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 peoplenominated by the employees. Often this contribution is financed througha loan or overdraft.
  • The trust invests these contributions on behalf of the employeesor their nominees, often by loaning an amount equal to the contributionsback 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 generallyfinanced by money borrowed from the trust. Where the trust is not aunit trust, selected employees or persons may be nominated as beneficiaries.The selected employees are predominantly directors or shareholders ofboth the employer and trustee companies.
  • The holders of ordinary units are entitled to distributions of incomein proportion to their holding.
  • Bonus units may be issued to selected employees or selected employeesmay become participating members. Corpus may be distributed, at thetrustee's discretion, among the holders of bonus units in proportionto their holding and then to participating members. There is no considerationprovided by employees to become bonus unit holders or participatingmembers.

The flow of funds

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'sprofits but are structured to purportedly provide a large tax deductionto the employer and avoid a fringe benefits tax liability.

Our legal perspective:

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

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

What you can do

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

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