Most companies haven’t thought about what they should do in the event of a wind up of a trust and yet it is something that is likely to be more relevant since the changes to the tax legislation in 2009. Salary sacrifice plans post 2009 do not need to have a forfeiture condition (just a restriction on trading lock) for deferral. Tax Exempt plans have never had a forfeiture condition. Commonly now companies are considering whether to terminate their employee share plan trusts for cost reasons.
Trusts for employee plans are only used where there is a company philosophy that all of the plans should sit under a single trust structure or there is a real risk of forfeiture.
The question usually then arises what should a company consider on the wind up of a trust?
- Ensure that you receive approval for the termination or wind up of the trust
Most Trust Deeds have a clause that provides for the Trust to end. Usually the resolution to terminate the Trust is at Board level or the committee or delegates that the Board has given authority to deal with the day to day management of the Trust.
Once this resolution has been passed it is important that this information is then passed onto the Trustees (whether individuals or a Trust company), as the trustee(s) will need to formally meet and confirm the termination of the Trust as well.
- Communicate with your employees
A Trust can be terminated and wound up with or without employees holding shares. Where employees are still holding shares these shares will need to be transferred onto the main share register in their own names. Ideally where they have an existing holding the transfer is into this account to consolidate all of their holdings. Where the shares have an existing restriction on them (for tax deferral) this must be maintained when the shares transfer.
Generally companies communicate with their employees about the change to the Trust where there are still employees holding shares at decision point. This is often quite a simple letter describing what is going to happen, when and what will happen to their shares as a result.
- Ensure that the financials and tax returns are up to date and complete
The Trust will need to finalise its accounts once the termination has happened. This means completing and filing a final Income Tax Return and completing a final set of financials for the trustee(s) to sign off on.
The Trust needs to retain sufficient funds to cover the costs of the filing and any audit or other costs associated with the final creation of financials. The Trust can not be finalised until this process is complete.
- Deal with unallocated shares and residual sums
Once all allocated shares have been identified and transferred to your employees some Trusts will have one or more of the following assets that they need to be dealt with:
- unallocated shares, excess shares that no employee is entitled to;
- unallocated residual money or interest, this is usually money that has accumulated in the Trust bank account and to which no one is entitled;
- unclaimed money or DRP shares or missing employee holders.
Generally companies deal with these issues as outlined below:
Unallocated shares – these are transferred to another employee share plan trust (where this is allowed in the Trust Deed and there is another employee plan) or sold and the proceeds are used for costs, transferred to another employee benefits plan or given to charity (where the sale and proceeds are being returned to charity companies use ShareGift Australia, to sell the shares with no commission with 100% going to the charities).
Note: if the shares are sold the proceeds of the sale can not be returned to the company as this infringes the self acquisition provisions in the Corporations Act;
Residual money, this is used to offset against any winding up costs, income tax or advisors fees with the residual being transferred to another employee benefit or to charity;
Unclaimed money/shares this needs to be held for the minimum period under the state legislation before it can be gazetted, commonly a Trust would start a clean up process around these amounts prior to the wind up decision and termination approval happening. This issue can delay the full wind up until the statutory periods have been met.
Once these matters have been resolved the Trust Bank account is closed.
Checklist:
reconcile your shares and bank account and make sure all financial documentation is up to date;
understand the allocated and unallocated share holdings and any residual money not allocated to employees, get a report on this;
think about whether shares are still restricted and what to do if they are to avoid any adverse tax consequences for your employees;
get a tax review of the potential tax issues that you need to consider in the wind up process;
get a clear picture of the unclaimed monies and unpresented cheques;
understand the provisions of the Trust Deed.
For our members there is a more detailed article about when and whether a trust is needed, see our membership site.