ATO ID 2003/690: Employee share scheme: company demerger - allotment of shares to trustee
Date of decision: 26 June 2003
Year of income: Year ended 30 June 2003
Business line: Superannuation and Employer Obligations

Issue
Does the allotment of shares in a demerged entity, to the trustee of an employee share trust, in respect of shares held on behalf of employees in the head entity of the demerged group, constitute a 'fringe benefit' as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Decision
No. The allotment of the shares in the demerged entity is not in respect of employment and thus does not constitute a 'fringe benefit' as defined in subsection 136(1) of the FBTAA.

Facts
A head entity has established an employee share scheme under which a trustee holds shares in the head entity on behalf of 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. The trustee of the employee share trust is an associate of the participating employees.

Reasons for decision
Summary: For a benefit to be a 'fringe benefit' in accordance with the definition in subsection 136(1) of the FBTAA, it must be provided to an employee or the associate of the employee in respect of the employment of the employee. Whilst the expression 'in respect of' has no fixed meaning, the full Federal Court in J & G Knowles v FC of T (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22; examined its meaning in relation to Fringe Benefits Tax (FBT) and noted that: ... what must be established is whether there is a sufficient or material, rather than a causal connection or relationship between the benefit and the employment... The Court also suggested that it would be useful to ask 'whether the benefit is a product or incident of the employment'. Whilst participating employees' interests, via the trust, in shares held by the trustee, are acquired pursuant to an employee share scheme - and therefore in respect of their employment - shares in the demerged entity are allotted to all shareholders on the basis of their ownership of shares in the head entity at the time of the demerger. Thus, as the allotment of shares to the trustee is considered to be a product or incident of the shareholder relationship rather than the employment relationship, it does not constitute a 'fringe benefit'.

Legislative references: Fringe Benefits Tax Assessment Act 1986 subsection 136(1).
Case references: J & G Knowles v FC of T (2000) 96 FCR 402 2000 ATC 4151 (2000) 44 ATR 22
Related ATO interpretative decisions: ATO ID 2003/417 | ATO ID 2003/418
Subject references: Benefit Company restructuring Employee share schemes & options Fringe benefits In respect of employment