On 5 March 2014 the Australian Taxation Office released a draft ruling relating to the tax treatment of employee remuneration trust arrangements. In the past, the Commissioner of Taxation has issued various private tax rulings on employee remuneration trust arrangements which had allowed income tax deductions for employer contributions to employee remuneration trusts. Many of these trusts were used to acquire shares in the employer to be provided to employees under existing or future equity based remuneration plans.
The draft ruling indicates that the ATO is now seeking to limit the circumstances in which deductions will be available to the employer. The draft ruling also indicates that there may be significant difficulties for private companies establishing employee remuneration trusts, as the arrangement may attract the application of the punitive Division 7A (treating contributions as deemed dividends to the trust).
The draft ruling has been open for consultation and has received a degree of criticism from the professional bodies so it is expected that significant clarifications and changes will be made before the final ruling is issued. Some of the criticism relates to how the Tax Office will apply its new views to existing remuneration trust arrangement. Companies with existing employee trust arrangements, and those wanting to establish an employee equity remuneration scheme for their Australian employees will need to monitor the situation closely.