On 18 September 2019, the ATO issued a new draft tax determination TD 2019/D8: it provides guidance in relation to the criteria that must be met by an EST in order for the EST, its beneficiaries and the employer company to qualify for certain capital gains tax (CGT) and fringe benefits tax concessions.
An employee share trust (EST) is a common structure that employers (both listed and unlisted) use to manage the sale restrictions and forfeiture conditions that are often associated with their share-based incentive programs. However, this is not the only practical benefit that an EST can deliver.
The benefits of using an employee share trust include:
· hedging against rising share price
· the company maintains control over shares, while at the same time the Trustee has a fiduciary duty to employees, providing greater transparency and integrity to the arrangement
· the employer’s contributions to the EST may be tax-deductible
Typically, an EST would operate as follows:
· company makes a contribution to the EST.
· EST uses the contribution to either subscribe for shares from the company or purchase them on-market.
· EST delivers shares to the employee per their entitlement under an employee share scheme.
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.
Companies should be reviewing and auditing the activities of their ESTs, together with the underlying trust deed, to ensure compliance with the Draft Determination.
Finalised draft taxation determination can be found here.
When dealing with complicated tax questions such as employee share trusts, it’s always best to consult an expert. Make sure you have all the right information before you start and always consult your tax agent for any questions or queries. If you need advice on tax matters please contact us at mail@thetaxaccountant.com.au and our agent will be able to help you.