Private ruling: Employee Share Scheme (ESS) - Assessable discount - International
Published: June 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ending 30 June 2012
Date scheme commenced: Prior to 1 July 2009

Ruling: Q1: Can you exclude a portion of the discount on your Restricted Stock Units (RSU's) from your assessable income because you were a non-resident for a period prior to the date of grant? | A1: No.

Relevant facts and circumstances: Issue 1 You were a non-resident for a period prior to date of grant. You were a resident of Australia for tax purposes from date of grant until the end of the vesting period. Prior to 1 July 2009 you were granted a number of RSU's in Company A under an ESS agreement. You did not pay any consideration for your RSU's. The RSU's convert to shares on the vesting dates and no amount is paid to have them convert. Your RSU's are qualifying rights according to the ESS provisions. You did not make any elections in regard to your RSU's. Your RSU's vested (converted to shares) on the following dates: · 31 January 2009 · 31 January 2010 · 31 January 2011 · On or after 28 October 2011 due to the termination of your employment on this date the final vesting date of 31 January 2012 was not reached. Section 1.1 of your ESS agreement states that the purpose of the plan is to: (a) enhance the growth and profitability of Company A and its subsidiaries by providing the incentive of long-term rewards to key employees who are capable of having a significant impact on the performance of Company A and its subsidiaries; (b) to attract and retain employees of outstanding competence and ability; (c) to encourage long-term stock ownership by employees; and (d) to further the identity of interests of such employees with those of stockholders of Company A. Paragraph (iii) of section 3.7 of your ESS agreement provides that your RSU's are subject to forfeiture conditions such that except as otherwise provided within the plan, if you cease to be an employee prior to the end of the vesting period, you shall immediately forfeit all RSU's granted. You did not declare any amounts of assessable income in your foreign country tax returns or pay any taxes in the foreign country in relation to the assessable discount on your RSU's. You have provided copies of a number of documents which are to be read with and form part of the description of the scheme for the purpose of this ruling. Issue 2 After 1 July 2009 you were granted a number of restricted shares in Company B under an ESS agreement. You are a Trader and Trading Manager responsible for all of Company B's Equity (stock market) Risk Trading for all of the listed entities. The main local Australian subsidiary has restated financial results due to equity trading losses. You are fully responsible for a subsidiary which almost needed re-capitalisation due to equity trading losses. Section 6 of your ESS agreement states that if it is determined that you have engaged in Detrimental Conduct (also known as 'claw back'), Company B will be entitled to recover from you in its sole discretion some or all of the shares of restricted stock covered by the agreement. Exhibit A (d) of your ESS agreement defines Detrimental Conduct (also known as 'claw back') to mean: (A) any conduct that would constitute Cause or (B) any one of the following: (1) any act or omission by you resulting or intended to result in personal gain at the expense of Company B; (2) the improper disclosure by you of proprietary, privileged or confidential information of Company B or its subsidiaries or a client or former client of Company B or its subsidiaries or a breach of a fiduciary duty owed to Company B or its subsidiaries or a client or former client of Company B or its subsidiaries; (3) improper conduct by you including, but not limited to, fraud, unethical conduct, falsification of records of Company B or its subsidiaries, unauthorised removal of property or information of Company B and its subsidiaries, intentional violation or negligent disregard for Company B's or its subsidiaries' policies, rules and procedures, insubordination, theft, violent acts or threats of violence, unauthorised possession of controlled substances on the property of Company B or its subsidiaries, conduct causing reputational harm to Company B or its subsidiaries or a client of Company B or its subsidiaries, or the use of the property, facilities or services of Company B or its subsidiaries for unauthorised or illegal purposes; (4) the performance by you of your employment duties in a manner deemed by Company B or its subsidiaries to be grossly negligent; (5) the commission of a criminal act by you, whether or not performed in the workplace, that subjects, or if generally known, would subject Company B or its subsidiaries to public ridicule or embarrassment; or (6) you taking or maintaining trading positions that result in a need to restate financial results in a subsequent reporting period or that result in a significant financial loss to Company B or its subsidiaries during or after the performance year. Section 12(a) of your ESS agreement states that the restricted shares may be modified, suspended or terminated by Company B at any time. Section 11(a) of your ESS offer document states that under the terms of the agreement there is no real risk of forfeiture; accordingly, you will be subject to tax at grant. You have provided copies of a number of documents which 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 1936 Subsection 139B(1) | Income Tax Assessment Act 1936 Subsection 139B(1A) | Income Tax Assessment Act 1936 Subsection 139B(2) | Income Tax Assessment Act 1936 Subsection 139B(3) | Income Tax Assessment Act 1936 Subsection 139C(1) | Income Tax Assessment Act 1936 Subsection 139CA(2) | Income Tax Assessment Act 1936 Section 139E | Income Tax Assessment Act 1997 Section 83A-10 | Income Tax Assessment Act 1997 Subsection 83A-105(3) | Income Tax Assessment Act 1997 Subsection 83A-110(1) | Income Tax Assessment Act 1997 Section 83A-115 | Income Tax (Transitional Provisions) Act 1997 Section 83A-5 | International Tax Agreements Act 1953 Subsection Sch 2-Art 15(2)

Reasons for decision: Summary: You cannot exclude a portion of the discount on your RSU's from your assessable income because you were a non-resident for a period prior to the date of grant. | Detailed Reasoning - Detailed reasoning: You acquire rights from an employee share scheme (ESS) if the rights are acquired, whether directly or indirectly, in relation to your employment or in relation to any services you provide. If you pay any money, or provide any other consideration, to acquire the rights, the consideration must be less than the market value of the rights at the time you acquire them. Generally, your rights will be acquired from an ESS when your employment contract is entered into or when you accept an offer received under an employee share plan. However, if you are a non-resident at the time of acquisition your rights will be acquired when you first become an employee in Australia. 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 rights. 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. You will not be taxed under ESS rules if, when you become an employee in Australia, no forfeiture conditions remain on the rights you hold. However, if a condition of your employee share plan is that your rights may be forfeited unless you undertake further employment or services, a portion of the discount will generally be assessable in Australia under the ESS rules. Prior to a law change in 1 July 2009 under the former ESS provisions you could make an election to be taxed up-front on rights acquired prior to 1 July 2009. However, if you do not make an election, the discount will not be included in your assessable income until the income year in which an event, known as a 'cessation time', occurs. The cessation time for rights is the earliest of the following: · when you dispose of the rights - other than by exercise · when your employment in respect of which the rights were acquired ceases · when the rights are exercised, if the shares that are acquired by exercising the rights have no restrictions or conditions affecting their subsequent disposal or you forfeiting ownership of the shares · if there are such restrictions or conditions on the shares acquired by exercising the rights, when the last of the restrictions or conditions cease to have effect · ten years from the date you acquired the rights. Paragraph 83A-5(2)(a) of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) provides that Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies where: · rights were granted under an employee share scheme before 1 July 2009 · the rights were to be assessable in the year that the cessation time occurs, and · the cessation time did not occur before 1 July 2009. Subsection 83A-110(1) of the ITAA 1997 provides that your assessable income for the year that the deferred taxing point occurs includes the market value (calculated at the deferred taxing point) of rights that were granted under an employee share scheme reduced by their cost base. Paragraph 83A-5(4)(b) of the ITTPA 1997 ensures that the ESS deferred taxing point is determined using the cessation time from Division 13A of Part III of the ITAA 1936 (see the reference to cessation time above). | Detailed Reasoning - Application to your case: In your case, at some time prior to 1 July 2009 you were granted a number of RSU's in Company A under an ESS agreement. A condition of your employee share plan was continuous employment and any unvested RSU's on the date of your termination of employment would be terminated on that date. As forfeiture conditions exist, the period after becoming an Australian employee becomes relevant to determining when you earned your RSU's. The terms and conditions of your ESS agreement indicate that your RSU's relate to future work rather than work you completed in the past. The main indicators are: purpose of your ESS agreement - Section 1.1 of your ESS agreement states that the purpose of the plan is to: (a) enhance the growth and profitability of Company A and its subsidiaries by providing the incentive of long-term rewards to key employees who are capable of having a significant impact on the performance of Company A and its subsidiaries; (b) to attract and retain employees of outstanding competence and ability; (c) to encourage long-term stock ownership by employees; and (d) to further the identity of interests of such employees with those of stockholders of Company A · vesting conditions - the existence of vesting conditions indicates your RSU's relate to the performance of future work and if these conditions are not satisfied the right to acquire RSU's will be lost · forfeiture conditions - a plan solely related to past work would be unlikely to have forfeiture conditions relating to continuous employment. · no assessable amounts declared in foreign country tax returns - as you have not declared any assessable amounts in your foreign country tax returns you have determined that the foreign country employment is not relevant. The above factors and specifically the requirement of continuous employment determine that the time after your RSU's were granted is relevant. Although you were a non-resident for a period prior to date of grant, you were a resident from date of grant until the end of the vesting period. Therefore, as you were a resident during the entire relevant period you are assessable in Australia under the ESS rules. As you did not make an election to be taxed up-front, your RSU's will be assessed at cessation time. The cessation times for your RSU's were the following times: · 31 January 2009 · 31 January 2010 · 31 January 2011 · On or after 28 October 2011 (termination date). The deferred taxing points for your RSU's will be the above vesting dates and your termination date. Therefore, a discount amount relating to your RSU's should have been included in your 2009, 2010, 2011 and 2012 income tax returns. | Summary: Your shares are not subject to a real risk of forfeiture. | Detailed Reasoning - Detailed reasoning: Generally, a discount to the market value of an ESS interest is taxed on acquisition of the ESS interest. However, when there is a real risk that the benefits of an ESS interest may never be realised because the ESS interest may be forfeited, the tax will be deferred until a deferred taxing point. The 'real risk of forfeiture' test is relevant in determining the deferred taxing point. | Detailed Reasoning - Real risk of forfeiture test: Whether or not a real risk of forfeiture is present will depend on the facts and circumstances of each scheme and the individual circumstances of the employee. An ESS interest acquired by an employee is at real risk of forfeiture if a reasonable person would consider that there is a real risk that the employee may forfeit or lose the ESS interest, other than by intentionally taking no action to realise the benefit. The meaning of 'real' is something more than a mere possibility. An ESS interest will not be at real risk of forfeiture if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility. The 'real risk of forfeiture' test is intended to provide for deferral of tax when there is a real alignment of interests between the employee and employer, through the employee's benefits being at risk. The test is a principle based test, intended to deny deferral of tax where schemes contrive to present a nominal risk of forfeiture, without complying with the intent of the proposed law. Real risks of forfeiture in a scheme may include conditions where retention of the ESS interests is subject to: · performance hurdles, or · a minimum term of employment. There is no real risk of forfeiture where a scheme simply includes a condition which: · restricts an employee from disposing of an ESS interest for a specified time · allows an employee to request that the ESS interest be forfeited, or · provides for an employee to forfeit an ESS interest if they are dismissed for fraud or gross misconduct. | Detailed Reasoning - Application to your case: In your case, there is no real risk of forfeiture in relation to a minimum term of employment or performance hurdles. You have stated the real risk of forfeiture is in relation to the following conditions of your ESS agreement: Detrimental Conduct (claw back) as defined by your ESS agreement the discretionary nature of the shares You have raised that given your position as Trader and Trading Manager responsible for all of Company B's Equity (stock market) Risk Trading there is a real risk that you may engage in Detrimental Conduct and that Company B could reasonably invoke the 'claw back' clause should any local subsidiary suffer from a significant loss or earnings revision. Under the plan, you have highlighted that Detrimental Conduct can include you taking or maintaining trading positions that result in a need to restate financial results in a subsequent reporting period or that result in a significant financial loss to Company B or its subsidiaries during or after the performance year. Where, if it is determined that you have engaged in Detrimental Conduct, Company B will be entitled to recover from you in its sole discretion some or all of the shares of restricted stock. You have raised examples where entities that you have trading responsibilities for have restated financial results due to equity trading losses. It is your view that these examples could reasonably cause Company B to invoke the claw back clause. We consider that the Detrimental Conduct condition of your ESS provides only a 'mere' or 'rare' possibility of forfeiture. A reasonable person would not consider there to be a real risk of forfeiture in relation to the scheme because of the existence of the Detrimental Conduct clause. Your decision to take & maintain trading positions or perform any other actions that constitute Detrimental Conduct is entirely within your own control. The scheme provides that the share may be modified, suspended or terminated by Company B at any time. A reasonable person would not consider that this clause presents a real risk of forfeiture as this would be unlikely to occur in normal circumstances. Your ESS agreement states that under the terms of the agreement there is no real risk of forfeiture; accordingly, you will be subject to tax at grant.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Question 1: Are your restricted shares that do not immediately vest subject to a real risk of forfeiture?