Private ruling: Employee share scheme (ESS) - ESS discount - foreign employment - Australian employment - apportionment
Date of advice: 3 May 2016
Published: June 2016
Ruling period: 30 June 2015.
Date scheme commenced: 1 July 2014.

Ruling: Q1: Will you be assessable on the whole ESS discount amount as outlined in your ESS Annual Tax Statement for the 2014-15 income year? | A1: No. You will only be assessable on the Australian service portion of the ESS discount amount.

Relevant facts and circumstances: Documentation has been provided in with the private ruling which should be read in conjunction with, and forms part of, the scheme. You commenced employment with Company A in 20XX. Around three years later you moved overseas with the intention of leaving Australia permanently, becoming a resident of the overseas country, and ceasing to be a resident of Australia for tax purposes. Around two months after you left Australia, you resigned from Company A. In the following month you commenced employment with Company B on an open ended local contract. Company B's headquarters are based in the overseas country. From 20YY you have lodged your Australian income tax returns as a non-resident. Company A and B's parent company (Company C) made offers for you to receive rights under various ESSs. The rights were offered to you based on your performance as an employee of Company C in the respective income years. You participated in a number of deferred taxing point ESSs offered by Company C and were granted ESS interests during the following income years: Income year ESS interests were issued Income year in which deferred taxing point occurred 2010-11 income year 2014-15 income year 2011-12 income year 2014-15 income year 2012-13 income year 2014-15 income year 2013-14 income year 2014-15 income year 2014-15 income year 2014-15 income year You received an ESS Annual Tax Statement from Company C which outlined the total amount of discount from your ESS deferral schemes, which should be recorded at item 12 label F in your relevant assessment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 Division 83A-C

Reasons for decision: Summary: You acquired employee share scheme interests, the rights, under a tax deferred employee share scheme. Therefore, Subdivision 83A-C of the ITAA 1997 will apply and the rights will be taxed at a deferring taxing point. Employee share scheme interests are considered to be 'earned' over the vesting period. Therefore, the amount of the gain calculated on the vesting of the employee share scheme interests will need to be apportioned between the period when you were a foreign resident earning foreign income and an Australian resident earning Australian sourced income. | Detailed Reasoning - Employee Share Schemes (ESS): All references are to the ITAA 1997 unless otherwise noted. Division 83A applies to shares, rights and stapled securities acquired under an ESS on or after 1 July 2009. An ESS is defined in subsection 83A-10(2) as a scheme under which ESS interests in a company are provided to employees, or associates of employees, of the company, or a subsidiary of the company, in relation to the employee's employment. An ESS interest in a company is defined in subsection 83A-10(1) as a beneficial interest in: a) a share in the company; or b) a right to acquire a beneficial interest in a share in the company. | Detailed Reasoning - ESS deferred taxing point: Subdivision 83A-C allows for the deferral of tax on the amount assessable in respect of an ESS interest if certain conditions are satisfied. Section 83A-115 determines the ESS deferred taxing point for ESS interests constituted by a beneficial interest in shares. Subject to subsection 83A-115(3), the deferred taxing point for shares is the earliest of when: • there is no real risk that the employee will forfeit the share, or lose the share other than by disposing of it; and there are no genuine restrictions preventing disposal; or • when the employee ceases the employment in respect of which they acquired the share; or • seven years after the employee acquired the share. | Detailed Reasoning - Amount to include in assessable income: Subsection 83A-110(1) provides that your assessable income for the year that the deferred taxing point occurs includes the market value of the ESS interest (calculated at the deferred taxing point) reduced by the cost base of the interest. Subsection 83A-110(2) prescribes that you 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. Subsection 83A-110(2) attributes a source to a gain that is (or would be) assessable income under subsection 83A-110(1). Whether the gain is ultimately included in the taxpayer's assessable income is then determined by the core residence and source rules relating to statutory income in section 6-10. The assessability of statutory income is affected by the residency status of the person who derives it. The assessable income of an Australian resident will include statutory income from all sources, whether in or out of Australia (subsection 6-10(4)). On the other hand, for a foreign resident, the assessable income includes statutory income from all Australian sources (paragraph 6-10(5)(a)). Temporary residents are also only assessable on Australian sourced income. A gain on an ESS interest that relates to employment in Australia is treated as income from sources in Australia. The gain will be assessable income under the core residence and source rules, whatever the residency status of the taxpayer. A gain on an ESS interest that relates to employment outside Australia is treated as income from sources outside Australia. This has several important consequences, as set out below, which flow from the core residence and source rules and specific provisions regarding foreign employment income. Division 83A does not provide any guidance in determining whether a gain on an ESS interest relates to employment inside or outside Australia this is considered to be a conclusion of fact. The Explanatory Memorandum to Act No 133 of 2009 makes the following comments regarding the matter: 1.351 ... In the case of an ESS interest that is subject to a deferred taxing point, it is the amount included in your assessable income that is attributed a source (that is, both the discount and subsequent gains are attributed with a source). The attribution is done in a manner consistent with the rule applying to discounts. 1.352 The apportionment between foreign sourced and Australian sourced income is to be done in a manner consistent with Organisation for Economic Development (OECD) practice, as explained in the explanatory memorandum to the New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005. 1.354 Whether the discount on the ESS interest acquired under an employee share scheme relates to employment in Australia or outside Australia is a question of fact that needs to be determined on a case-by-case basis. Accordingly, consideration of the explanatory memorandum for the New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005 is required. Relevantly, the document states at the following paragraphs: 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. 4.34 However, for inbound individuals the portion of the discount that relates to foreign service when a non-resident will not be included in assessable income. This exclusion may also apply in other cases, such as where a taxpayer ceases to be a resident before the end of the relevant period of employment (see paragraph 4.43). [Schedule 4, item 5, subsection 139B(1A)] 4.41 How, for these provisions, the amount of the otherwise assessable discount will be assigned to the relevant foreign or qualifying service will depend on the facts and circumstances of each case. This is essentially the approach adopted by the OECD in respect of rights, and therefore also of relevance in interpreting the relevant articles of Australia's tax treaties. 4.42 The revised OECD commentary does, however, set out a number of principles that offer guidance as to what outcome the facts and circumstances would typically point to. Those principles suggest that a generally reasonable approach would look at the time worked in the relevant foreign or qualifying service as a proportion of the total period of employment to which the right relates. While these statements are focused on inbound employees, the same principles apply to employees leaving Australia. Therefore, if the ESS interest may be forfeited unless the individual undertakes further employment or services at the time employment ceases in Australia, then generally only a portion of the discount will relate to Australian service. Consequently, apportionment of amounts that relate to employment both in and out of Australia may be required. Application to your situation You commenced employment with Company A in 20XX and resigned from your employment with them in 20YY. You moved overseas and commenced employment with Company B around three months after you moved from Australia. You participated in ESSs offered by Company A and B's parent company, Company C and were granted rights in various income years. One lot of rights was issued prior to you leaving Australia in 20YY, and the other lots were issued to you after you had moved overseas. The rights you were granted while you were employed in Australia were not forfeited when you left Australia and commenced employment with Company B. The taxing point for your rights occurred in the relevant income year. As outlined above, ESS interests are earned over the vesting period and you will be assessable on any portion of the ESS discount that is attributable to your Australian employment. The ESS discount arising in relation to the rights issued prior to the date you left Australia must be apportioned to account for the amount of time that is attributable to your Australian employment. That portion will be assessable in Australia notwithstanding that you were a foreign resident at the deferred taxing point. Your other rights were issued after you had become a foreign resident. As they are not related to your Australian employment, and you were a foreign resident for Australian taxation purposes when they were issued and at the deferred taxing point, the ESS discount arising in relation to those rights is not assessable in Australia. Therefore, the ESS discount arising in relation to your rights issued during the 20YY-YY income year needs to be apportioned to account for your Australian and foreign employment. You determine the percentage of apportionment for your rights using the following formula: Number of days you were a resident of Australia during the vesting period Total number of days you worked for LLCL during the vesting period The portion amount of the ESS discount attributable to your Australian employment in relation to the rights issued during the 20YY-YY income year needs to be included in your relevant assessment.