Potential breaches flagged with employee share schemes

If an employee is granted rights to receive shares or options and the employee surrenders those rights to their SMSF, or exercises those rights but nominates their SMSF to receive the shares or options, the ATO will consider certain transactions to have occurred, Ms Formica explained in an online article.­

“In the ATO’s view, shares or options transferred to an SMSF under an employee share scheme are generally considered to have been acquired from the employee, who would be a related party of the fund, even if the shares or options are transferred directly from the employer to the SMSF,” Ms Formica said.

“If the shares or options are acquired from the employee, from the perspective of the Superannuation Industry (Supervision) Act (SIS), the SMSF will be in breach of section 66, unless the shares or options are listed securities at the time of acquisition by the fund, or the employer is a related party of the fund and the acquisition wouldn’t cause the fund’s in-house asset ratio to exceed 5 per cent.”

Determining whether or not the shares or options are in fact acquired from the employee or the employer will require a review of all of the facts and circumstances of the offer, she noted.

SMSF professionals and their clients should also be aware that if the SMSF acquires the shares or options, the employee will have made a personal contribution to their SMSF equal to the market value of the shares or options less any consideration actually paid by the fund, she cautioned.

“For example, where the SMSF pays, say, $10,000 for the shares or options but they have a market value of $50,000, the employee is considered to have made a $40,000 personal contribution to their SMSF, and the cost base of the shares or options for capital gains tax purposes in the fund will be $50,000,” Ms Formica said.

The trustee will also need to ensure the employee is eligible to make contributions to superannuation.

This contribution would then generally be counted against the employee’s non-concessional contribution cap, which some trustees would not be allowed to make.

Ms Formica said: “Where the shares or options are listed securities, the acquisition by the fund will not cause any SIS compliance concerns provided the employee is eligible to make contributions to superannuation. However, the employee may need to consider the impact on their non-concessional contribution cap.

“However, where the shares or options are not listed securities, SMSF trustees should exercise considerable caution before allowing the fund to be nominated to take up the entitlement.”