Employee share scheme: company demerger - allotment of shares to trustee - sole activities test

Does paragraph (hb) of the definition of 'fringe benefit' in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) apply if, pursuant to a demerger, the trustee of an employee share trust is allotted shares in the demerged entity and transfers those shares to participating employees?

Yes. The allotment of shares to the trustee of an employee share trust and the subsequent transfer of those shares, does not breach the sole activities test contained within paragraph (hb) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA.

A head entity has established an employee share trust under which a trustee holds shares in the head entity on behalf of participating employees. The sole activities of the trust, prior to the demerger, were obtaining shares in the head entity and providing those shares to participating employees.

Under a demerger, the head entity allots shares in the demerged entity to existing shareholders in the head entity. Those shareholders include the trustee of the employee share trust, who will distribute the new shares to the participating employees immediately after they are allotted.

Benefits constituted by the acquisition by a trust of money or other property in relation to an employee share trust, are generally excluded from the definition of 'fringe benefit' by the operation of paragraph (hb) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA.

However that exclusion will only apply where: ... the sole activities of the trust are obtaining shares, or rights to acquire shares in a company (the "employer"), or a holding company (within the meaning of the Corporations Law) of the employer, and providing those shares or rights to employees of the employer.

The activities of a trustee administering an employee share trust will invariably involve a range of activities including clerical and administrative functions that are incidental or essential to the operation of the trust. Further, the terms of paragraph (hb) clearly envisage a trustee being able to receive money or other property as an essential prerequisite to obtaining shares in the employer.

The actions of the trustee in receiving and immediately distributing shares under the demerger are considered incidental to the trustee's function of administering the employee share trust.

Thus, the application of paragraph (hb) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA is not affected by the allotment of the demerged entity shares to the trustee of the employee share trust and the subsequent distribution of those shares to participating employees.