Assessability of discount on options granted under an employee share scheme by an Australian resident company to a director who is a resident of South Africa

Is the discount on options granted under an employee share scheme to a taxpayer, a South African resident, in respect of services provided in Australia by the taxpayer as a non-executive director of an Australian resident company, assessable income under subsection 6-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The discount on options granted under an employee share scheme to a taxpayer, a South African resident, in respect of services provided in Australia by the taxpayer as a non-executive director of an Australian resident company is assessable income under subsection 6-10(5) of the ITAA 1997.

The taxpayer is a resident of South Africa for taxation purposes and is a non-resident for Australian tax purposes.

The taxpayer acted as a non-executive director of an Australian resident company under the terms of a contract entered into in Australia.

The Australian resident company granted options to the taxpayer at a discount, in respect of the services provided in Australia by the taxpayer, as a non-executive director of the Australian resident company.

The options were issued under an employee share scheme within the meaning of Division 13A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 6-10(5) of the ITAA 1997 provides that the assessable income of a foreign resident taxpayer includes statutory income from all Australian sources and other statutory income that a provision includes as assessable income on some basis other than having an Australian source.

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is sections 139 to 139GH (Division 13A of Part III) of the ITAA 1936 which provides for the taxation of shares and rights acquired under employee share acquisition schemes.

Pursuant to subsection 139B(1) of the ITAA 1936, the discount given in relation to a share or right acquired under an employee share scheme is included in the taxpayer's assessable income. Under subsection 139B(1A) of the ITAA 1936, the discount is not included in the taxpayer's assessable income to the extent that the discount is given in relation to the taxpayer's relevant engagement in foreign service while a non-resident.

The discount on the options granted to the taxpayer, in respect of services provided by the taxpayer as a non-executive director of the Australian company, is a discount given in relation to a right acquired under an employee share scheme pursuant to subsection 139B(1) of the ITAA 1936. As the taxpayer provided the services in Australia, the exclusion of subsection 139B(1A) of the ITAA 1936 does not apply.

Accordingly, the discount is statutory income to be included in the taxpayer's assessable income as determined under Division 13A of Part III of the ITAA 1936.

In determining liability to Australian tax, it is necessary to consider not only the income tax laws, but also any applicable tax treaties contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one.

Schedule 42 to the Agreements Act contains the tax treaty between Australia and the Republic of South Africa (the South African Agreement). This Agreement operates to avoid the double taxation of income received by Australian and South African residents.

Article 16 of the South African Agreement provides that directors' 'fees and other similar payments' derived by a resident of South Africa, in the capacity as a member of the board of directors of a company which is a resident of Australia, may be taxed in Australia.

Taxation Ruling TR 2001/13 provides the Commissioner's views on interpreting tax treaties. Paragraph 104 of TR 2001/13 provides that the 'OECD Model Tax Convention on Income and on Capital' and Commentary will often need to be considered in interpreting tax treaties. Paragraph 108 of TR 2001/13 provides that often the changes that have occurred to the relevant OECD Commentaries over time will need to be examined and considered.

Article 16 of the South African Agreement is virtually identical to that contained in the OECD Model Tax Convention on Income and on Capital. Paragraph 1.1 of the OECD Commentary on Article 16 of the OECD Model Tax Convention on Income and on Capital states that: Member countries have generally understood the term 'fees and other similar payments' to include benefits in kind received by a person in that person's capacity as a member of the board of directors of a company (e.g. stock-options, the use of a residence or automobile, health or life insurance coverage and club memberships).

Paragraph 3.1 of the OECD Commentary on Article 16 further provides that the article will apply to any benefit derived from the option itself until it has been exercised, sold or otherwise alienated (for example upon cancellation or acquisition by the company or issuer).

The discount is a benefit that constitutes 'fees and other similar payments' to which Article 16 of the South African Agreement applies. Therefore, Australia, being the country of source, has the right to tax the discount derived by the taxpayer as a member of the board of directors of the company.

Accordingly, the discount on options granted under an employee share scheme will be included in the taxpayer's assessable income under subsection 6-10(5) of the ITAA 1997. Note: this ATO ID also applies to the provisions of other tax treaties that contain the term 'fees and other similar payments' or 'fees and similar payments' and are equivalent to Article 16 of the South African Agreement.