Employee Share Options: taxing rights of UK on gain by an Australian resident taxpayer where the share options were granted to the taxpayer when they were working in the UK

Does the United Kingdom (UK) have taxing rights under Article 12 of Schedule 1 to the International Tax Agreements Act 1953 (the UK Agreement) to a portion of a gain made by a taxpayer on the exercise of employee share options, when the taxpayer was a resident of Australia but those options were granted when they were working in the UK?

Yes. The UK has source country taxing rights under Article 12 of the UK Agreement to that portion of the gain that relates to the employment period spent in the UK. This is calculated by apportioning the gain at exercise by the number of days worked in the UK after the granting of the options, to the total number of days between the grant of the options and the date of vesting.

While the taxpayer was resident of the UK, the taxpayer was granted employee share options in a UK public company.

The taxpayer subsequently relocated to Australia and became an Australian resident.

The taxpayer continued to work for the UK public company until after the sale of the shares.

After satisfying the conditions of the options (the vesting date), the taxpayer exercised and sold the corresponding shares on the same day for a gain.

Article 12 of the UK Agreement provides that salaries, wages and other similar remuneration derived by a resident of Australia in respect of an employment shall be taxed only in Australia unless the employment is exercised in the UK. If the employment is exercised in the UK, such remuneration as is derived therefrom shall be deemed to have a source in and may be taxed in the UK.

The employee share options are 'other similar remuneration' for the purposes of Article 12 of the UK Agreement.

The taxpayer derived the gain as a resident of Australia. However, as the employee share options related partly to employment exercised in the UK, a portion of the gain derived by the exercise of those options may be taxed in the UK.

The amount of the gain that is attributable to the employment exercised in the UK is calculated by apportioning the gain by the number of days that the taxpayer worked for their employer in the UK after the granting of the options, to the total number of days between the grant of the options and the date of vesting.

Note: the Australian domestic law implications are a separate matter to this decision on source country treaty taxing rights.