Employee share scheme: provision of financial assistance by a trustee to acquire shares - 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, under an employee share scheme (ESS), the trustee of the ESS trust provides financial assistance to participating employees to enable them to purchase shares in the employer company?

No. The provision of financial assistance by the trustee to participating employees for the purposes of purchasing shares in the employer company, will breach the sole activities test contained within paragraph (hb) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA.

A company has established a trust to administer an ESS.

The company will make contributions to the trust to enable the trustee to acquire shares in the company and to provide financial assistance to participating employees in the ESS.

The shares acquired by the trustee will be immediately allocated to participating employees in the ESS.

Financial assistance will be provided by the trustee to participating employees to facilitate the purchase of shares in the ESS.

A benefit constituted by the acquisition by a trust of money or other property in relation to an employee share scheme, is 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 Act 2001) of the employer, and providing those shares or rights to employees of the employer.

The test contained in paragraph (hb) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA is clearly more restrictive or narrower than a dominant purpose or principal activities test. It requires the activities of the trust to be solely or exclusively concerned with the acquisition of shares or rights and the provision of those shares or rights to employees (or associates) of the employer.

The acquisition of shares by a trustee and the provision of those shares to employees will necessarily involve a number of clerical and administrative functions. To the extent that a trustee undertakes clerical and administrative functions that are an incidental part of obtaining and providing shares to employees, those activities will not be considered a breach of the sole activities test.

However, the provision of financial assistance by the trustee to employees, albeit to facilitate the acquisition of shares, is considered to be an additional activity of some substance, which is over and above the clerical and administrative functions which are incidental to the activities of obtaining shares and providing them to employees.

Accordingly, paragraph (hb) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA will not apply where the activities of the trustee under the ESS include the provision of financial assistance to participating employees to facilitate the acquisition of shares in the employer company.