Employee Share Trust (EST) vs. Peak Performance Trust (PPT): Decoding Employee Ownership Mechanisms in Australia

In this article, we will cover:

• The differences, pros and cons of an EST and PPT
• How a trust benefits the business, its owners, and employees
• General considerations for both EST and PPT
• Employee salary sacrifice in a Peak Performance Trust

Succession Plus created its first Employee Share Trust for an LJ Hooker office in NSW in 2006, the first in Australia and still going strong. In the nearly two decades since, our advisors have rolled out more than 130 employee ownership plans – and associated trusts – for businesses of all sizes.

The two most common trusts are an Employee Share Trust (EST) and a Peak Performance Trust (PPT). A PPT is a specific type of Employee Ownership Trust (EOT), a mechanism used in Australia to facilitate employee ownership and participation in a company.

Ninety-nine percent of Succession Plus Employee Share Schemes are set up under a trust, and of those, 99% are a Peak Performance Trust.

How does a trust benefit a business, its owners and employees?

A trust is a legal structure that allows individuals and businesses to transfer assets (such as property, money, or, in the case of an Employee Share Ownership Plan, shares) to a trustee.

The trustee, either an individual or a corporate entity, is responsible for managing and safeguarding these assets on behalf of beneficiaries. The trust’s terms and conditions are outlined in a legal document called the trust deed.

Trusts serve a multitude of purposes, including estate planning, asset protection, and a mechanism to ensure the orderly distribution of assets. In some cases, they can allow individuals to take advantage of certain tax benefits.

Including a trust as part of your ESOP or ESS

An Employee Share Ownership Plan, sometimes called an Employee Share Scheme, offers a unique blend of financial, cultural, and strategic advantages, aligning employees’ interests with the company’s success.

The trust, whether it’s a PTT or EST, provides the financial-legal mechanism for managing the shares and forms part of the ESS rules.

As the employer company prospers, so do the employees, creating financial incentives for performance and long-term commitment. This sense of ownership and commitment often fosters increased motivation and dedication among the workforce.

Using an Employee Ownership Trust to create a retirement safety net

Fewer than 1-in-5 Australian business owners have a financial strategy for retirement in the form of a written plan.

An ESOP & EOT can be useful for business owners transitioning from their leadership role, often foregoing the need to put the business up for sale on the open market. In transitioning ownership to key personnel through shares, owners can ensure the continuity of their operations and leave a lasting legacy.

Employees benefit too! Most ESOPs are typically designed to function over two-to-15 years. As employees accumulate shares over their tenure, they can cash-in or sell their shares on exit or retirement.

The employer company benefits, as employees of ESOP-enabled firms tend to stay longer, reducing turnover costs and enhancing market value through institutional knowledge.

Employee Share Trust (EST) vs Peak Performance Trust (PPT)

Let’s delve into the different tax implications, technical aspects, and legal considerations for an EST and PPT. Note, however, that the information in this article is general and should not be taken as legal or tax advice.

Employee Share Trust (EST)

Structure and Set-up

• An EST is established to hold and manage shares on behalf of employees.
• Shares are purchased by the trust or allocated to the company.
• Employees listed as beneficiaries receive shares — or share options — from the trust. The disbursement of shares is typically related to employment terms, meeting KPIs, or other outlined criteria.

Tax Considerations

• A beneficiary’s burden under the Income Tax Assessment Act depends on how and when employees acquire shares or options, as well as when they dispose of them.
• Benefits provided under an EST can be subject to Fringe Benefits Tax (FBT).
• Capital gains tax may apply when employees eventually sell their shares.

Technical Aspects

• The trust must be structured to align with business objectives and relevant employee incentives.
• Share valuation, especially in private companies, can be complex and requires regular assessment.

Legal Considerations

• Compliance with the Corporations Act 2001 and Australian Securities and Investments Commission (ASIC) regulations is essential.
• The trust deed must clearly outline the operation of the trust, the rights of beneficiaries, and the management of the shares.
• Employment contracts may need to integrate terms relating to the EST.

Peak Performance Trust (PPT)

Structure and Set-up

• A PPT is designed to provide employees with a share in the company’s profits, which is used to acquire shares.
• The trust receives a portion of the company’s profits, which are then used to acquire shares.
• Employees can contribute by buying shares with personal savings, income, or salary sacrifice.

Tax Considerations

• Contributions by the company to the PPT are generally tax-deductible.
• Distributions to employees from the PPT are typically treated as income and subject to income tax; if dividends are distributed, franking credits will still apply.
• Careful structuring is required to optimise the company’s and employees’ tax efficiency.

Technical Aspects

• The PPT should have clear rules for profit allocation and distribution, as well as entry, valuation, exit, and wind-up of the trust.
• Financial reporting and accounting for the trust require precise management.

Legal Considerations

• As with ESTs, compliance with relevant corporate and trust laws is necessary.
• The trust deed for a PPT must specifically address profit participation aspects.
• Employee agreements should reflect the terms of participation in the PPT.

General Considerations for Both EST and PPT

In any trust structure, some basics are a standard requirement for all plans:

• Governance: Proper governance structures are crucial for managing these trusts effectively and transparently.
• Employee Communication: Clear communication with employees about how the trust works and their entitlements is key to the success of these plans.
• Documentation: Detailed and precise documentation, including the trust deed and employee agreements, is essential.
• Professional Advice: Due to the complexities involved, especially concerning tax and legal compliance, seeking professional advice is highly recommended.

Employee salary sacrifice in a Peak Performance Trust

Salary sacrifice is a voluntary arrangement where employees can choose to redirect a portion of their pre-tax salary towards specific benefits, such as your PPT. The ‘sacrificed’ amount is generally not subject to income tax. This can be especially attractive for higher income earners, provided they consider how and when they will ‘cash out’ of the trust.

How to set up your Employee Share Trust or Peak Performance Trust

Now you understand what are the benefits of an employee share trust. Many Australian mid-market businesses could benefit from creating one, and more are using them as part of their employee engagement and retention strategy.

Employee Share Trusts (ESTs) and Peak Performance Trusts (PPTs) are elegant ways to align employees and company interests. Each comes with its own set of challenges; navigating the intricacies demands careful consideration.

Our experienced Succession Plus advisors have a proven track record in tailoring plans to suit businesses of all sizes.

Ready to take the next step? Book a free consultation with a Succession Plus advisor today, and trust us to help you pave the way for success.

Dr Craig West

Founder & Chairman | Succession Plus

Dr Craig West is a strategic accountant who has over 20 years of experience advising business owners.

With a background as an accountant in practice and two master’s degrees, Craig formed a strong view that the majority of business owners (and often their advisers) were unprepared and unaware of the steps required to prepare for exit. He then designed and documented a unique 21-Step Business Succession and Exit Planning process to assist owners and their advisers in navigating this process.

Craig now acts as a strategic business and financial mentor for mid-market business owners. Craig has written four critically acclaimed books educating business owners on employee incentives, succession planning, asset protection, and exit strategies. Additionally, he has completed doctoral research on Employee Share Ownership Plans (ESOPs) for succession.

Craig is a Member of the Forbes Business Council where he leverages his extensive experience to contribute valuable insights on helping business leaders navigate the complexities of growing and exiting their businesses.

In April 2024, the Exit Planning Institute admitted Craig to the International Exit Planning Circle of Excellence.