Private ruling: Employee Share Scheme (ESS) - Assessable discount - International
Published: December 2012
Ruling period: Year ended 30 June 2008 | Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2012
Date scheme commenced: At some time prior to 1 July 2009

Ruling: Q1: Can you exclude a portion of the discount on parcel A shares from your assessable income? | A1: No. | Q2: Can you exclude a portion of the discount on share parcels B and C from your assessable income? | A2: Yes. | Q3: Can you exclude a portion of the discount on parcel D shares from your assessable income? | A3: Yes. | Q4: Can you exclude a portion of the discount on parcel E shares from your assessable income? | A4: No.

Relevant facts and circumstances: Issue 1 While working for Company A in Country A and Australia you were granted a number of parcels of shares under an Employee Share Scheme (ESS) agreement. Share parcels A to C were granted prior to 1 July 2009, parcels D and E were granted after1 July 2009. The shares vested over several years according to your ESS agreement. Vesting dates were provided. You were an Australian resident when you were granted parcel A and a non-resident for part of the vesting period. You were a non-resident when you were granted share parcels B to D. You were a non-resident for part of the vesting period of share parcel D. You became an Australian resident at some time after parcel D shares were granted and continued to work for Company A until your employment was terminated. No forfeiture conditions exist for share parcels A to C. You did not pay any consideration for your shares. Share parcels A, B and C are qualifying shares according to section 139CD of the Income Tax Assessment Act 1936 (ITAA 1936). Share parcels D and E are ESS interests according to section 83A-10 of the Income Tax Assessment Act 1997 (ITAA 1997). Your ESS agreement provides that since July 2009, the plan has a new rule where, in certain circumstances your shares may be forfeited. Forfeiture will occur if between the date you accept an offer under the plan and a predetermined date: · you resign from Company A · your employment is terminated by Company A with cause, or by a failure to meet performance objectives in connection with your employment · you commit an act which brings Company A into disrepute · you commit any act of fraud or defalcation in relation to the affairs of Company A. You did not make any elections nor did you declare any discount amounts upfront, in Australia or Country A. You included any discounts that reached cessation time in your Australian income tax returns. Issue 2 You stopped being an Australian resident at some time after parcel A shares were granted when you left Australia to reside in Country A. You returned to Australia at some time after parcel D shares were granted and were a resident of Australia for tax purposes until you employment with Company A terminated. You again stopped being an Australian resident after your employment in Company A terminated and you left Australia to reside in Country A. You chose to disregard any capital gains or capital losses on both occasions when you stopped being an Australian resident.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 139B(1) | Income Tax Assessment Act 1936 Subsection 139B(1A) | Income Tax Assessment Act 1936 Subsection 139B(2) | Income Tax Assessment Act 1936 Subsection 139B(3) | Income Tax Assessment Act 1936 Subsection 139C(1) | Income Tax Assessment Act 1936 Subsection 139CA(2) | Income Tax Assessment Act 1936 Section 139E | Income Tax Assessment Act 1997 Section 83A-10 | Income Tax Assessment Act 1997 Subsection 83A-105(3) | Income Tax Assessment Act 1997 Subsection 83A-110(1) | Income Tax Assessment Act 1997 Section 83A-115 | Income Tax Assessment Act 1997 Section 104-160 | Income Tax Assessment Act 1997 Section 104-165 | Income Tax (Transitional Provisions) Act 1997 Section 83A-5

Reasons for decision: Detailed Reasoning - Detailed reasoning: 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 on 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 an 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 on 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 parcel A: As you were a resident at the time of grant your parcel A shares will be acquired at date of grant. Given that you were a non-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 did not make an election, the discount will not be included in your assessable income until the income year in which cessation time occurs. Your cessation time for your parcel A shares is the vesting date. Therefore, you will need to include the discount amount in your relevant income tax return. | Detailed Reasoning - Share parcels B and C: As you were a non-resident at the time of grant, share parcels B and C will be acquired when you became an Australian resident. As no forfeiture conditions existed at the time you became an Australian resident, the period of employment after you became an Australian resident is not relevant to determining when you earned your shares. Given that your employment in Australia is not relevant to share parcels B and C you will not be taxed under ESS rules in Australia. | Detailed Reasoning - Share parcel D: As you were a non-resident at the time of grant, share parcel D will be acquired when you became an Australian resident. A condition of your employee share plan was that your unvested shares may 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 you became an Australian resident becomes relevant to determining when you earned your shares. 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 your plan states your shares are at a real risk of forfeiture, the tax on the discount will be deferred until the deferred taxing point occurs. The amount assessed will be the market value of the parcel D shares at the deferred taxing point, reduced by their cost base. Your deferred taxing point for your parcel D shares is your termination date. Therefore, you will need to include the discount amount in your relevant income tax return. | Detailed Reasoning - Share parcel E: As you were a resident at the time of grant, your parcel E shares will be acquired at date of grant. Your parcel E shares are fully assessable in Australia as you were an Australian resident for the entire vesting period until termination of your employment. As your plan states your shares are at a real risk of forfeiture, the tax on the discount will be deferred until the deferred taxing point occurs. The amount assessed will be the market value of the parcel E shares at the deferred taxing point, reduced by their cost base. Your deferred taxing point for your parcel E shares is your termination date. Therefore, you will need to include the discount amount in your relevant income tax return. | Detailed Reasoning - Detailed reasoning: When you stop being an Australian resident, you are taken to have disposed of each of your assets that are not taxable Australian property for their market value at the time you stopped being a resident. This is known as CGT event I1. A capital gain or loss you make is disregarded if: · the asset is a qualifying share; · the asset is not covered by an election under section 139E of the ITAA 1936; and · the cessation time for the share has not occurred. You can also choose to disregard all capital gains and capital losses you made when you stopped being a resident. If you make this choice, those assets are taken to be taxable Australian property until the earlier of: · a CGT event happening to the assets (for example their sale or disposal), or · you again becoming an Australian resident. In your case, you stopped being an Australian resident at some time after parcel A shares were granted and became an Australian resident again at some time after parcel D shares were granted. When you left Australia you held parcel A shares which had already reached cession time. As cessation time had occurred prior to when you stopped being an Australian resident, the capital gain or capital loss is not disregarded under subsection 104-160(6) of the ITAA 1997. However, you made the choice to disregard all capital gains and capital losses on the date you stopped being an Australian resident. Therefore, you will need to realise any capital gains or capital losses on parcel A shares when you again became an Australian resident. You also chose to disregard any capital gains or capital losses when you stopped being an Australian resident for the second time. Therefore, all capital gains and capital losses you made will be disregarded until the earlier of a CGT event happening to the assets (for example their sale or disposal), or you again becoming an Australian resident. If you do not make the choice, CGT event I1 will happen and you may make a capital gain or capital loss. The time of the event is when you stopped being an Australian resident. Your capital gain for each parcel of shares you own is its market value on the date you stopped being an Australian resident less its cost base. Your capital loss for each parcel of shares you own is its reduced cost base less its market value on the date you stopped being an Australian resident.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Assessability of the discount on ESS interests. | Capital gains tax consequences where an individual stops being an Australian resident. | Question: Can you disregard any capital gain made on assets you own at the time you stop being an Australian resident? | The scheme commenced: At some time after 1 July 2009