Private ruling: Employee share scheme - International - Foreign resident - Foreign service
Date of advice: 7 September 2016
Published: November 2016
Ruling period: 20VV-WW income year | 20WW-XX income year | 20XX-YY income year | 20YY-ZZ income year
Date scheme commenced: 1 July 20VV

Ruling: Q1: Is the Taxpayer a foreign resident during the foreign service period? | A1: Yes. | Q2: Is the ESS discount from the deferral schemes included in the Taxpayer's assessable income for the 20YY-ZZ income year? | A2: No.

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. Presence inside and outside Australia The Taxpayer is an Australian citizen. During 20VV, the Taxpayer was offered a contract of employment with a foreign subsidiary of an Australian listed company. The foreign subsidiary offered the Taxpayer a senior permanent full time role at the company commencing some three months later. The role was based from their foreign headquarters. Whilst the parent company is an Australian listed company, the Taxpayer's role at the foreign subsidiary was exclusively in relation to providing services to non-Australian operating companies. The Taxpayer departed Australia to undertake this role about this time (beginning the 'foreign service period'). The airline ticket was a one-way ticket. When departing Australia, the Taxpayer stated on their Immigration Outgoing Passenger card that this was a permanent departure. The Taxpayer had already been granted permanent residency in the foreign country due to a prior engagement living and working there for many years. Due to the permanent nature of the role on offer, at the time of accepting the role the Taxpayer intended to reside outside of Australia permanently. Pursuant to a clause of the employment contract, the Taxpayer was provided with the sole and exclusive use of an apartment. The Taxpayer remained responsible for the cost of all consumables, utilities and service charges related to the apartment. The Taxpayer has undertaken some short trips to Australia whilst living overseas. The majority of these trips have been short business trips to the Australian parent company's head office. All business trips were of seven days duration or less. There were also some personal trips to Australia at Christmas time. Since the departure income year, the Taxpayer has not spent more than 183 days in Australia in any given income tax year. During 20ZZ, the Taxpayer ceased employment with the foreign company (ending the 'foreign service period') to take a role with another foreign employer unrelated to the foreign company or the Australian listed company and continued to work there for the remainder of, and subsequent to, the 20YY-ZZ financial year. The Taxpayer has never been a member of the superannuation scheme established by deed under the Superannuation Act 1990 or an eligible employee for the purposes of the Superannuation Act 1976 . Family ties The Taxpayer has a spouse, and adult children who are not dependent. The Taxpayer's spouse also occupied the overseas apartment upon acceptance of the employment offer. The Taxpayer's children remained in Australia as they were either finishing university or working. Some years earlier, the Taxpayer returned to Australia from living and working in the foreign country. For about the next ten years, the Taxpayer worked in one Australian capital city and maintained a rented apartment there. During this time, the Taxpayer jointly purchased a property in another Australian capital city. The property has been retained by the Taxpayer since departure for the use of the adult children who have remained in Australia. Whilst the Taxpayer retained the property, the Taxpayer shipped clothing, furniture and personal items and effects to the foreign country. The Taxpayer's spouse has never been a member of the superannuation scheme established by deed under the Superannuation Act 1990 or an eligible employee for the purposes of the Superannuation Act 1976 . Maintenance and Location of Assets - Assets in the foreign country The Taxpayer has the following assets in the foreign country: • Personal items and furniture transferred from Australia, for use in the rented property • The Taxpayer shares the leased home in the foreign country with the spouse • Bank accounts and credit cards • A motor vehicle Maintenance and Location of Assets - Assets in Australia The Taxpayer has the following assets in Australia: • The jointly owned property - which is furnished and occupied by the Taxpayer's children • Superannuation and investment portfolio managed through a professional firm • A 20 year old car Social Arrangements The Taxpayer has taken up appropriate social memberships in the foreign country to reflect the employment being undertaken. The Taxpayer currently has no Australian club or association memberships. At the time of departure, the Taxpayer cancelled or suspended all existing memberships. The Taxpayer's mail has been diverted from Australia to the foreign country. The Taxpayer suspended their Australian health insurance coverage and has obtained private health insurance in the foreign country. The Taxpayer has advised the Australian Electoral Commission of the change of residence to the foreign country. Employee share scheme (ESS) The 20YY-ZZ income year pre-fill report for the Taxpayer shows certain amounts from employee share schemes as being assessable. Subsequent to commencing employment at the foreign subsidiary, the Taxpayer was issued by the employer with a new Executive Service Agreement (ESA). It is understood that the ESA was issued to all executive level employees of the Australian listed company. As part of the ESA, the Taxpayer was issued with a one off grant of ESS interests, in two tranches, as a sign-on benefit. Pursuant to the plan, there is a real risk of forfeiting the interests in the rights due to a cessation of employment. Where an employee resigns or is terminated for cause, all unvested rights lapse unless the relevant Committee of the listed Australian company determines otherwise. Tranche 1 of the sign on benefit rights vested in the 20YY-ZZ income year. As the Taxpayer ceased employment with the foreign subsidiary, all rights granted under Tranche 2 of the sign on benefit were forfeited. In addition, the Taxpayer received additional ESS interests via another Plan. Interests in the other Plan reached their ESS taxing point in the 20YY-ZZ income year. All ESS interests that have deferred taxing points during the 20YY-ZZ income year were acquired by the Taxpayer after commencing work in the foreign country. Certain documents are to be read with and form part of the description of the scheme for the purpose of this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 6, | Income Tax Assessment Act 1997 Division 83A, | Income Tax Assessment Act 1997 Subsection 995-1(1) and | Income Tax Assessment Act 1936 Subsection 6(1).

Reasons for decision: Summary: The Taxpayer is a foreign resident during the foreign service period. | Detailed Reasoning - Detailed reasoning: The term 'foreign resident' is defined for income tax purposes to mean a person who is not a resident of Australia. A person is a resident of Australia for income tax purposes if any of the following four tests are met: • The resides test • The domicile test • The 183 day test, or • The superannuation test. If any one of these tests is met, an individual will be a resident of Australia for taxation purposes. From the facts you have provided, it is clear that the Taxpayer has resided in the foreign country for the whole of the foreign service period. The Taxpayer's residence in the foreign country became the permanent place of abode from the beginning of foreign service period. The Taxpayer is not a member of the superannuation scheme established by deed under the Superannuation Act 1990 or an eligible employee for the purposes of the Superannuation Act 1976 or the spouse or child aged under 16 of such a person. Based on the facts you have provided, we can conclude that the Taxpayer will not satisfy any of the tests of residency. Accordingly the Taxpayer is not a resident of Australia for income tax purposes for any of the foreign service period. Instead, the Taxpayer is a foreign resident during this period. | Summary: The ESS discount from the deferral schemes is not included in the Taxpayer's assessable income for the 20YY-ZZ income year. | Detailed Reasoning - Detailed reasoning: The basic operation of the employee share scheme provisions is not at issue. In short, the reporting by the Australian listed company means that: • The Taxpayer was granted ESS interests after 30 June 2009 at a discount to their market value • The ESS interests met the conditions to be assessable at the deferred taxing point • The deferred taxing point has occurred during the 20YY-ZZ income year, and • Before any adjustments, the Taxpayer's assessable discount amounts were the amounts disclosed in the pre-fill reports For the reasons given above, the Taxpayer has been a resident of the foreign country for the whole of the foreign service period for income tax purposes. The overwhelming majority of the Taxpayer's services have physically been provided to the foreign subsidiary in the foreign country during this period or at least outside Australia. There have been some minor trips to Australia for business reasons associated with the Taxpayer's duties in the foreign country. There were less than 50 business days in Australia during these trips with the longest lasting seven days. There have also been some minor trips to Australia for personal reasons at the end of each calendar year. There were some X personal days in Australia. Paragraph 71 of Taxation Determination TD 2012/8 states: 71. If a person engaged in foreign service is required by their employer to spend a short time in Australia or in another foreign country during a period of foreign service for reasons directly related to that person's continuing foreign service engagement, that time will be treated as part of the person's continuous period of foreign service provided it is not excessive by comparison with the scheduled period of foreign service. For example, this will apply to time spent to attend conferences, training sessions or briefing sessions. Paragraph 51 of Taxation Determination TD 2012/8 makes a similar statement about recreation leave, but is interpreting a provision that is not relevant to this case. Subsection 83A-110(2) of the Income Tax Assessment Act 1997 states: Treat an amount included in your assessable income under subsection (1) as being from a source other than an *Australian source to the extent that it relates to your employment outside Australia. The whole of the Taxpayer's ESS discounts that are listed on the pre-fill report relate to the Taxpayer's service with the Australian listed company as an employee of the foreign subsidiary and to the foreign service. The minor periods of physical presence in Australia also count as foreign service. Therefore, the whole of these ESS discounts have a source outside Australia and are therefore not assessable in Australia as the Taxpayer is a foreign resident for the whole of this period.

Reasons for decision: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.