The Commissioner of Taxation (Commissioner) has finalised his views on the meaning of “employee share trust” (EST) in the recently released taxation determination TD 2019/13.

Key takeaways are:

From 1 January 2020, trustees of ESTs must stop undertaking activities that are not a natural incident or consequence of obtaining, holding and providing shares under an employee share scheme (ESS) (Ineligible Activities).  Some Ineligible Activities are listed at Appendix A.

If a trustee of an EST carries on Ineligible Activities from 1 January 2020, the trust will not be an EST and can never regain this status.  Where one EST is the relevant trust for multiple ESS arrangements, then all ESS arrangements will be impacted by the relevant trust ceasing to be an EST. 

A trust ceasing to be an EST means:

  • Transfers of options and shares by the trustee to a beneficiary employee will be taxable, which means trustees will need to monitor costs of acquisition and proceeds from or market value of disposals.
  • Employers may not be entitled to tax deductions for contributions to the trust.
  • Employers may be liable to fringe benefits tax (FBT) on contributions to the trust. 

Trustees of ESTs must review their activities before 1 January 2020 to ensure that they are not Ineligible Activities.  Fortunately, the mere existence of broad reaching discretionary powers or duties in the EST trust deed should not mean the trustee has been engaging in Ineligible Activities unless those powers are actually exercised.  Appendix B contains a non-exhaustive list of permitted activities for an EST (Permitted Activities).

Employee share trusts

Very broadly, an ESS is a scheme designed to provide shares or rights (such as options) to acquire shares (ESS interests) in a company to employees.  Those ESS interests may be held through an EST.

Why use an EST

An EST provides certain commercial benefits:

  • ESS interests that are forfeited from employees or otherwise lapse can be recycled, avoiding the need to issue new ESS interests (thus avoiding the dilutive effect on existing shareholders) and having to seek shareholder approvals;
  • ESS interests can warehoused (and, for that purpose, may be acquired progressively over time);
  • Only one shareholder (the trustee) is recorded on the share register, instead of each employee shareholder, enabling private companies to remain just that – private; and
  • Conditions of grant and shareholder rights and restrictions of a company can be better managed by having to deal with the trustee only, rather than numerous employee shareholders.

An EST also provides certain tax benefits (although these benefits are not an increment to those benefits that would be available for employees holding the ESS interests directly):

  • the trust is disregarded for most capital gains tax (CGT) purposes by treating ESS interests owned by the trustee as being directly owned by the beneficiaries of the trust;
  • capital gains and capital losses made by the trust are disregarded for certain CGT events; and
  • contributions made by the employer company to the trust are exempt from FBT and may be deductible.

ESTs are not surprisingly a commonly used structure in ESS arrangements.

When is a trust an EST

A trust is an EST only if its sole activities are:

  • (a) obtaining shares or rights in a company; and
  • (b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the ESS to employees, or to associates of employees, of:
    • the company; or
    • a subsidiary of the company; and
  • (c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b).

We consider each of the key elements below in the context of the Commissioner’s recent tax determination.

“a trust”

The Commissioner’s view is that it is the activities of the trustee in relation to a particular trust that must be tested.  That is, the trustee is considered separately and independently for each trust of which it is the trustee, and only in that capacity.


The Commissioner’s view is that the actual activities that the trustee has undertaken should be examined.  A trustee’s activities must be limited to those described in paragraphs (a), (b), and (c) replicated above.  The mere existence of broad reaching powers or duties in the trust deed should not mean the trustee has breached the requirements to be an EST unless those powers are actually exercised.

“merely incidental”

The Commissioner considers that, because the provisions relating to ESTs are concessional in nature, the phrase “merely incidental” should not to be construed broadly.  Accordingly, an activity will be merely incidental to the activities mentioned in paragraphs (a) and (b) replicated above if it is a natural incident or consequence of the trust obtaining, holding and providing ESS interests.  If the activity follows some other purpose, then the activity will not be taken to be “merely incidental”.

We have set out at Appendix A examples of activities the Commissioner considers are Ineligible Activities.  We have also included a list of Permitted Activities at Appendix B.

Consequence of failing to meet the requirements of an employee share trust

The Commissioner’s view is that, once the trust fails to meet the requirements of an EST, it will no longer be and can never regain its status as an EST as the trust’s “sole activities” will no longer be those outlined in paragraphs (a), (b) and (c) replicated above.

If a trustee managing multiple ESSs via a single trust was to carry on Ineligible Activities in respect of a single ESS, the trust would cease qualify as an EST for each ESS being managed.

The Commissioner’s compliance approach

Importantly, where the trust’s sole activities from 1 January 2020 are Permitted Activities, 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 for periods on or after 1 January 2020.

Trustees must take active steps to cease all Ineligible Activities prior to 1 January 2020.

Appendix A – Ineligible Activities

A trust will not meet the requirements of an EST where the trustee’s activities go beyond those activities that can be regarded as being “merely incidental” to obtaining shares or rights in a company and ensuring the ESS interests are provided to employees.

Without limitation, the Commissioner considers the following to be Ineligible Activities of a trustee:

  • waiving or relinquishing certain entitlements, such as waiving the right to be paid or credited dividends pursuant to a dividend waiver clause contained in the governing trust documents (this is sometimes done so the trustee does not have to pay tax on dividends paid on unallocated shares);
  • providing financial assistance, such as providing a loan to an employee to purchase shares or interests in the employer company;
  • payment of income or accrued capital from shares that have not been allocated under an ESS to a beneficiary (or to employees who do not hold a beneficial interest in the employer company under the trust);
  • exercising a general discretion to make distributions of income or capital to pay a class of participating employees or other beneficiaries of the trust amounts unrelated to their ESS interests or entitlements under the ESS rules;
  • borrowing money:
    • for a purpose other than purchasing shares or rights in the employer company;
    • with security provided over any of the trust’s assets for the loan; or
    • where the interest payable on the loan is more than arm’s length commercial rates;
  • investing in assets other than shares or rights to shares in the employer company;
  • engaging in trading activities in relation to shares in the employer company, other than purchasing and selling shares to satisfy obligations under the ESS;
  • distributing mainly cash payments to participating employees rather than shares or ESS interests under the ESS; and
  • providing additional benefits to participants and/or employees, over and above the delivery of the ESS interests or resulting shares and any dividend equivalent payment that accrues directly from the employee’s ESS interest.

Appendix B – Permitted Activities

A trust will be an EST where all the trustee’s activities are a natural incident of the trust acquiring and holding shares for the allocation to participating employees.

Without limitation, the Commissioner considers the following activities are Permitted Activities:

  • the opening and operation of a bank account to facilitate the receipt and payment of money;
  • bookkeeping, preparing financial, tax and regulatory statements, and other record-keeping and administrative actions necessary to operate the trust and undertake the Permitted Activities;
  • the receipt of dividends in respect of shares held by the trustee on behalf of a participating employee and their distribution to the employee;
  • 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;
  • the receipt of dividends in respect of unallocated shares and interest from bank accounts and using those funds to:
    • acquire additional shares for the purposes of the ESS;
    • pay necessary and incidental costs of administering the trust and undertaking the Permitted Activities, for example costs relating to the audit of the trust and fees for professional services provided to the trustee in relation to the trust;
    • pay interest on loans provided for the acquisition of shares or rights in the employer company, where the interest payable does not exceed arm’s length commercial rates;
  • paying a dividend equivalent payment to a participating employee under the rules of the ESS, where
    • the amount paid is equal to or less than the amount of dividends paid to the trustee (net of tax paid by the trustee on the dividends), in relation to the number of shares being received by the participating employee, during an accumulation period; and
    • the payment is made at or around the time, and because, the shares vest or are transferred to the participating employee (as required by the ESS);
  • dealing with shares forfeited under an ESS including the sale of forfeited shares and using the proceeds of sale for Permitted Activities;
  • the transfer of shares to participating employees, or the sale of shares on behalf of such employees and the transfer to the employee of the net proceeds of the sale of those shares, when required under the rules of the ESS; and
  • receiving and immediately distributing shares under a demerger or actions in order to participate in a takeover or restructure covered by the ESS rollover provisions.
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