. Further, the first element of the cost base of your ESS interest at the time of the ESS deferred taxing point is nil as subdivision 83A-C of the ITAA 1997 applies to the interest. We note that you arrived in Australia under a temporary resident visa and were subsequently granted permanent residency. Section 768-955 of the ITAA 1997 modifies the cost base of CGT assets to be the market value at the time an individual ceases to be a temporary resident of Australia. However, subsection 768-955(4) of the ITAA 1997 states that section 768-955 does not apply to an ESS interest where the ESS deferred taxing point for the interest has not yet occurred. Therefore, subsection 768-955(4) of the ITAA 1997 does not apply in your circumstances as the deferred taxing point for your ESS interest had not occurred at the time you ceased to be a temporary resident.