Employee Share Scheme: shares or rights acquired by a non-resident of Australia

Is the discount given on shares or rights acquired by a taxpayer, whilst a non-resident, from an employee share scheme under Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936), included in the taxpayer's assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), where restrictions relating to acquisition of the shares or rights are lifted after the taxpayer became a resident of Australia?

No. The discount given on shares or rights acquired by a taxpayer, whilst a non-resident, from an employee share scheme under Division 13A of the ITAA 1936, is not included in the taxpayer's assessable income under section 6-5 of the ITAA 1997, where restrictions relating to acquisition of the shares or rights are lifted after the taxpayer became a resident of Australia.

The taxpayer is an employee of a multinational company.

While a non-resident of Australia, the taxpayer acquired a number of shares and rights under an employee share scheme. At that time, the taxpayer received salary for work performed overseas.

The shares and rights were issued at a discount and there were restrictions on them.

The restrictions on the shares and rights were not lifted until after the taxpayer became a resident of Australia.

The discount given on the shares and rights acquired in respect of the employment of a taxpayer is employment related income at the date of acquisition of the shares and rights ( Donaldson v. FC of T 74 ATC 4192; (1974) 4 ATR 530). Employment income is ordinary income of the taxpayer in the income year of acquisition of the shares and rights under section 6-5 of the ITAA 1997.

Section 10-5 of the ITAA 1997 lists provisions that may impact on various kinds of ordinary income under section 6-5 of the ITAA 1997. One of these provisions is the employee share scheme provisions in Division 13A of the ITAA 1936.

Division 13A applies to discounts given on shares and rights acquired by the taxpayer. The discount is included in the taxpayer's assessable income in the year of acquisition of the shares and rights under subsection 139B(2) of the ITAA 1936 as they are not qualifying shares or rights.

The shares and rights are not qualifying shares or rights under subsection 139CD(3) of the ITAA 1936 as the company is not the employer of the taxpayer 'at the time of their acquisition' by the taxpayer. An employer for Division 13A purposes is defined in section 139GA of the ITAA 1936 as having the same meaning as that term in subsection 221A(1) of the ITAA 1936. The company is not an employer of the taxpayer as defined at that time because it did not pay to the taxpayer work and income support related withholding payments and benefits as defined in subsection 221A(1) of the ITAA 1936. The company was not required under section 12-1 of Schedule 1 to the Taxation Administration Act 1953 to withhold tax from the salary of the taxpayer as the salary is exempt income under paragraph 23(r) of the ITAA 1936. The salary is exempt income because it was not from an Australian source as the taxpayer performed the employment services outside Australia.

Accordingly, Division 13A confirms that the discount on the shares and rights is ordinary income. However, as the discount is not from Australian sources, it is exempt income of the taxpayer under paragraph 23(r) of the ITAA 1936 and does not form part of the taxpayer's assessable income under section 6-5(3) of the ITAA 1997 and subsection 6-15 of the ITAA 1997.

Note: For capital gains purposes, the cost base of the rights and shares is their market value on the date that the taxpayer became a resident of Australia (section 136-40 of the ITAA 1997).