Private ruling: Employee share scheme
Date of advice: 2 March 2016
Published: April 2016
Ruling period: 20XX-YY income year
Date scheme commenced: 1 July 20ZZ

Ruling: Q1: Is the whole of the amount described as 'Discount on ESS interests acquired pre 1 July 2009 and 'cessation time' occurred during the financial year' on the Employee Share Scheme Statement to be included in your assessable income for the 20XX-YY income year? | A1: No. Only the Australian service component is assessable.

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 were employed by company A or subsidiaries thereof in certain foreign countries prior to moving to Australia about seven years ago. You were a temporary resident of Australia for about 18 months. You then became a permanent resident. You were employed in Australia by a subsidiary of company A. Whilst working overseas for company A, you received employee share options. Further options were also issued to you whilst you were a temporary and permanent resident of Australia. The options were granted at a discount to their market value and had an exercise denominated in a foreign currency. The options generally had a three year vesting period and were to expire ten years after they were granted. One parcel had a five year vesting period. Your employer provided information to you on an employee share scheme statement for the 20XX-YY income year advising that the cessation time had occurred in relation to ESS interests granted before 1 July 2009 and advising the amount of the assessable discount. This employee share scheme statement also advised that the deferred taxing point had occurred in relation to ESS interests granted under deferral schemes and advised the amount of the assessable discount for the 20XX-YY income year. This employee share scheme statement was prepared on the basis that all of the service occurred within Australia. It has not considered whether or not there was any foreign service that may not be assessable to you in Australia.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 83A, | Income Tax (Transitional Provisions) Act 1997 Division 83A, | Income Tax Assessment Act 1997 Division 770 and | Income Tax Assessment Act 1936 Division 13A of Part III.

Reasons for decision: Summary: Only the Australian service portion of the amount described as 'Discount on ESS interests acquired pre 1 July 2009 and 'cessation time' occurred during the financial year' on the Employee Share Scheme Statement is to be included in your assessable income for the 20XX-YY income year | Detailed Reasoning - Detailed reasoning: Options to acquire shares form part of your remuneration if the options are granted to you in relation to your employment and at a discount to their market value. The employee share scheme provisions are used to work out: • When you need to include this discount in your assessable income, and • The amount of the discount. The employee share scheme provisions were amended as from 1 July 2009. Some options were granted when the former provisions applied but will be assessable after the new provisions have commenced. Transitional rules apply in such cases. The application of the employee share scheme provisions to you as a new resident is based on three critical dates. They are: • The date of grant of the options • The date you became an Australian resident, and • The taxing point. The information provided to you by your employer means that the employee share scheme provisions apply to you in the following manner: • You were granted options in relation to your employment before 1 July 2009 at a discount to their market value • These options were qualifying rights and therefore the taxing point was to be deferred until the 'cessation time' • The cessation time happened during the 20XX-YY income year • Before reduction for foreign service (if applicable), your assessable discount in the 20XX-YY income year was the amount nominated on the employee share scheme statement. The discount is assessable in the 20XX-YY income year because you did not choose to include it in your assessable income in the income year when you became an Australian resident by making a subsection 139E(3) election. Foreign service adjustment The foreign service transitional rule excludes the foreign service component of an employee share scheme discount from your assessable income in Australia. The relevant legislation does not provide a mechanism for determining the extent to which remuneration in the form of options should be assigned to foreign or domestic service. Therefore, the outcome will depend on the facts and circumstances of your case. Guidance is provided in the Explanatory Memoranda that supported the 2005 and 2009 amendments to the employee share scheme provisions. 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. Paragraph 4.6 of the Explanatory Memorandum for the New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005 states: 4.6 The OECD commentary on the articles of the model tax convention is relevant in interpreting Australia's tax treaties. The revised commentary treats the benefit accruing up to the exercise of a right as an employment benefit to which Article 15 (Income from Employment) of the model tax convention applies. The commentary recognises that the facts and circumstances of the particular case will determine the period of employment to which the right relates. The number of days worked in a treaty country during this employment period then determines the extent of that country's source taxing rights. Paragraph 4.32 of the Explanatory Memorandum for the New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005 states: 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. Paragraphs 12.7 to 12.15 of the OECD commentary concerning the taxation of income from employment suggest the following principles for determining the service period in relation to employee stock options: 12.7 The first principle is that, as a general rule, an employee stock-option should not be considered to relate to any services rendered after the period of employment that is required as a condition for the employee to acquire the right to exercise that option... 12.11 The second principle is that an employee stock-option should only be considered to relate to services rendered before the time when it is granted to the extent that such a grant is intended to reward the provision of such services by the recipient for a specified period… 12.13 Finally, there may be situations in which some factors may suggest that an employee stock-option is rewarding past services but other factors seem to indicate that it relates to future services. In cases of doubt, it should be recognised that employee stock-options are generally provided as an incentive to future performance or as a way to retain valuable employees… Paragraph 12.9 of this commentary assists in interpreting the first principle and states: It is also important to distinguish between a situation where a period of employment is required as a condition for the acquisition of the right to exercise an option, i.e. the vesting of the option, and a situation where an option that has already vested may be forfeited if it is not exercised before employment is terminated (or within a short period thereafter). In the latter situation, the benefit of the option should not be considered to relate to services rendered after vesting since the employee has already obtained the benefit and could in fact realise it at any time… This means that generally, options with forfeiture conditions are considered to be earned during the period between the grant date and the vesting date (that is, the vesting period). In special cases, an alternate 'earning period' may be warranted. Apportioning your service on the basis of the vesting periods, the grants before 1 July 2009 are split between Australian and foreign service. In your situation, only about 50% of the employee share scheme discount in respect of grants before 1 July 2009 relates to your employment in Australia. Note: The whole of the employee share scheme discount in respect of the grant after 30 June 2009 relates to your employment in Australia as you arrived in Australia before it was granted to you.