Navigating the Deemed Exercise Rules in Singapore as an Australian Expat

Australian Expats employed in Singapore are commonly offered shares in their employer company as part of their total compensation. While this is beneficial to accelerate your potential earnings, if you’re planning to return home at some stage, it’s critical to understand the deemed exercise rules in Singapore as an Australian Expat. In the blog, we explain what the deemed exercise rules in Singapore are and how you can best navigate them as an Australian Expat.

What are the Deemed Exercise rules?

The deemed exercise rules in Singapore trigger a taxable event for foreign employees when ceasing their employment in Singapore. Under Singapore tax law, foreign employees are deemed to have derived a final taxable gain from any unexercised or restricted Employee Share Options (ESOP), and any unvested/restricted shares under an Employee Share Ownership (ESOW) plan granted while working in Singapore. This rule applies to ESOP and ESOW granted from 1 Jan 2003.

Who is affected by the deemed exercise rules?

The deemed exercised rules apply to the following employees:

• Foreigners (non-Singapore Citizens) ceasing employment.

• Singapore Permanent Residents leaving Singapore permanently.

• Singapore Permanent Residents posted to work overseas.

What types of ESOP and ESOW plans are affected?

The following employee share plans are affected by the deemed exercise rules:

• Unexercised employee share options (ESOP) granted while employed in Singapore

• Restricted employee share options (ESOP) granted while employed in Singapore

• Restricted/unvested shares granted to an employee while employed in Singapore, under any Employee Share Ownership ESOW plan.

  
  

How do the deemed exercise rules affect Australian Expats?

You are affected by the deemed exercised rules in Singapore as an Australian Expat when ceasing employment. The rules are considered an exit tax, with tax payable to the Inland Revenue Authority of Singapore (IRAS) in the same year of assessment that you cease employment in Singapore.

You are liable to pay tax on any unexercised/unvested option or share plans, despite not having access to the actual options/shares at the time (i.e. the options and shares cannot be sold to cover the tax liability). This can create a significant tax liability and require you to liquidate other assets to cover the liability that you may not have anticipated. Planning ahead is imperative for the deemed exercise rules in Singapore as an Australian Expat to ensure you can meet the tax liability.

Managing Stock/Equity-based compensation as an Australian Expat

If you would like to learn more about maximising stock-based compensation as an Australian Expat, such as ESOPs and ESOW, check out our comprehensive guides here:

• Employee Stock Purchase Plans

• Stock Options

• Restricted Stock Units

How is the deemed taxable gain calculated?

The deemed taxable gains are calculated based on the Open Market Value (OMV) of the shares as at one month before the cessation of employment, or the date of grant of the ESOP or ESOW (whichever is later), less the price payable (if any) by the employee to acquire the shares.

The taxable gain calculation can be simplified to “A – B”

A refers to the open market price of the shares as at:

• one month before the date the employee ceases employment; or

• the date of grant of the ESOP or ESOW, whichever is the later.

  
  

B refers to:

• the exercise price of the shares under the unexercised/restricted ESOP; or

• the price paid or payable for the shares acquired under the ESOW with vesting imposed.

  
  

Tax Refund - Available when deemed taxable gain is more than actual taxable gain

If the amount of deemed gain calculated and reported at the time of ceasing employment in Singapore is greater than the actual gain realised by the individual upon exercise or vesting of shares, there is an option to apply for a reassessment of the tax liability based on the actual gain.

The employee can apply for a reassessment of the deemed gain within 4 years from the year of assessment following the year in which the "deemed exercise" rule is applied. For example, for deemed gain taxed in the Year of Assessment 2024, the application for reassessment must be made by 31 Dec 2028.

To apply for a reassessment of tax liability, the individual must submit:

(a) an application to the Comptroller of Income Tax (CIT) within four years from the year of assessment following the year in which the deemed exercise rule applied; and

(b) relevant documentation to support that the actual tax liability is lower than that computed under the deemed exercise rule.

Tracking Option – Alternative method to Deemed Exercise rule

As an alternative to the deemed exercise rules in Singapore as an Australian Expat, the Tracking Option allows an employer the option to track when the ESOP or ESOW is exercised/vested. The employer can track and report the gains from the ESOP and ESOW based on actual realised gains and report this to the IRAS. The employee will be assessed on such gains based on his tax residency status at the time that the gains arise.

The employer will need to meet the qualifying conditions and apply to IRAS for the Tracking Option. This may not always be available to all employers, so it’s worth checking with your employer before ceasing employment to see if this is an option.

Conclusion

Navigating the deemed exercise rules in Singapore as an Australian Expat requires careful planning and a clear understanding of your tax obligations before ceasing employment. These rules can result in a significant and often unexpected tax liability on unvested or unexercised share plans, despite you not having access to the actual shares at the time.

As an Australian Expat, being proactive about your stock-based compensation, exploring potential alternatives like the Tracking Option, and considering the possibility of reassessment if actual gains differ, can all help you better manage this complex aspect of cross-border tax. Make sure to seek tailored tax advice and coordinate with your employer ahead of any departure from Singapore to avoid unpleasant surprises and stay ahead of your financial obligations.

Runway Wealth Management is the trusted Financial Adviser to the Australian Expat community. Our tailored advice is backed by expertise, education and experience, which allows us to be at the forefront of Australian Expat Financial Planning.

If you would like to speak to one of our Expat Financial Advisers about this blog or if you have other queries, we would be more than happy to speak with you. Feel free to send us an enquiry through the ‘Contact Us’ tab provided in the link below:

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General Advice Disclaimer: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.