Private ruling: capital gains tax - employee shares and foreign service
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010
Date scheme commenced: 1 July 2008

Ruling: Q1: Is the cost base of the Company A employee share scheme benefits acquired whilst employed in an overseas country, for a period of several years, their market value on the date you became a resident of Australia? | A1: No. | Q2: Is the cost base of the Company A employee share scheme benefits, acquired as a resident of Australia Before you went overseas), their market value on the date you became a resident of Australia? | A2: No. | Q3: Are the Company A employee share scheme benefits acquired as a resident of Australia subject to tax at cessation of employment when the options lapsed without being exercised? | A3: No.

Relevant facts and circumstances: You were employed by several entities within Company A. You worked overseas as a foreign resident for several years until you returned to Australia. You paid tax in the foreign country. You participated in a Senior Executive Share Plan and received employee share scheme (ESS) benefits during your period of employment. The exercise of theses benefits was subject to rigorous share price performance restrictions and there was a real risk of forfeiture. The shares and rights were treated as qualifying and tax was deferred until the cessation point as you did not make a section 139E election in relation to those benefits. You were provided with a summary of the benefits from your provider showing the original issue date, type of benefit, quantity, cost, market value, discount and tax withheld prior to your cessation of employment. You returned to Australia and continued to work for Company A until your employment ceased when you were made redundant. You received an amended summary after you ceased employment which showed that the ESS benefits received after you returned to Australia had been forfeited following your cessation of employment. You received no consideration for the lapse and you were not given the option to exercise the ESS benefit as the performance hurdles were not met. You provided details of the vesting and expiry dates of each allocation showing that these occurred whilst you were a non-resident and resident of Australia.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 13A, | Income Tax Assessment Act 1936 subsection 139B(1), | Income Tax Assessment Act 1936 subsection 139B(1A), | Income Tax Assessment Act 1936 subsection 139B(3), | Income Tax Assessment Act 1936 Section 139C, | Income Tax Assessment Act 1936 subsection 139CA(2), | Income Tax Assessment Act 1936 subsection 139C(3), | Income Tax Assessment Act 1936 Section 139CD, | Income Tax Assessment Act 1936 subsection 139DD(2), | Income Tax Assessment Act 1936 Section 139E, | Income Tax Assessment Act 1936 Section 139GBA, | Income Tax Assessment Act 1936 Section 26AAC, | Income Tax Assessment Act 1997 Division 83A, | Income Tax Assessment Act 1997 Section 83A-340, | Income Tax Assessment Act 1997 Section 104-25, | Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 subsection 855-45(4), | International Tax Agreements Act 1953 Schedule 30 and | International Tax Agreements Act 1953 subsection 4(2).

Reasons for decision: Detailed Reasoning - New Employee Share Scheme Provisions: Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) deals with the taxation of discounts on shares, rights and stapled securities acquired under employee share schemes (ESS). This Division replaced the previous employee share scheme provisions outlined in Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) and the former subsection 26AAC of the ITAA 1936. The provisions of Division 83A and the amended tax policy contained therein, apply in full to ESS interests acquired on or after 1 July 2009. Special transitional rules apply where employment benefits are granted before 1 July 2009. Where the exact number of ESS interests is uncertain, and it becomes clear that a benefit will comprise a definite number of ESS interests on or after 1 July 2009, Division 83A treats the right to the employment benefit as having always been that number of rights to acquire shares, that is, the definite number of shares. Depending on the date of the original grant, the ESS interests may be taxed under the Division 83A policy, or the transitional rules that preserve the operation of the previous regimes. If the ESS interest is a share or right acquired before 1 July 2009 under ITAA 1936 former Division 13A, but would be acquired on or after 1 July 2009 under Div 83A, a tiebreaker rule provides that the operation of ITAA former Div 13A will be applied. In your circumstances, Div 13A will be applied to the ESS benefits acquired. | Detailed Reasoning - International Tax Agreements: Section 6-5 of the ITAA 1997 states that if you are a non resident, your assessable income for Australian tax purposes will include income from Australian sources. However subsection 4(2) of the International Tax Agreements Act 1953 states that double tax agreements prevail over ITAA 1936 and ITAA 1997, in the event that provisions are conflicting. The treatment of Australian sourced income therefore needs to be considered with reference to the double tax agreement with the foreign country which is contained in Schedule 30 of the International Tax Agreements Act 1953 . Article 15 of the double taxing agreement with the foreign country deals with taxation of income derived from dependant personal services, which include ESS income, as follows: (1) Basis of taxation. Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived from that exercise may be taxed in that other State. (2) Temporary visits - conditions for exemption . Notwithstanding the provisions of paragraph (1), remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: (a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the tax year or the year of income, as the case may be, of that other state; (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of that other state; (c) the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in that other state. (3) Notwithstanding the preceding provisions of this Article, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic by a resident of one of the Contracting States may be taxed in that Contracting state. The International Taxation Agreement between Australia and the foreign country stipulates that income from employment undertaken in foreign country is subject to taxation in that country. Article 24 of the International Tax Agreements Act 1953 eliminates double taxation, preventing taxation of the income in Australia as well as the foreign country. | Detailed Reasoning - Foreign Service: An amendment to the general application of Division 13A in relation to inbound individuals applying to employee shares or rights acquired on or after the 25 June 2006 also applies to employee shares or rights acquired before 25 June 2006 if: · the individual holding the shares or rights was not an Australian employee immediately before 25 June 2006, and · becomes an Australian employee, in relation to acquisition of these employee shares or rights, on or after 25 June 2006. In your case, you acquired ESS benefits before and after 25 June 2006; you were not an Australian employee immediately before 25 June 2006 and became an Australia employee after 25 June 2006. For the purposes of calculating the amount that Australia can include in your assessable income, the discount determined needs to be apportioned for the period that is attributable to the employment exercised in Australia. The apportionment is calculated by the number of days that you worked in Australia for your employer during the performance period of the ESS benefits, to the total number of days worked for your employer during the performance period. The performance period is defined from the date the ESS interest was first acquired to the point where the interest could first be exercised. If the performance period expires before the period of foreign service is concluded, taxation will occur in the foreign country and no taxation liability occurs in Australia. In your circumstance, you were employed by Company A and worked in a foreign country. You were a non-resident for Australian taxation purposes for several years until your return to Australia. You acquired several ESS benefit parcels during your period of employment, both as a resident and non-resident of Australia. You determine the percentage of apportionment for each parcel of ESS benefits as follows: number of days you were a resident of Australia during the performance period total number of days you worked for Company A during the performance period | Detailed Reasoning - Acquisition of employee shares under Division 13A of the Income Tax Assessment Act 1936: Under Division 13A of the ITAA 1936, you acquire shares or rights under an employee share scheme when they are acquired in respect of your employment and the consideration paid for their acquisition is less than the market value of the shares or rights at the time you acquired them. An election under section 139E of the ITAA 1936 can be made by an employee in respect of the qualifying shares or rights. The effect of making an election is that the discount given in respect of the qualifying shares or rights is included in the employee's assessable income in the year of acquisition. If an election is not made, the discount is included in the employee's assessable income when cessation time occurs. In your case, you did not make an election for the ESS benefits when you were originally granted them. Therefore, you are required to include the employee discount amount in your assessable income in the income year in which cessation occurs. | Detailed Reasoning - Cessation time: The cessation time for shares or rights with restrictions preventing disposal or conditions resulting in forfeiture, acquired under an employee share scheme is the earliest of the following: (a) when the shares or rights are disposed of; (b) the later of when the disposal restrictions cease and the lapsing conditions expire in relation to the shares acquired through exercising the rights; (c) when the employees employment ceased with their employer; and (d) ten years from the date of acquisition of the shares or rights. Where the cessation has occurred upon the ceasing of employment, and: · the participating employee does not make an election, and · their rights do not lapse when they cease employment, and · the shares transferred to the employee in relation to their rights are not disposed of within 30 days of cessation time, then the discount of the rights and the first element of the cost base of the shares is the market value of the rights at cessation time. | Summary: In your case, the market value of the ESS benefit is taken on the date you ceased employment with Company A. This was the earliest of the conditions listed above for when cessation time will occur, it is viewed that cessation time occurred when you ceased employment. The first element of the cost base of the ESS benefits will be the market value on the day you ceased employment. The market value can not be determined on the date you returned to Australia and became a resident for Australian taxation purposes as your options were qualifying options and a cessation event had not occurred. | Detailed Reasoning - Loss of ESS benefits: You acquired X parcels of ESS benefits as an Australian resident and did not declare the assessable discount in your relevant income tax return. The X parcels of ESS benefits were cancelled as your employment with Company A was terminated. You were unable to exercise the ESS benefits and consequently received no benefit from their acquisition. If the rights lapse without being exercised and they would have entitled you to acquire shares in your employer (or a holding company of your employer) then you are deemed not to have acquired the rights for the purposes of the employee share provisions.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.