Private ruling: Employee Share Schemes - international
Date of advice: 3 April 2018
Published: June 2018
Ruling period: 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019
Date scheme commenced: 1 January 2015

Ruling: Q1: Is the portion of your employee share scheme (ESS) interests that relate to your employment outside Australia included in your Australian assessable income? | A1: Yes | Q2: Where your ESS interests are taxable in Australia, are you able to claim a foreign income tax offset for tax paid on your ESS interests in Hong Kong? | A2: Yes

Relevant facts and circumstances: You are an Australian citizen. Until a date in 201W, you were employed by Australian Subsidiary Company and lived in Australia. You ceased being an Australian resident for taxation purposes on that date in 201W when you moved to an overseas country to work and reside. You were a resident of the overseas country between that date in 201W and a date in 201X. You were employed in an overseas country by Overseas Subsidiary Company. You returned to Australia on a date in 201X and became an Australian resident for taxation purposes again on this date. After returning to Australia, you were again employed by Australian Subsidiary Company. While working for Australian Subsidiary Company in Australia and Overseas Subsidiary Company in the overseas country, you were granted restricted stock units under an Employee Share Scheme (ESS) agreement in Overseas Head Company. All share parcels were granted after 1 July 2009 and vested over several years in accordance to the ESS agreement. Shares granted while you were an Australian resident and vested whilst you were a resident of an overseas country were included in your 201X Non-Resident Australian Income Tax Return and 201Y Australian Income Tax Return. Shares granted and vested entirely while you were a resident of an overseas country were included in your income tax returns for that country. You had ongoing target objectives (vesting conditions) you were required to achieve in order to be granted the shares at the end of the vesting period. No consideration was paid for the vesting of any the shares.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 6 | Income Tax Assessment Act 1997 Division 83A | Taxation Administration Act 1953 Section 4

Reasons for decision: Summary: The portions of the ESS interests that relate to your employment in an overseas country that vested while you were a resident of Australia for tax purposes are taxable Australian income. The Australian government asserts the right to tax the worldwide income of Australian residents unless a double taxation agreement acts to exclude certain overseas source income. As there is no double taxation agreement between Australia and the overseas country, all income of Australian residents earned in the overseas country will be taxable in Australia. | Detailed Reasoning - Detailed reasoning: Australia does not have a double taxation agreement with the overseas country. The provisions of Australia’s domestic tax laws will apply to the income in question. The employee share scheme provisions are contained in Division 83A of the ITAA 1997. Under Australian taxation law, the discount on an ESS only becomes taxable when the deferred taxation point is reached. 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 or 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 confirm this intention and state: 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. … 1.351 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)] … 1.354 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. As you were an Australian resident at the deferred taxation points for share parcels A to E, and will be an Australian resident at the deferred taxation point for parcel F, the entire amount of the ESS discount will be included in your taxable Australian income under Divisions 6 and 83A of the ITAA 1997. Had you been a non-resident or temporary resident at the deferred taxation point, only the Australian source ESS income - the amounts earned while you were working in Australia - would have been taxable in Australia. | Detailed Reasoning - Question Two: Division 770 of the ITAA 1997 allows you to claim a foreign income tax offset (FITO) in relation to income that has been taxed in both Australia and overseas. This is the case whether or not there is a dual tax agreement between Australia and the country in question. Accordingly, you are able to claim a FITO for any tax paid on the portion of the employee share scheme discount that was subject to tax in the overseas country.