Private ruling: Capital gains tax - Employee share scheme - Options - International
Published: October 2016
Ruling period: 2014-15 income year | 2015-16 income year | 2016-17 income year
Date scheme commenced: 1 July 200X

Ruling: Q1: Is the first element of the cost base and reduced cost base of your interest in the ESS shares equal to its market value calculated as at the cessation time? | A1: Yes. | Q2: Is the first element of the cost base and reduced cost base of your interest in the reinvested shares equal to the sum of the amounts you have declared as dividends? | 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 commenced employment with the foreign employer overseas some 20 years ago. As an employee, you were granted options to acquire ordinary shares in the foreign employer before 1 July 200X at a specified exercise price. The exercise price was less than the market value of the shares calculated as at the grant date. You did not hold more than 5% of the shares in the foreign employer, nor could you control the casting of more than 5% of the votes that might be cast in a general meeting of the company. You relocated to Australia during the relevant income year and are an Australian resident from this date. At the same time, you began a two year unpaid career break from the foreign employer. The options vested during the 20XX-XX income year and you immediately exercised them using after tax funds that you had been contributing since the options were granted to you. You also immediately transferred a one-half interest in these shares to your spouse. You chose to resign from the foreign employer later in the 20XX-XX income year having never been an Australian employee of the foreign employer or providing any services to the foreign employer while being physically present in Australia. You have received dividends as a joint owner of shares in the foreign employer and reinvested into new shares. You have declared the market value of these 'reinvested' shares as foreign dividends in your income tax returns. You have provided the market values and exchange rates at relevant dates as part of your private ruling application.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 83A, | Income Tax Assessment Act 1997 Part 3-1 and | Income Tax Assessment Act 1997 Part 3-3.

Reasons for decision: Summary: The first element of the cost base and reduced cost base of your interest in the foreign employer shares is equal to its market value calculated as at the cessation time. | Detailed Reasoning - Detailed reasoning: You will make a capital gain from the sale of your interest in the shares in the foreign employer if the capital proceeds (sale proceeds) are more than its cost base. You make a capital loss if the capital proceeds are less than the reduced cost base. Normally, the first element of the cost base and reduced cost base of shares acquired by exercising options is the sum of the amount paid to acquire the options and the amount paid to exercise them and acquire the shares. But there are instances where this method is not appropriate. Your case is such an instance. New residents who own shares or options in foreign companies generally use the market value (of the shares or options) calculated as at the date of residency in the cost base (instead of the purchase price) to ensure that only the growth in value of the options or shares while an Australian resident is subject to tax. (You owned options to acquire shares in the foreign employer when you became an Australian resident.) Employees who are granted shares or options granted under employee share schemes use the market value (of the shares or options) at the employee share scheme taxing point in the cost base to ensure that shareholders aren't double taxed as employee share schemes have their own taxing regime. The cost base adjustment that applies to you for capital gains purposes is based on whichever of these occurred last and what you owned at that time. In considering the application of the new resident adjustment - you became an Australian resident during the relevant income year. In considering the application of the employee share scheme adjustment - the options meet the conditions to be qualifying rights and so the taxing point occurs at the cessation time which was during the 20XX-XX income year when you exercised them (as this was the first to occur of all the potential cessation times). In your case, the cessation time is the later time. Therefore the adjustment to the first element of the cost base is calculated as at this time. Note 1: you are very unlikely to have made a capital gain or loss when you transferred a one-half interest in your shares to your spouse as both the cost base and capital proceeds would have been equal to its market value calculated at approximately the same date. Note 2: none of the employee share scheme discount is assessable to you in Australia as your membership of the employee share scheme relates solely to your foreign employment and the options were granted to you before 1 July 200X. | Summary: The first element of the cost base and reduced cost base of your interest in the reinvested shares is equal to the sum of the amounts you have declared as dividends. | Detailed Reasoning - Detailed reasoning: In a similar way, there is an adjustment to the first element of the cost base and reduced cost base of shares acquired by reinvesting dividends to ensure that you are not double taxed. The cost base and reduced cost base of your one-half interest in the dividend reinvestment plan shares will include the amount of the dividends you have declared. This treats you as if you had received the dividends in cash and then immediately used those funds to buy new shares.