Australian Taxation Office

Employee Benefit Trust arrangements

The Scheme

A typical employee benefits trust arrangement has the following features:

• An employer entity sets up an Employee Benefits Trust.
• The entity contributes to the trust for employees or other people nominated by the employees. Often this contribution is financed through a loan or overdraft.
• The trust invests these contributions on behalf of the employees or their nominees, often by loaning an amount equal to the contributions back to the employer entity or an associate of the employer entity.
• A selected employee or person may be invited to acquire an interest (for example, by taking up ordinary units) in the trust. This is generally financed by money borrowed from the trust. Where the trust is not a unit trust, selected employees or persons may be nominated as beneficiaries. The selected employees are predominantly directors or shareholders of both the employer and trustee companies.
• The holders of ordinary units are entitled to distributions of income in proportion to their holding.
• Bonus units may be issued to selected employees or selected employees may become participating members. Corpus may be distributed, at the trustee’s discretion, among the holders of bonus units in proportion to their holding and then to participating members. There is no consideration provided by employees to become bonus unit holders or participating members.

The flow of funds

The tax mischief

The taxpayer’s legal perspective:

The arrangements are designed to defer or avoid tax on the employer company’s profits but are structured to purportedly provide a large tax deduction to the employer and avoid a fringe benefits tax liability.

Our legal perspective:

The Tax Office has a number of concerns relating to employee benefits trust arrangements including:

• the application of the Fringe Benefits Tax Assessment Act 1986 to the employer’s contribution to the employee benefits trust, and
• the employer’s contribution not being included in the aggregate fringe benefit amount resulting in the provision of a tax benefit for the purposes of section 67 of the Fringe Benefits Tax Assessment Act 1986.

What you can do

If you are a member of an employee benefit trust you should contact the Tax Office on 1800 001 111 for further advice.

If you are considering establishing an employee benefit trust you may wish to seek a ruling from the Tax Office on the taxation impacts for participants in the arrangement. For further information, contact the Tax Office on 1800 001 111.