Private ruling: Employee share scheme options - issued while a non-resident of Australia
Published: April 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: The scheme has commenced

Ruling: Q1: Do the employee share scheme (ESS) provisions apply to the employee share options granted before you became a resident of Australia for taxation purposes? | A1: Yes. | Q2: Is any portion of the ESS discount amount taxable in Australia? | A2: Yes.

Relevant facts and circumstances: You have acquired employee share options in your employer's company, an internationally listed company. The options were granted in several tranches. Some of the options were granted while you were a non-resident of Australia. You became a resident of Australia for taxation purposes and were employed by a subsidiary of the international company. You ceased to be a resident of Australia for taxation purposes some years later at which time you left Australia indefinitely. Your employment continued with the international company. The share options issued to you prior to your becoming a resident of Australia were issued during the period in which you were a non-resident employed by a non-resident company. Some of the share options were issued while you were a resident of Australia. These options have a vesting date subsequent to the date that you ceased to be a resident of Australia for taxation purposes.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 13A, | Income Tax Assessment Act 1936 Subsection 139C(1), | Income Tax Assessment Act 1936 Subsection 139C(3), | Income Tax Assessment Act 1936 Subsection 139GA(1), | Income Tax Assessment Act 1936 Subsection 139GBA, | Income Tax Assessment Act 1997 Division 83A and | Income Tax (Transitional Provisions) Act 1997 Division 83A.

Reasons for decision: Summary: Shares or options acquired under an ESS prior to 1 July 2009 are taxed in accordance with Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 139C(1) of the ITAA 1936 provided that a taxpayer acquired a right under an employee share scheme if they acquire it in respect of, or for or in relation directly or indirectly to any employment of theirs. Subsection 139C(3) of the ITAA 1936 provided that a right is only acquired under an employee share scheme if it is acquired at a discount to its market value. Subsection 139GA(1) and section 139GBA of the ITAA 1936 included foreign service within the definition of employment. Changes to the laws governing the taxation of ESS interests occurred on 1 July 2009 and Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) was introduced. In some cases, ESS interests were granted when the former provisions applied but will be assessable after the new provisions commenced. Transitional rules apply in such cases. The transitional rule that is relevant to foreign service states that amounts are not to be included in your assessable income as an ESS discount to the extent that they relate to your employment outside Australia. The remainder (the Australian service component) is assessable in Australia. You contend that as you acquired your options while you were a non-resident of Australia and that as the vesting dates in respect of the options occurred after you ceased to be a resident of Australia, your options are not subject to taxation in Australia. However, it is necessary to consider whether or not the options relate to your employment in Australia. Guidance in respect of the Australian and foreign service components of employee share scheme discounts is provided by the explanatory memorandum to the Bill that introduced Division 83A into the ITAA 1997 and the explanatory memorandum to the Bill that introduced the foreign service provisions into the former Division 13A of Part III of the ITAA 1936. Paragraph 1.352 of the Explanatory Memorandum for the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 states: 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. Paragraphs 4.31 and 4.32 of the Explanatory Memorandum for the New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005 state: | Detailed Reasoning - Treatment of individuals who become Australian employees (inbound individuals): 4.31 These amendments have the effect that individuals who acquire employee shares or rights while offshore, and then later become Australian employees while still engaged in employment or service that is relevant to the acquisition of the shares or rights, will apply the employee share scheme provisions at the point of becoming an Australian employee [Schedule 4, item 6, subsection 139B(2); item 7, subsection 139B(2A)]. Where an individual acquires an employee share or right in relation to the employment of an associate, the employee share scheme provisions will apply at the time that associate first engages in employment or service in Australia in relation to the acquisition of the share or right. [Schedule 4, item 14, paragraph 139D(1)(c); item 15, subsection 139D(2); item 16, subsection 139D(3)] 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. | Detailed Reasoning - Example 4.1: Under the terms of his employee share plan Arnold is required to complete five years of service before obtaining an unforfeitable right to an employee right. Arnold becomes an Australian employee when only four years of service have been completed. One year as an Australian employee will be relevant to the acquisition of Arnold's right. The standard approach as suggested by paragraph 4.32 of the Explanatory Memorandum for the New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005 would conclude that your service in Australia up until the vesting date was relevant to the earning of the employment income represented by the ESS interests. The standard approach outlined above is an appropriate method of apportioning the ESS discount over the period that you earned them. The standard approach effectively treats the ESS discount as being equivalent to a cash bonus that is paid at the taxing point but earned over the vesting period. The bonus is apportioned on a time basis (and therefore equally over the period it is earned). This will mean that any discount amount in respect of the options will need to be apportioned based on the period that is attributable to your Australian employment and this amount will be taxable in Australia. The following formula will need to be applied when apportioning the discount amount: Discount amount at the deferred taxing point multiplied by days employed in Australia between the date of grant and the date of vesting divided by total days employed between the date of grant and the date of vesting.