1: Will employee share scheme discount amounts be assessable to you under section 83A-110 the Income Tax Assessment Act 1997 (ITAA 1997) when the Rights vest while you are an Australian resident for taxation purposes ?
: No. Question 2: Were the Rights acquired at their market value under section 855-45 of the ITAA 1997 when you became an Australian resident? Answer: Yes. This ruling applies for the following periods : Income year ending 30 June 20XX Income year ending 30 June 20XX Income year ending 30 June 20XX Income year ending 30 June 20XX The scheme commenced on: 1 July 20XX
You were an employee of Company A in Australia for several years. You are an Australian citizen and were a resident of Australian for taxation purposes until you relocated to Country A to take up employment with Company X, a subsidiary of Company A located in Country 1. After some years you changed employment, commencing work with another subsidiary of Company A located in Country 1. During your employment in Country 1, you participated in employee share schemes (ESS) offered by your employers and were granted several parcels of rights to acquire ordinary shares under the Deferred Stock Awards (the Plan) in Company A. The Agreement outlining the rules of the Plan provide that: • The participants of the Plan would receive common stock (Deferred stock) which would be transferred to the applicant within a specified period after the applicable vesting date in accordance with the vesting schedule
• 'vesting' means the lapsing of certain (but not all) restrictions described herein and in the Plan with respect to one or more deferred shares as of each applicable vesting date. To vest in all or any portion of this Award as of any date, you must have been continuously employed with the Company or a subsidiary from and after the date hereof and until (and including) the applicable vesting date, except as otherwise provided herein. • Company A has the sole discretion to settle any vested deferred shares in the form of a cash payment in specified conditions, or issue shares of common stock which the participant must sell immediately • Circumstances of forfeiture means the termination of employment with Company A or its subsidiaries either: - Voluntarily, other than by reason of retirement, or for good reason on or prior to a specified period on or prior to the first anniversary of a change in control; or - Involuntarily reasons determined by Company A or relevant subsidiary in their sole discretion for 'gross conduct'
• Any or all of the rights to receive shares of common stock under the Agreement that have not vested, issued and been transferred to the participant can be immediately forfeited if: - The participant ceases to be employed by Company A and its subsidiaries due to circumstances of forfeiture; or - Company A, at its discretion, determines that prior to the ceasing of employment with Company A or its subsidiaries for any reason constituted grounds for an involuntary termination • If the participant's employment terminates by reason of retirement or disability or any reason other than for circumstances of forfeiture, then unless the vesting of the rights is accelerated, the participant's unvested right to receive shares of common stock shall continue to vest in accordance with the vesting schedule subject to the terms and conditions of the Agreement. • 'Retirement' means the participant's attainment of age 55 and completion of 5 years of continuous service with Company A and its subsidiaries.
• The Award is subject to all applicable laws, rules and regulations of the participant's country of residence (and country of employment, if different) and any special terms and conditions for their country of residence (and country of employment if different), including as set forth in the addendum included with the Agreement ('Countries Addendum') • The Addendum for Australia states 'This Award is intended to be subject to tax deferral under Subdivision 83AC of the Income Tax Assessment Act 1997 (subject to conditions and requirements thereunder)' • The Addendum for Country 1 stated that the Award would be paid in shares of common stock only and did not provide any right for the participant to receive a cash payment. You were granted rights under the Plan during several income years for which you did not pay any consideration. You were over 55 years of age when the rights were granted, having completed five years of continuous service with the subsidiaries of Company A. Company A's shares were listed on a Stock exchange.
You did not own at least 10% of the rights to acquire shares in Company A when the rights were granted to you. The rights vest on a quarterly basis under the vesting schedule, subject to certain forfeiture conditions, with shares being issued when the rights vested. The shares were not subject to any disposal restrictions. Resulting shares from the exercising of the rights were distributed to you after the rights vested. You retired from your employment in Country 1 on Date 1 and returned to Australia after a short period when you became an Australian resident for taxation purposes. You held X amount of the rights granted while you were in Country 1 (collectively referred to as the Rights) when you returned to Australia. Some of the Rights vested some months after you returned to Australia, and you sold the resulting shares after a short period. The remainder of the Rights will vest in accordance with the vesting schedule during the income years during the ruling period and you will receive shares as a result of exercising the rights.
Income Tax Assessment Act 1997 Division 83A Income Tax Assessment Act 1997 Subdivision 83A-B Income Tax Assessment Act 1997 Subdivision 83A-C Income Tax Assessment Act 1997 Section 83A-10 Income Tax Assessment Act 1997 Section 83A-20 Income Tax Assessment Act 1997 Section 83A-25 Income Tax Assessment Act 1997 Section 83A-33 Income Tax Assessment Act 1997 Section 83A-45 Income Tax Assessment Act 1997 Section 83A-105 Income Tax Assessment Act 1997 Section 83A-110 Income Tax Assessment Act 1997 Section 83A-315 Income Tax Assessment Act 1997 Section 855-45
Question 1: Will the employee share scheme discount amount be assessable to you under section 83A-110 the Income Tax Assessment Act 1997 (ITAA 1997) when they vest while you are an Australian resident for taxation purposes? All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise noted. Employee share schemes Generally, Division 83A applies where an employee ESS interest under an employee share scheme (ESS) at a discount under section 83A-20. 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. The type of ESS the employee participates in, and in some cases the employee's personal circumstances, will determine when the discount arising in relation to the granting of the ESS interests will be assessed for taxation purposes.
The default position under Division 83A is that an employee who acquires an ESS interest is taxed upfront on any discount to market value of the ESS interest under subsection 83A-20(1). Under a taxed upfront ESS, the discount is included in the taxpayer's assessable income in the income year in which the ESS interest is acquired under subsection 83A-25(1). However, where the conditions for Subdivision 83A-C are met, the discount will not be assessed in the income year in which the ESS interest is acquired but will be assessed at the earliest ESS deferred taxing point under section 83A-110 under a deferral ESS. Deferred taxation under Subdivision 83A-C can apply to: • a share, right or stapled security acquired at a discount under an ESS where the share, right or security is subject to a real risk of forfeiture • a share or stapled security acquired under salary sacrifice arrangements provided the employee receives no more than $5,000 worth of shares under those arrangements in an income year, and
• a share or right, if the ESS restricted the employee immediately disposing of the share or right and the scheme rules expressly state that the scheme is subject to Subdivision 83A-C. Deferred taxation applies, and upfront taxation does not apply, to an ESS interest if all of the following requirements contained in section 83A-105 are satisfied: 1. Upfront taxation under Subdivision 83A-B would otherwise apply to the ESS interest. 2. After applying the market value test in section 83A-315, there is still a discount in relation to the interest 3. The start-up concession in section 83A-33 does not reduce the taxpayer's assessable income for the interest. 4. For ESS interests acquired from 1 July 2015, the further conditions in section 83A-45 as follows must be met: • Subsection 83A-45(1) - When you acquire the ESS interest you are employed by a company or a subsidiary of the company • Subsection 83A-45(2) - The ESS relates only to ordinary shares
• Subsection 83A-45(3) - There is no breach of the integrity rule preventing the ESS interest being in certain share trading and investment companies, together with some other requirements; and • Subsection 83A-45(6) - The employee/taxpayer does not hold more than 10% of the shares in the issuing company or cannot control more than 10% of the votes in that company at a general meeting; and 5. If the ESS interest is a beneficial interest in a share, the taxpayer and the ESS meet the conditions in section 83A-105(5)(2) 6. If the ESS interest If the ESS interest is a beneficial interest in a right, from 1 July 2015 this condition will be satisfied if a the time the employee acquired their beneficial interest in rights, the ESS genuinely restricted them from immediately disposing of the rights in accordance with subsection 83A-105(6). The ESS's rules must also expressly state that Subdivision 83A-C applies to the scheme. Application to your situation You were granted the ESS rights under the Plan while you were living in Country 1 and were employed by subsidiaries of Company A in Country 1.
We have taken the following into consideration when making our decision when determining the nature of the ESS you participated in based on the facts of your situation: • The rights you were granted and the Plan you participated in meet the conditions contained in section 83A-10 for the rights to be viewed as ESS interests and the Plan to be viewed as an ESS • You did not pay anything to acquire the rights, therefore they were acquired at a discount in accordance with section 83A-20 • Company A was not a start-up company, therefore the start-up concession is not a consideration • The conditions contained in section 83A-45 in relation to your employment, the receipt of ordinary shares, that Company A and its subsidiaries were not share trading and investment companies, and you that did not hold 10% of the shareholding and voting rights were all met • Once the rights vested, there were no selling restrictions on the sale of the shares once they were distributed to you
• You did not meet any of the conditions contained in Section 4 of the Agreement for any or all of your rights to be immediately forfeited when you retired. However, you did meet the conditions of 'retirement' due to your age and because you had been employed by the subsidiaries of Company A for the required period which enable the rights to continue to vest in accordance with the vesting schedule after your retirement • Reference to 'deferred' in the Agreement indicates that participants of the Plan would not receive interests immediately. However, it is not a tax comment in relation to the type of ESS plan under which the rights were granted; and • Clause 2 of the Australian addendum attached to the Agreement states 'This Award is intended to be subject to tax deferral under Subdivision 83A-C'. However, while this is a generalised intention, the statement by its nature acknowledges that there may be instances when it is not a deferral ESS.
Based on the information provided, the conditions for the Plan to be a deferred ESS under section 83A-105 in your situation were not met. Therefore, any discount arising in relation to the rights granted under the Plan were assessable for ESS purposes under Subdivision 83A-B as a taxed upfront ESS while you were in Country 1. For completeness, the rights were technically indeterminate rights given that the Agreement outlines that the Company could issue either shares or cash to settle them. If you receive any cash amounts when you are an Australian resident for taxation purposes, the cash amounts would be assessable in Australia on receipt as being ordinary income received in arrears. Question 2: Were the rights acquired at their market value under section 855-45 of the ITAA 1997 when you became an Australian resident? ESS and capital gains tax In most cases, ESS interests are exempt from capital gains tax (CGT) until the interest has been taxed under the ESS provisions contained in Division 83A. Once an ESS interest has been taxed under the ESS provisions, it is taxed under the CGT provisions.
Under section 108-5 a CGT asset is any kind of property or a legal or equitable right that is not property, such as a right. Individual becoming an Australian resident Section 855-45 sets out the CGT consequences of a foreign resident individual or a company becoming an Australian resident except for assets that are: • Taxable Australian property (paragraph 855-45(1)(a)); or • An asset that was acquired before 20 September 1985 (paragraph 855-45(1)(b)). If an individual becomes an Australian resident, then, for each CGT asset that was owned just before the individual became an Australian resident: • the asset is taken to have been acquired by the individual at the time of becoming an Australian resident (subsection 855-45(3)), and • the first element of the cost base and reduced cost base of the asset at the time of becoming an Australian resident is its market value at that time (subsection 855-45(3)). Subsection 855-45(4) outlines exclusions from the application of section 855-45 for some ESS interests, such as:
• If the taxation of the discount under the ESS is deferred and the ESS deferred taxing point for the ESS interest had not arisen when the individual comes to Australia, the ESS interest is treated as having been acquired for its market value at the ESS deferred taxing point (paragraph 855-45(4)(a)); or • The start-up provisions contained in paragraphs 83A-33(1)(a) to (c) apply to the ESS interest (paragraph 855-45(4)(b)). In all other cases when section 855-45 applies to ESS interests, such as when the ESS interests are taxed upfront, the first element of the cost base and reduced cost base of the share or right will be its market value at the time the individual became a resident of Australia for taxation purposes as outlined above. Application to your situation As outlined above, the Rights were assessable under Division 83A-B as being granted under a taxed upfront ESS. Accordingly, the exemption from the application of section 855-45 does not to apply to your Rights as the ESS discount arising in relation to them had already been assessable for ESS purposes prior to you returning to Australia.
Therefore, for CGT purposes, the Rights are viewed as CGT assets that you acquired on the date you became an Australia resident. The first element of the cost base of the Rights will be their market value at the time you became an Australian resident.