Employee benefit arrangements have recently come under increased scrutiny from the ATO. This article aims to provide a comprehensive overview of these arrangements, their potential tax implications, and key considerations for both employers and employees.
Types of employee benefit arrangements
The ATO has identified several types of employee benefit arrangements that may be designed to avoid tax. These include:
- Employee bonus arrangements
- Employee share trusts
- Employee investment trust/plans
- Employee incentive trust/plans
- Employee savings plans
- Employee entitlement funds
- Employee reward schemes
It’s important to note that these arrangements do not include complying employee share schemes and approved worker entitlement funds.
Common structures
1. Employee benefit trust arrangements
These typically involve:
- An employer establishing an employee benefit trust
- Employees directing salary to be paid into the trust
- The trust investing contributions on behalf of employees
- Selected employees acquiring an interest in the trust
These arrangements are often structured to provide tax deductions for the employer while avoiding Fringe Benefits Tax (FBT) liabilities.
2. Employee share or incentive plans
Key characteristics include:
- Establishment of a special purpose company by the employer
- Allocation of shares or membership interests to selected employees
- Employer contributions to the special purpose company
- Investment of contributions, often through loans back to the employer
While designed as employee incentive plans, participation is often limited to business controllers.
3. Employee remuneration trusts (ERTs)
ERTs are established to provide remuneration or incentives to Australian resident employees. They involve:
- Trust establishment by the employer or an adviser
- Trustee receiving money or assets from the employer
- Provision of benefits to employees or their associates
Tax implications
For employers:
- Contributions to ERTs may be deductible if genuinely intended for employee remuneration
- Pay As You Go (PAYG) withholding may be required on certain contributions
- FBT can apply to contributions, benefits, and loans provided through ERTs
- Ongoing maintenance fees for ERTs may be deductible
For employees:
- Benefits received from an ERT may be assessable income if considered remuneration
- Contributions made to an ERT on an employee’s behalf may be assessable income
ATO concerns
The ATO is particularly concerned about arrangements designed to:
- Defer or avoid tax on employer profits
- Provide large tax deductions for employers
- Avoid FBT liabilities
Key considerations
- Employers should carefully evaluate the tax implications of any employee benefit arrangement before implementation.
- Employees should be aware of the potential tax consequences of participating in such arrangements.
- Both parties should consider seeking professional tax advice to ensure compliance with current regulations.
While employee benefit arrangements can serve legitimate purposes, it’s crucial to navigate them with caution. The ATO’s increased focus on these structures underscores the importance of thorough due diligence and professional guidance when considering their implementation.
For further information or specific advice regarding employee benefit arrangements, it is recommended to consult with a qualified tax professional or refer to the latest ATO guidelines.
Contact our KMT advisers for tax advice before extracting wealth from your company.
About our advisers:
Michael Fox has been dedicated to his clients’ success, devising comprehensive wealth strategies for personal and business growth for over four decades. With extensive expertise in business governance and family business succession, Michael specialises in empowering emerging businesses and family enterprises by fostering renewal, enhancing value, and smoothing transitions to the next generation. Please do not hesitate to reach out if you need assistance.
Chrisanthe Lekatis is renowned for her expertise in management accounting, virtual CFO services, and top-tier business advice. She empowers management with tailored strategies for success, streamlining processes to achieve efficient and cost-effective outcomes. Her commitment to building trust and lasting relationships goes beyond professional excellence; it’s a personal ethos. By actively listening and understanding her clients’ businesses and goals, Chrisanthe thrives on collaborative efforts to navigate challenges and collectively achieve their aspirations. Please do not hesitate to reach out if you need assistance.
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek tax advice from a qualified accountant at KMT Partners. Information is current at the date of issue and may change.
