Private ruling: Employee share scheme - deferred taxing point - Australian employment - foreign employment
Date of advice: 11 November 2015
Published: January 2016
Ruling period: Income year ending 30 June 2016 | Income year ending 30 June 2017 | Income year ending 30 June 2018; and | Income year ending 30 June 2019.
Date scheme commenced: 1 May 2011.

Ruling: Q1: Will any part of the discount arising in relation to the Restricted Share Units (RSUs) be assessable under Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Should the discount included in your assessable income be apportioned based on the number of days between the grant of the RSUs and the deferred taxing point where the vesting date occurs when you are a non-resident? | A2: Yes. | Q3: Is the gain from the RSUs protected from Australian taxation under Article 14(2) of the relevant Convention? | A3: No.

Relevant facts and circumstances: The arrangement that is subject of the private ruling is described below. This description is based on the following documents. These documents form part of, and are to be read with this description. The relevant documents are: • your application for private ruling • The Holding Company Plan Rules (Plan Rules) • The Holding Company Offer flyer; and • General information offer booklet - Holding Company Plan You were employed by Company A, an Australian resident subsidiary of the Holding Company. The Holding Company's remuneration structure includes performance based profit share arrangement, which is provided to employees in the form of the Holding Company's shares, under the Holding Company's Plan (the Plan). The purpose of the Plan is to align the interests of eligible employees with the interests of shareholders of the Holding Company and to assist the Holding Company to retain high quality staff. The Holding Company has a trust (the Trust) for the purposes of subscribing for, or acquiring, delivering, allocating and holding shares in the Holding Company for participants of the Plan under the terms and conditions set out in the Holding Company Trust Deed (the Trust Deed). You participated in the Plan and were awarded parcels of RSUs as follows: Granted Vested during 2013-14 income year Vested during 2014-15 income year Vested during 2015-16 income year Expected to vest during 2016-17 income year Expected to vest during 2017-18 income year Expected to vest during 2018-19 income year Expected to vest during 2019-20 income year During 2010-11 income year % of RSUs granted % of RSUs granted % of RSUs granted During 2011-12 income year % of RSUs granted % of RSUs granted % of RSUs granted During 2012-13 income year % of RSUs granted % of RSUs granted % of RSUs granted During 2013-14 income year % of RSUs granted % of RSUs granted % of RSUs granted During 2014-15 income year % of RSUs granted % of RSUs granted % of RSUs granted Pursuant to the Plan Rules, a RSU is a beneficial interest in an ordinary share in the Holding Company, which is held by the Trust on behalf of the participant for the purposes of the Plan. You did not pay any money for the RSUs. The Plan Rules contained specified conditions which would result in the RSUs being forfeited by the participant and contained restrictions on the participant selling, assigning, transferring or otherwise dealing with the RSUs. You ceased being an Australian resident during the 20XX-YY income year, when you became a tax resident. You were employed by Company B, a non-resident member of the Holding Company, commencing around two months after you left Australia. At the time you commenced your employment in the specific country, some of the RSUs had not yet vested. These 'unvested RSUs represented various proportions of the RSU parcels granted during various income years while you were a resident of Australia. The following statements have been made in the private ruling request: • You submit that in accordance with the Class Ruling issued by the Australian Taxation Office (ATO) in relation to the Company Holding Plan, the deferred taxing point for your RSUs is the date they vest, pursuant to subsection 83A-115(4) of the ITAA 1997, because at the time the RSUs vest there is no longer a real risk that you will forfeit or lose your beneficial interest in the RSUs, and the Plan no longer genuinely restricts you from disposing of the RSUs • You contend that the relevant facts in determining whether the ESS discount relates to your employment inside or outside of Australia are: • The RSUs were granted to you for nil consideration • The RSUs held by you vest over a number of years after being awarded, with a portion of the RSUs granted vesting in each year • The RSU will only vest if circumstances giving rise to forfeiture of the RSUs do not arise • A main condition of the vesting of the RSUs is that you continue to be employed by an entity of the Holding Company on the date of vesting • As you were not a resident of Australia at the time of vesting, you should only be taxed in Australia on gains that do not relate to your employment outside of Australia, or in the event that the gains on vesting of RSUs fall under the definition of share option scheme for the purposes of the DTA, gains that were derived from your employment in Australia • The gains on the vesting of your RSUs arose solely due to your employment on the vesting date as the gain is a direct result of you being an employee of the Holding Company on the date that the RSUs vested. Distinct from the case of Efstathakis , the vesting of the RSUs did not depend on the actual performance of services during the period between the granting of the RSUs and their vesting date. The remuneration, or gain, was not derived by you in relation to specific work in any particular place and the location in which you performed your services was merely incidental and not relevant to your derivation of the gain on the vesting of the RSUs • The key consideration is your employment at the time of vesting rather than your past or future services. The source of the gain should be determined by reference to your employment at the time of vesting. At that time, you were employed by a non-resident subsidiary of the Holding Company and performed your employment services outside of Australia in respect of the Holding Company's non-Australian operations. Based on the above, you consider that the gain on the vesting of your RSUs should be considered as relating entirely to your employment outside of Australia • You consider that the period of employment to which your RSUs relate is the date of vesting. Distinguished from the prima facie rule set out in not 8(b) of the DTA there are facts which indicate that the period to which the gain on the vesting of the RSUs relates is the date of vesting. As you were employed by a non-resident subsidiary of the Holding Company, and performed your employment services outside of Australia in respect of the Holding Company's non-Australian operations, you consider that the gain on the vesting of the RSUs should not be considered as derived from employment exercised in Australia • When considering Article 14 of the DTA, it appears that in your case the gain from the RSUs would only be recognised as being derived for Australian domestic taxation purposes at the deferred taxing point, such as on vesting, and this position would not be modified by the DTA • Based on the vesting point for the RSUs, you would be treated as having derived the entire gain from each RSU under Australian domestic taxation laws after 30 June 2015 because: • You would not be a resident of Australia • The remuneration, being the benefit that is taxed on vesting, would not be paid by any employer. Although a contribution of cash to the Trust on initial grant of RSU may be relevant to the benefit obtained by the employee on vesting, that is not the remuneration that is being addressed under paragraph 2 of Article 14 of the DTA, which is instead the benefit obtained by the employee on vesting, being either its interest in the shares or the value of that interest; and • The remuneration would not be deductible to the employer in working out any taxable profits of an Australian permanent establishment of the employer. • Gains relating to RSUs which vest from 1 July 2015 onwards would be protected from Australian taxation by the terms of paragraph 2 of Article 14 of the DTA; and • In conclusion, you have made the following summarising statements: • The gain on vesting of the RSUs should be treated as being from a source other than Australian source under subsection 83A-110(2) of the ITAA 1997 and no part of the gain should be included in assessable income under paragraph 6-10(5)(a) of the ITAA 1997 • The DTA does not apply to the RSUs issued as part of the Plan • In the event that the DTA applies, for the purposes of Article 14, the gain does not relate to employment exercised in Australia and should therefore not be treated as being taxable in Australia; and • Alternatively, it is submitted that the gains on vesting of the RSUs from 30 June 2015, onwards are protected from Australian domestic taxation under the terms of paragraph 2 of Article 14 of the DTA.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 Division 83A-C | Income Tax Assessment Act 1997 Section 83A-10 | Income Tax Assessment Act 1997 Subsection 83A-25(2) | Income Tax Assessment Act 1997 Section 83A-110 | Income Tax Assessment Act 1997 Section 83A-115

Reasons for decision: Summary: Your RSUs were acquired under an employee share scheme where they were of real risk of forfeiture. Therefore, Subdivision 83A-C will apply and the RSUs will be taxed at a deferring taxing point. Employee share scheme interests are considered to be 'earned' over the vesting period. Therefore, the amount of the gain calculated on the vesting of the interests will need to be apportioned between the period where you were an Australian resident earning Australian sourced income and a non-resident of Australia earning foreign income. | Detailed Reasoning - Employee Share Schemes (ESS): All references are to the ITAA 1997 unless otherwise noted. Division 83A applies to shares, rights and stapled securities acquired under an employee share scheme on or after 1 July 2009. An employee share scheme is defined in subsection 83A-10(2) as a scheme under which ESS interests in a company are provided to employees, or associates of employees, of the company, or a subsidiary of the company, in relation to the employee's employment. An ESS interest in a company is defined in subsection 83A-10(1) as a beneficial interest in: a) a share in the company; or b) a right to acquire a beneficial interest in a share in the company. | Detailed Reasoning - Subdivision 83A-C: Subdivision 83A-C allows for the deferral of tax on the amount assessable in respect of an ESS interest if certain conditions are satisfied. Subdivision 83A-C will apply to the rights if the following conditions in section 83A-105 are satisfied: a) Subdivision 83A-B would, apart from section 83A-105, apply to the rights b) subsections 83A-35(3), (4), (5) and (9) apply to the rights, and c) there is a real risk that you will forfeit or lose the interest (other than by disposing of it, exercising the right or letting it lapse) pursuant to subsection 83A-105(3). | Detailed Reasoning - ESS deferred taxing point: Section 83A-115 determines the ESS deferred taxing point for ESS interests constituted by a beneficial interest in shares. Subject to subsection 83A-115(3), the deferred taxing point for shares is the earliest of when: • there is no real risk that the employee will forfeit the share, or lose the share other than by disposing of it; and there are no genuine restrictions preventing disposal; or • when the employee ceases the employment in respect of which they acquired the share; or • seven years after the employee acquired the share. Ceasing employment Section 83A-330 provides that for the purposes of Division 83A, you will be treated as ceasing employment when you are no longer employed by any of the following: a) your employer in that employment; b) a holding company (within the meaning of the Corporations Act 2001 ) of your employer; c) a subsidiary of your employer; or d) a subsidiary of a holding company (within the meaning of the Corporations Act 2001 ) of your employer. | Detailed Reasoning - Amount to include in assessable income: Subsection 83A-110(1) provides that your assessable income for the year that the deferred taxing point occurs includes the market value of the ESS interest (calculated at the deferred taxing point) reduced by the cost base of the interest. Subsection 83A-110(2) prescribes that you treat an amount included in your assessable income under subsection (1) as being from a source other than an Australian source to the extent that it relates to your employment outside Australia. Subsection 83A-110(2) attributes a source to a gain that is (or would be) assessable income under subsection 83A-110(1). Whether the gain is ultimately included in the taxpayer's assessable income is then determined by the core residence and source rules relating to statutory income in section 6-10. The assessability of statutory income is affected by the residency status of the person who derives it. The assessable income of an Australian resident will include statutory income from all sources, whether in or out of Australia (subsection 6-10(4)). On the other hand, for a foreign resident, the assessable income includes statutory income from all Australian sources (paragraph 6-10(5)(a)). A gain on an ESS interest that relates to employment in Australia is treated as income from sources in Australia. The gain will be assessable income under the core residence and source rules, whatever the residency status of the taxpayer. A gain on an ESS interest that relates to employment outside Australia is treated as income from sources outside Australia. This has several important consequences, as set out below, which flow from the core residence and source rules and specific provisions regarding foreign employment income. There are no provisions in Division 83A that specify whether a gain on an ESS interest relates to employment inside or outside Australia. The Explanatory Memorandum to Act No 133 of 2009 makes the following comments regarding the matter: 1.351 ... 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 a manner consistent with the rule applying to discounts. 1.352 The apportionment between foreign sourced and Australian sourced income is to be done in a manner consistent with Organisation for Economic Development (OECD) practice, as explained in the explanatory memorandum to the New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005. 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. Accordingly, consideration of the explanatory memorandum for the New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005 is required. Relevantly, the document states at the following paragraphs: 4.32 Individuals will need to examine their circumstances and specific employee share plan to determine whether the period after becoming an Australian employee is relevant to the acquisition of the employee share or right. The period of employment after becoming an Australian employee will generally not be relevant if no forfeiture conditions remain at the time an individual becomes an Australian employee. If the employee share or right may be forfeited unless the individual undertakes further employment or services at the time employment commences in Australia, a portion of the discount will generally be assessable in Australia. 4.34 However, for inbound individuals the portion of the discount that relates to foreign service when a non-resident will not be included in assessable income. This exclusion may also apply in other cases, such as where a taxpayer ceases to be a resident before the end of the relevant period of employment (see paragraph 4.43). [Schedule 4, item 5, subsection 139B(1A)] 4.41 How, for these provisions, the amount of the otherwise assessable discount will be assigned to the relevant foreign or qualifying service will depend on the facts and circumstances of each case. This is essentially the approach adopted by the OECD in respect of rights, and therefore also of relevance in interpreting the relevant articles of Australia's tax treaties. 4.42 The revised OECD commentary does, however, set out a number of principles that offer guidance as to what outcome the facts and circumstances would typically point to. Those principles suggest that a generally reasonable approach would look at the time worked in the relevant foreign or qualifying service as a proportion of the total period of employment to which the right relates. Generally, if the ESS interest may be forfeited unless the individual undertakes further employment or services at the time employment ceases in Australia, a portion of the discount will generally be assessable in Australia. Consequently, apportionment of amounts that relate to employment both in and out of Australia may be required. Application to your situation You participated in the Holding Company Plan while you were an Australian resident for taxation purposes. Under the Plan you were granted RSUs which were beneficial interests in shares held in trust for you. You were granted RSUs in the 2010-11, 2011-12, 2012-13, 2013-14 and 2014-15 income years. You ceased being an Australian resident on during the 20XX-YY income year. The Plan Rules supports that the RSUs you were granted under the Plan meet the requirements to be viewed as ESS interests acquired under an ESS for the purposes of Division 83A. The Plan Rules outlines that the following forfeiture conditions applied in relation to your RSUs: • ceasing to be an employee • employer ceasing to be a Group Member • forfeiture of RSU subject to relevant requirements; and • termination for fraud, etc. The Class Ruling issued by the ATO provides the Commissioner's opinion on how the relevant legislation applies to the participants who take part in the ESS to which this private ruling relates. While the Class Ruling applies to the employees of the Holding Company who were Australian residents during the whole of the vesting period, the rules contained in the Class Ruling outline how the ESS operates. Those conditions will still apply to your RSUs even though you were not an Australian resident for the whole of the vesting period. The Class Ruling outlines that the Commissioner accepts that the RSUs acquired by the participants were at real risk of forfeiture and therefore Subdivision 83A-C applies to the RSUs. In accordance with the Commissioner's view as outlined in the Class Ruling, your RSUs will be taxed at a deferred taxing point determined under section 83A-115. The next issue to consider is the assessability in Australia of the ESS discount arising in relation to your RSUs, which we have considered as follows: In your case, you had been employed by Company A and were granted the RSUs You were granted RSUs in the 2010-11, 2011-12, 2012-13, 2013-14 and 2014-15 income years. You moved to the relevant country during the 20XX-YY income year, and commenced employment with Company B a few months after you had moved to the relevant country. The Class Ruling outlines that if the participant of the Plan ceased employment with the Holding Company before the vesting of their RSUs, the RSUs would be forfeited unless the Board determined otherwise at its discretion. This meant that you had to be employed by a Holding Company member when the RSUs were granted and every day up to the date the RSUs vested, being the vesting period. If those conditions had not been met, the RSUs would have been forfeited. The Plan Rules also outlines that a participant of the Plan would forfeit their RSUs if they cease employment in the same conditions as outlined in the Class Ruling. Therefore, it is viewed that the RSUs vesting were conditional on you continuing to remain employed with in the Holding Company from the date of grant until the date vesting on the RSUs occurred. Accordingly, your employment from the date of grant until the vesting date occurred in relation to each parcel of RSUs is relevant in determining whether there are any taxation implications for you arising in relation to the RSUs. As there were forfeiture conditions that applied to your RSUs if you did not continue to work for the Holding Company until the vesting date, it is viewed that your RSUs were earned over the entire vesting period. Accordingly, the amount of gain calculated on the vesting of the RSUs will need to be apportioned between the period you were an Australian resident earning Australian sourced income and a non-resident earning foreign income as a proportion of the whole vesting period. The discount assessable in Australia will be apportioned based on the number of days you were an Australian resident between date of grant and vesting date. You need to determine the percentage of apportionment for each parcel of RSUs using the following formula: ___Number of days you were a resident of Australia during the vesting period___ Total number of days you worked for Holding Company during the vesting period | Summary: The double taxation agreement between the relevant country and Australia provides that both the country of residence and the country of source both have the right to tax the income, but the resident country will provide relief from double taxation through a credit against tax paid in the source country. | Detailed Reasoning - Double taxation relief: Australia has entered into the Convention between the Government of Australia and the Government of the relevant country for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains [2003] ATS 22 (relevant country) with the government of the relevant country. Article 14 of the DTA, which relates to income from employment, outlines that generally, salaries, wages and similar remuneration derived by a resident of one country from an employment exercised in the other country may be taxed in that other country. However, subject to specified conditions, there is a conventional provision for exemption from tax in the country being visited where visits of only a short-term nature are involved [Paragraphs 1 and 2 of Article 14]. The conditions for this exemption are that: a) the period of the visit or visits does not exceed, in the aggregate, 183 days in any 12 month period commencing or ending in the fiscal year or year of income of the visited country; b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the country being visited; and c) the remuneration is not deductible in determining taxable profits of a permanent establishment which the employer has in the country being visited. The focus of paragraph 2 of Article 14 of the DTA is the remuneration related to your employment in Australia only. You need to meet all of the conditions specified in all of the subparagraphs for this remuneration to be exempt from tax in Australia. Article 22 of the DTA operates to ensure that where an item of income or gain is taxable in both the relevant country and Australia, double taxation relief will be given by the recipient's country of residence in accordance with paragraphs 1, 2 and 3 of this Article. The effect of Articles 14 and 22 of the DTA is that neither the relevant country nor Australia has an exclusive right to tax the income. The agreement represents that both the country of residence and the country of source both have the right to tax the income, but the resident country will provide relief from double taxation through a credit against tax paid in the source country. In the case of a resident of the relevant country who is taxable in the relevant country on income or chargeable gains which are also taxable in Australia under this tax treaty, Article 22 of the DTA requires the relevant country to allow the relevant country resident a credit for the amount of Australian tax paid on that income or chargeable gains [Subparagraph 2(a) of Article 22]. Application to your situation You were a resident of Australia for the taxation purposes when the RSUs were granted and you are a relevant country resident when some of the RSUs will vest. Considering each of subparagraphs of paragraph 2 of Article 14 of the DTA in turn: • you will not physically have been present in Australia during any of the income years that the ESS discounts are notionally assessable, therefore this condition is passed • the remuneration related to your employment in Australia is paid by, or on behalf of the Australian subsidiary of Macquarie Capital, which is an Australian resident, therefore this condition is not passed • it would be expected that the remuneration would be deductible to this Australian subsidiary (being the relevant employer for the purpose of this condition), therefore this condition is also not passed. The effect of Subdivision 83A-C is that all your unvested rights will be treated as derived and received at the deferred taxing point. Based on the facts provided, we consider that the discount arising in relation to all of the parcels of RSUs that have vested after you became a resident of the relevant country will have a portion of the discount that is attributable to your Australian employment. In accordance with paragraph 1 of Article 14 of the DTA, both the relevant country and Australia can tax you in relation to the RSUs to the extent they have an Australian source. Only the relevant country can tax you in relation to the RSUs to the extent they have a relevant country source.