I am trying to work out whether the deferred taxing point for my foreign ESOP is when the options vest, or when I exercise them. The Income Tax Assessment Act 1997 states the following in section 83A-120 "ESS deferred taxing point—rights to acquire shares":
(2) The ESS deferred taxing point for the *ESS interest is the earliest of the times mentioned in subsections (4), (6) and (7).
[...]
(4) The first possible taxing point is the earliest time when:
(a) you have not exercised the right; and
(b) there is no real risk that, under the conditions of the *employee share scheme, you will forfeit or lose the *ESS interest (other than by disposing of it, exercising the right or letting the right lapse); and
(c) if, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately disposing of the ESS interest—the scheme no longer so restricts you.
(6) The 2nd possible taxing point is the end of the 15 year period starting when you acquired the interest.
(7) The 3rd possible taxing point is the earliest time when:
(a) you exercise the right; and
(c) there is no real risk that, under the conditions of the scheme, after exercising the right, you will forfeit or lose the beneficial interest in the *share (other than by disposing of it); and
(d) if, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately disposing of the beneficial interest in the share if you exercised the right—the scheme no longer so restricts you.
It is clear that subsection (7) would be triggered if I exercise a vested option. However, I am trying to work out whether subsection (4) would be triggered when an option vests, but I do not exercise it. The rules of my ESOP restrict me from transferring (i.e. disposing of) options. However, after an option has vested, I would be able to exercise it and dispose of the resulting share. How does this situation apply to criteria (4)(c)?
(The problem if the deferred taxing point is when options vest is that in a small unlisted company, it is not necessarily feasible to find a buyer to dispose of some of the resulting shares in order to be able to pay the tax, even if not technically restricted from doing so.)
Further questions:
- Would the shares (in a foreign company) resulting from exercising options in my foreign ESOP be subject to Australian CGT as a temporary resident in Australia (at least, to the extent that they relate to employment in Australia)? I have read the information here on this topic, but it the key question is whether the ESS interests are "taxable Australian property", which I can't find guidance on.
- The ITAA 1997 states that "If you are a foreign resident, only the part of the discount that relates to your employment in Australia is included in your assessable income." Say half of some options relate to employment in Australia and half relate to employment in a foreign country, and I exercise half of those options. How is it determined "which half" (i.e. relating to employment in which country) I exercised? Or do I get to choose?
Thanks in advance
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