Private ruling: Employee share scheme - International - Change residency
Date of advice: 2 March 2016
Published: April 2016
Ruling period: 2014-15 income year
Date scheme commenced: 1 July 200X

Ruling: Q1: Is the whole of the amount described as 'Discount from deferral schemes' on the Employee Share Scheme Statements to be included in your assessable income for the relevant income year? | A1: Yes. | Q2: Are you entitled to claim a foreign income tax offset in relation to the foreign service portion of the employee share scheme discounts that are included in your assessable income? | A2: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are an Australian citizen who had worked overseas with company A for some X years as a tax resident of that country. During this period, you received Deferred Share Units as well as Restricted Share Units that were to vest over a number of years. A couple of years ago, you returned to Australia to work for company A and became an Australian tax resident. Company A has issued two employee share scheme statements to you for the 2014-15 income year advising that the deferred taxing point had occurred in relation to grants under deferral schemes. The first employee share scheme statement was in respect of the Restricted Share Units. The other employee share scheme statement was in respect of the Deferred Share Units. Company A provided another letter that apportioned these employee share scheme discounts between your Australian and foreign service.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 6, | Income Tax Assessment Act 1997 Division 83A, and | Income Tax Assessment Act 1997 Division 770.

Reasons for decision: Summary: The whole of the amount described as 'Discount from deferral schemes' on the Employee Share Scheme Statements is to be included in your assessable income for the relevant income year. | Detailed Reasoning - Detailed reasoning: The employee share scheme provisions that apply to grants after 30 June 2009 and therefore for relevant income years are contained in Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997). The operation of the employee share scheme provisions for employees who are Australian residents for the whole of the vesting period is not at issue. Your employer has advised you that these Restricted Share Units and Deferred Share Units were issued under deferral schemes and that the deferred taxing point for them has occurred during the relevant income year. The employee share scheme provisions - foreign service The actual liability to tax on employee share scheme discounts is determined by Division 83A of the ITAA 1997 in concert with Division 6 of the ITAA 1997. Both subsections 83A-25(2) and 83A-110(2) of the ITAA 1997 merely define the component of an employee share scheme discount that relates to foreign employment as having a foreign source. As statutory income, the actual amount to be included in assessable income is 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. Paragraphs 1.347 to 1.357 of the Explanatory Memorandum for the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 confirms this intention and states: 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). You were an Australian resident at the deferred taxing point identified for this private ruling for the Restricted Share Units and Deferred Share Units. Therefore, the whole of the employee share scheme discounts that relate to these deferred taxing points is to be included in your assessable income under Divisions 6 and 83A of the ITAA 1997. | Summary: You are entitled to claim a foreign income tax offset in relation to the foreign service portion of the employee share scheme discounts that are included in your assessable income. | Detailed Reasoning - Detailed reasoning: Division 770 of the ITAA 1997 allows you to claim a foreign income tax offset in relation to foreign income tax paid in respect of foreign source income that is included in your assessable income. Please refer to the Guide to foreign income tax offset rules for assistance in calculating the amount of the foreign income tax offset that you can claim. In practical terms: • You declare the whole amount disclosed on the employee share scheme statements at Item 12, Label F of your income tax return • You disclose the proportion of the employee share scheme discount that relates to your foreign service at Item 12, Label A of your income tax return • You claim your foreign income tax offset at Item 20, Label O of your income tax return