Employee share trust governance: Five areas where complexity is building

Employee share trusts underpin many of Australia’s most important incentive arrangements among ASX 300 companies, yet they are often treated as “set and forget” structures.

Their commercial benefits depend on effective ongoing governance, and a clear understanding of how an employee share trust should be administered. Below we outline five areas where we are currently seeing the most complexity in practice: indeterminate rights, foreign participants, Pillar Two reporting and the ongoing reliance on Private Binding Rulings. Each warrants attention from reward and remuneration teams, tax managers, CFOs and company secretaries, all of whom have a role in the successful operation of an employee share trust.

Indeterminate rights

Indeterminate rights are awards that may be settled in cash or shares, or for which the number of shares is not known at grant. They create governance complexity because the timing and availability of the employer deduction may depend on when the award becomes a right to acquire a definite number of shares. This may delay the deduction and require an amendment to an earlier income tax return. Careful tracking of share purchases and awards is therefore essential, particularly where shares are warehoused in the employee share trust several years before settlement.

Foreign participants and global plans

Foreign participants add a further layer of complexity. Many global groups operate equity plans into and out of Australia through a single Australian employee share trust, using it to deliver awards to employees of offshore subsidiaries as well as local staff. While commercially efficient, this can place pressure on the sole activities test, which requires the trustee to acquire and hold shares solely for the purpose of providing them to employees (and their associates) under an employee share scheme, together with activities that are merely incidental to that purpose. Arrangements such as servicing foreign entities, recharges and cross-border settlement mechanics should be reviewed to confirm they remain within that purpose, as failing the test may put the employee share trust’s concessional tax treatment at risk.

There are also international considerations. In some jurisdictions, an Australian employee share trust holding shares for local participants can trigger foreign reporting obligations; for example, Canada’s trust reporting rules may require filings where Canadian-resident employees are beneficiaries. Companies should identify their foreign participant populations early, document how awards to those participants will be settled, consider the jurisdictions in which a deduction may be available, check for any local reporting or registration requirements, and confirm that the employee share trust continues to operate in accordance with its supporting advice and any rulings obtained.

Pillar Two: a new reporting requirement

At a high level, Pillar Two introduces a global minimum Effective Tax Rate (ETR) via a system where Multinational Enterprise (MNE) groups with consolidated revenue over €750 million are subject to a minimum Effective Tax Rate of 15% on income arising in low-tax jurisdictions.

Pillar Two has introduced a new reporting issue for some Australian companies with an employee share trust. An employee share trust generally sits outside the Australian tax consolidated group but is still included in the group’s financial statements.

As a result, there may be instances where a wholly domestic Australian group may be treated as a Multinational Enterprise Group for Pillar Two purposes if the relevant thresholds are met. Groups already within the Pillar Two regime should also consider how their employee share trust should be treated in the group’s global minimum tax calculations and reporting.

Companies should consult their Pillar Two advisers to confirm that the employee share trust and its associated reporting requirements have been appropriately considered.

Your Private Binding Ruling is only as good as the facts behind it

A Private Binding Ruling (PBR) applies only to the facts described in the company’s ruling application. A new plan, a restructured award programme, a deed amendment or another material change should therefore prompt a review of whether the ruling still covers the arrangement. Treating a Private Binding Ruling as a living document can help identify gaps before an ATO review or renewal.

Private Binding Rulings generally apply for the period specified in the Notice of Private Ruling. Companies should begin planning for renewal at least six months before expiry. Because renewal is not automatic and the ATO will reassess the current facts, early preparation provides time to identify and address any divergence from the original arrangement.

Good governance is key

An employee share trust is a special purpose trust whose activities must satisfy the ‘sole activities test’ under the tax legislation. Good governance is essential to maintaining this status. In practice, this means having clear processes to ensure funds flow correctly into the trust bank accounts, shares are acquired only for the benefit of employees, and appropriate records—including dealing notices and financial statements—are maintained.

An employee share trust is not a ‘set and forget’ arrangement. Ongoing oversight and consistent administration are key to sustainable compliance now and into the future.

PwC’s Reward Advisory Services team comprises subject matter experts in employee share trusts. We support employee share trust governance through process guides, deed reviews, audits, tax compliance and Private Binding Ruling applications. We also provide practical employee share trust health checks that enable companies to quickly assess the overall health of their employee share trust.

If you would like to discuss an employee share trust health check or any of the issues raised in this article, please contact our team.