On 6 December 2019, following a period of consultation with industry, the ATO issued its finalised tax determination TD 2019/13: Income tax: what is an ’employees share trust’? (the Determination). The Determination provides guidance in relation to the criteria that must be satisfied by an employee share trust (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.In particular, it provides the Commissioner’s view as to when a trustee’s activities will not meet the ‘sole activities’ test or otherwise fall within the ‘merely incidental’ safe harbour. Following on from our previous report on the draft determination, accessed here; we explore the finalised Determination and subsequent impacts for companies, trustees and beneficiaries.
The ATO has maintained its view that if a trust fails the ‘sole activities’ test at any time, it will lose its status as an EST forever. However, the Commissioner’s compliance approach is that the ATO will not review ESTs in relation to activities undertaken before 1 January 2020. This is a sensible compromise and provides a way forward for trustees who may be unable to roll-over unallocated shares to a new EST without triggering potentially significant tax liabilities.
ESTs must carefully manage their activities and operations after 1 January 2020 to ensure that they do not inadvertently breach the ‘sole activities’ test.
Companies and trustees should use the 1 January 2020 cut-off point as an opportunity to review their EST deeds and activities to ensure that going forward, the trust will continue to qualify as an EST. Appropriate governance mechanisms should also be put in place to ensure that a EST does not inadvertently breach the ‘sole activities’ test in relation to activities undertaken after 1 January 2020. HWLE have prepared a checklist to assist trustees to determine whether the activities of the trust qualify as an EST.Please contact us to obtain a copy.
What’s new in the Determination?
The key differences between the Determination and the draft determination are summarised as follows:
- The ATO has observed that where the trust administers multiple ESS arrangements (which in our experience is common), it is the trustee’s activities in relation to the whole of the trust that are examined. The implication here is that if the trustee’s activities in relation to a particular share plan cause it to breach the ‘sole activities’ test, the trust will cease being an EST in relation to its administration of all share plans (see updated Example 3 in the Determination).
- The ATO’s list of activities that it considers to be ‘merely incidental’ has been expanded to also include:
– bookkeeping, preparing financial, tax and regulatory statements, and other record-keeping and administrative actions;
– borrowing money for the purpose of acquiring shares or rights in the employer company, where no security is provided over the trust assets and the interest payable on such a loan is not more than arm’s length commercial rates. However, parking debt in a EST and incurring interest deductions to offset dividend income in respect of unallocated shares may not be considered a ‘merely incidental’ borrowing activity; and
– the receipt of dividends in respect of unallocated shares and using those funds to pay necessary and incidental costs of administering the trust, such as audit and other professional service fees and paying interest on loans provided for the acquisition of shares or rights in the employer company.
- The ATO has revised its compliance approach. In short, the Determination confirms that for periods on or after 1 January 2020:
– the Commissioner will not apply compliance resources to investigate whether activities undertaken by the trustee prior to 1 January 2020 affect the trust being considered an EST on or after 1 January 2020, provided the trust’s sole activities from that date comply with the legislative requirements. Presumably, the ATO’s compliance approach also means that trustees will not be considered to make false or misleading statements to the Commissioner if they take positions in the trust’s tax return that continue to treat an existing trust as an EST after 1 January 2020 in circumstances where the trustee is aware that the trust may not be an EST because of a historic breach before 1 January 2020; and
– if the trustee applies for a private ruling covering periods on or after 1 January 2020, the Commissioner will not require those activities undertaken by the trustee prior to 1 January 2020 to be identified in the scheme for the private ruling. This is a practical solution for trustees who may want to apply for a private ruling in respect of future income years, but who are fully aware that the trust may have failed the sole activities test prior to 1 January 2020 (eg. because of a dividend waiver).
In light of the above, we recommend that all ESTs conduct a ‘health check’ as at 1 January 2020 to confirm (and evidence) that the trust’s activities as at that date satisfy the ‘sole activities’ test as interpreted by the Commissioner in the Determination. Trustees should also ensure that appropriate safeguards are in place to prevent the trust failing the ‘sole activities’ test going forward. Given what is at stake (and how easily EST status can apparently be lost), it is possible that the days of ‘do it yourself’ employee share trusts in corporate groups may well come to an end. Please contact a member of our team to assist with the review of your EST trust deed and to obtain a copy of our EST checklist.
This article was written by Shaun Cartoon, Partner and Vincent Licciardi, Senior Associate