Employee Share Scheme Trusts

Many ASX-listed companies use an employee share scheme (ESS) trust to facilitate and administer the company’s ESS arrangements. An employee share trust, for an ESS, is defined as one whose sole activities are obtaining shares or rights in a company and distributing those shares or rights to employees (or their associates) of the company or a group company and other activities that are merely incidental to these activities.

On 18 September 2019, the Commissioner of Taxation released a draft taxation determination, TD 2019/D8, providing his views on “What is an ‘employee share scheme trust’?”

The draft determination is important because an ESS trust enjoys fringe benefit tax (FBT) and capital gains tax concessions that would not be available if the trust does not meet the definition of an ‘employee share trust’.

The draft TD tells us when the Commissioner considers a trust will meet this definition and when it will not be an employee share trust and the key change is that it is the trustee’s activities that will now determine whether it meets the definition, or not, rather than the powers described in the trust deed .

What does this mean?

  • If the activities undertaken by the trustee are not a natural incident or consequence of obtaining, holding and providing shares or rights under an ESS, or if the activity is undertaken for or follows from some other purpose, such activities are not merely incidental.
  • Examples of activities that the Commissioner considers are not merely incidental include, but are not limited to:
    • Giving a loan to an employee for the purchase of shares or rights
    • Making distributions to employees who do not have an interest in the shares held in the trust. This can include certain dividend equivalent payments
    • Waiving a right to be paid a dividend on shares held in the trust
    • Paying distributions to employees that are unrelated to their ESS interests held in the trust
    • Investing in assets other than shares or rights to shares in the employer company
    • Engaging in trading activities in relation to the employer company shares
    • Distributing mainly cash payments to employees rather than shares
    • Providing additional benefits to employees over and above the entitlement from the equity grant

Importantly, the Commissioner states that once the trust fails to meet the requirements of an employee share trust, it will no longer be an employee share trust for the duration of the ESS. The trust cannot regain its status as an employee share trust for that ESS.

Employer companies that use an employee share trust should carefully review the draft determination and the activities of the trust to ensure it has not undertaken any activities that are more than merely incidental to the acquisition and distribution of employer company shares.

Employers and others can comment on the Commissioner’s draft determination up until 18 October 2019. The draft TD 2019/D* can be found HERE .

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