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Re: Where to pay CGT on ESS, Spain or Australia

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Hi ATO community,

 

I have a question regarding CGT that hopefully you can help. Here's the facts:

  • Spanish citizen
  • Australian Permanent Resident
  • Received options through an ESS scheme from an AU startup company (ie eligible for the startup concession)
  • Not holding more than 10% of the company in options/shares
  • Company not publicly listed yet (hence no way to dispose my shares)
  • Company not in the real estate or property industry
  • Planning to go back to Spain permanently
  • There's a double taxation agreement between Spain and Australia http://www.austlii.edu.au/au/other/dfat/treaties/1992/41.html

 

Given the circumstances I prefer to disregard CGT till actually selling the shares which means that these assets are initially taken to be taxable Australian property. However my preference would be to pay in Spain and I think that DTA allows me to do so. Yet the terms are somewhat unclear to me and I'd appreciate if someone can assist.

 

This is what Article 13 says regarding disposal of shares:


(4) Income or gains derived by a resident of one of the Contracting States from the alienation of shares or comparable interests in a company, the assets of which consist wholly or principally of real property in the other Contracting State of a kind referred to in Article 6, may be taxed in that other State.

(5) Income or gains from the alienation of shares, or comparable interests in a company other than those mentioned in paragraph (4) of this Article which is a resident of one of the Contracting States may be taxed in that Contracting State if the recipient of the income or gains, during a 12 month period preceding such alienation, had a participation, directly or indirectly, of at least 10 per cent in the capital of that company.

 

To rephrase these two paragraphs, only shareholders on AU property companies or holding more than 10% of any other company type are to pay CGT in Australia. None of them apply to me.

 

Finally we have paragraph 6:

 

(6) Nothing in this Agreement affects the application of a law of a Contracting State relating to the taxation of gains of a capital nature derived from the alienation of property other than that to which any of the preceding paragraphs of this Article apply.

 

I can't think of any specific law that applies to selling shares but this paragraph is quite cryptic to me. I think it may apply to selling other assets like eg fine art where there's specific regulations? Not sure if that's a valid example.

 

As my case isn't expressly mentioned then Article 21 applies:

 

(1) Items of income of a resident of one of the Contracting States which are not expressly mentioned in the foregoing Articles of this Agreement shall be taxable only in that State.

(2) However, any such income derived by a resident of one of the Contracting States from sources in the other Contracting State may also be taxed in that other State.


I can't see how selling these shares once in Spain may also be taxed in Australia (as there's no automatic tax withheld on such transaction) so I believe I'm falling under paragraph 1 of this article 21 (ie taxable only in the residency State).

 

All in all if I'm understanding it correctly I think I can safely pay CGT once in Spain and only there. Is my assumption correct?

 

In case I'm wrong hopefully I can make use of the ESS startup exemption here somehow? Maybe this type of ESS shares aren't taken as taxable Australian property on ceasing residency? No idea.

 

If that's not possible either and I finally have to lodge tax return in Australia from Spain as a non-resident I have a subsequent question about how to calculate the CGT discount but I'm going to hold it till the community confirms the first point.

 

Thanks for your assistance.

 

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ATO Certified Response

Community Moderator

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Hi @spaniard 

 

The ESS rules do not in the standard case directly impact on whether or not you have to pay CGT (except if you sell within 30 days of a deferred taxation point). Generally, the rules apply to tax the discount given by an employer to an employee  on the obtaining of shares. The CGT rules then  apply to the later disposal of those shares.

 

Ordinary shares are not taxable Australian property other than situations such as being shares in companies predominantly holding land etc.

 

If you cease to be an Australian resident you are deemed to have disposed of your shares, but may elect to defer CGT until you sell them. See when you-leave-Australia Capital gains on your assets.

 

If you have ceased to be an Australian resident and chosen to defer CGT and then  sell the shares, then a CGT event will apply at this time.

 

The DTA provision that you have quoted is generally taken to mean that it allows Australia or the other country  to tax non-residents of their country  on CGT, but not where the exceptions above it apply.

 

However, interpreting DTA provisions can be complex and fact specific.

 

In your case it could be the case that you would have to pay CGT in Australia where the operation of the DTA would not prevent paying tax in Australia.

 

However, any tax outcomes would depend on your particular circumstances and it is recommended that you  seek  advice  from the ATO on your circumstances to provide yourself with a level of certainty about the tax impacts of your proposed actions.

 

2 REPLIES 2

Former Community Support

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Hi @spaniard,

 

Thank you for putting the time into writing this question to us.

 

We will look into it and get back to you.

Most helpful response

ATO Certified Response

Community Moderator

Replies 0

Hi @spaniard 

 

The ESS rules do not in the standard case directly impact on whether or not you have to pay CGT (except if you sell within 30 days of a deferred taxation point). Generally, the rules apply to tax the discount given by an employer to an employee  on the obtaining of shares. The CGT rules then  apply to the later disposal of those shares.

 

Ordinary shares are not taxable Australian property other than situations such as being shares in companies predominantly holding land etc.

 

If you cease to be an Australian resident you are deemed to have disposed of your shares, but may elect to defer CGT until you sell them. See when you-leave-Australia Capital gains on your assets.

 

If you have ceased to be an Australian resident and chosen to defer CGT and then  sell the shares, then a CGT event will apply at this time.

 

The DTA provision that you have quoted is generally taken to mean that it allows Australia or the other country  to tax non-residents of their country  on CGT, but not where the exceptions above it apply.

 

However, interpreting DTA provisions can be complex and fact specific.

 

In your case it could be the case that you would have to pay CGT in Australia where the operation of the DTA would not prevent paying tax in Australia.

 

However, any tax outcomes would depend on your particular circumstances and it is recommended that you  seek  advice  from the ATO on your circumstances to provide yourself with a level of certainty about the tax impacts of your proposed actions.