The current economic climate due to COVID-19, as well as the Australian Taxation Office's (ATO) recent focus on employee share trusts (ESTs), calls for companies to review how they are using their ESTs to identify both opportunities and risks. Our recent experience implementing numerous ESTs and successfully applying for many EST private binding rulings from the ATO, has highlighted key areas companies should consider in reviewing the operational aspects of their ESTs. Below we outline the top 3 things to consider.
1 - Are you reaping the commercial benefits that an EST can offer?
This is an opportune time for companies to maximise the commercial advantages of using an EST, including the capital management flexibility it provides in how shares can be sourced to satisfy employee share scheme (ESS) awards e.g. via an on-market acquisition or fresh issue of shares. To preserve cash, more companies are considering granting a fresh issue of shares to their EST rather than using the EST to purchase shares on market, as is common practice amongst many ASX-listed companies.
2. Does your EST comply with ATO requirements?
The ATO's compliance approach (as set out in TD 2019/13 Income tax: what is an ‘employee share trust’? (TD)) highlights the Commissioner’s interpretation of what activities an EST may perform to meet the “sole activities” test. This is required to be eligible for certain CGT and FBT exemptions. We recommend companies review their EST's existing and anticipated activities as well as compliance with their trust deed under different scenarios, essentially performing a health check of the EST's operation. This review should cover the EST's basic activities as well as those that are less common. For example, companies conducting rights issues to raise cash in the current economic climate or those that offer dividend equivalent payments or dividend reinvestment plans will need to consider and carefully manage how these activities are conducted in respect of shares held by their EST.
3. Are you closing the gap on EST risks?
An EST health check should also encompass a review of processes to support tax deductibility of contributions made by a company to their EST. For instance, tracing the physical transfer of cash from the company to the EST in different scenarios including in the case of a fresh issue of shares is extremely important. Similarly, to the extent the company provides ESS awards to foreign tax residents via the EST, there are other tax deductibility considerations including determining a nexus with derivation of assessable income.
Given the current landscape, it is strongly recommended that companies undertake a health check of their current EST processes and activities. These activities may vary from company to company depending on a range of factors including the nature of the ESS awards, the participants involved and any capital management initiatives of the company, among others. Establishing an EST operating manual or process map for reference at each stage of the life cycle of an award (e.g. grant through to disposal of the underlying shares) can also be useful in allocating responsibilities within an organisation to ensure it is appropriately operated going forward.
We would be happy to discuss with you in more detail.
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