Impact on Expatriates

The new rules will also have impact on employees coming to or from Australia.

Foreign employment

Australian resident taxpayers will be subject to Australian income tax on all discounts they receive under employee share schemes regardless of whether they received it in relation to employment in Australia or outside Australia. 

Foreign resident taxpayers will only be subject to Australian income tax on discounts they receive under employee share schemes to the extent that the discount relates to the employment in Australia.

The following example is taken from the Explanatory Memorandum accompanying the legislation:

Bob is a foreign resident and works for a multinational company, Mimosa Co in Hong Kong.

Bob receives 1,000 shares in Mimosa Co under Mimosa Co's employee share scheme for no consideration. The 1,000 shares relate to Bob's employment with Mimosa Co over the next 24 months and have a market value of $5,000. The shares are subject to forfeiture conditions.

One year after acquiring the shares under the employee share scheme, Mimosa Co transfers Bob to Australia for five months to work in Mimosa Co's Australian operations in Darwin. After the five month posting, Bob returns to Hong Kong.

At the end of the 24 months, the forfeiture conditions cease to apply and Bob and no disposal restrictions exist. The shares at this time are subject to an ESS deferred taxing point. The market value of the shares is $10,000 at the taxing point.

Bob notionally includes in his assessable income the full $10,000. The ESS rules attribute $2,083 (5/24) to be from an Australian source and $7,917 (19/24) to be from a foreign source.

As Bob is a foreign resident, only the $2,083 is included in his taxable income.

Temporary residents

Temporary resident taxpayers will only be subject to Australian income tax on discounts they receive under employee share schemes to the extent that the discount relates to the employment in Australia.

In a positive move, the new legislation has removed much of the capital gains tax complexity associated with the former rules.

Consistent with the treatment of other CGT assets held by temporary residents, CGT will NOT apply to shares or rights acquired under an ESS, provided those shares or rights are not treated as Taxable Australian Property.

Outstanding matters

The Board of Taxation will consider and report to the Government on: 

1. The best method to deter the market value of employee share scheme benefits; and
2. Whether employees of start-up, research and development and speculative-type companies should benefit from a tax deferral arrangement despite not being subject to a real risk of forfeiture.

The Board of Taxation will report to Government on these issues by the end of February 2010.

Questions
Please contact:

Michael van Schaik, Associate Director, Employment & Remuneration Services.
Phone: +61 (0) 3 8635 1835
Email: mvanschaik@moorestephens.com.au

Shannon Burdeu, Manager, Employment & Remuneration Services
Phone: +61 (0) 3 8635 1859
Email: sburdeu@moorestephens.com.au