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SMSFs warned on NALI dangers with employer share schemes

SMSFs warned on NALI dangers with employer share schemes
By Miranda Brownlee
10 March 2022 — 2 minute read

With employer share schemes growing in popularity, SMSFs have been warned about some of the non-arm’s length issues that can arise where a fund acquires shares through an ESS.

Speaking in a recent webinar, DBA Lawyers special counsel Bryce Figot said that with employer share schemes (ESS) becoming increasingly popular, there had been a lot more interest in acquiring these shares through an SMSF.

Mr Figot explained that the ATO considers shares or options transferred to an SMSF under an ESS to have been acquired from the employee, who is a related party of the fund.


Based on ATO guidance, an SMSF trustee can acquire shares or options in companies from related parties as long as they are acquired at market value and either the shares or options are listed or the company is a related party of the SMSF and the acquisition will not result in the level of in house assets of the fund exceeding 5 per cent, Mr Figot explained.

“This is interesting, because by definition, if it’s acquired under an employee share scheme, it’s going to be acquired at a discount [rather than market value],” he noted.

“The ATO [is] saying here that because it’s really the employee who earns the entitlement, even if the employee directs the super fund to acquire it from the employer, that it’s still going to regard it as coming from the employee, so you’ve got to look at these exceptions,” he said.

Mr Figot said that while one of the exceptions states that shares and options can be transferred to an SMSF via an ESS if the company is a related party and the acquisition does not result in the level in house assets exceeding 5 per cent, this could lead to non-arm’s length income (NALI) issues. NALI issues can also arise potentially if an asset is acquired at a discount.

“Let’s say I have a $1 million fund; I could use $50,000 to invest in my risky private business. However, I think that’s going to have a big non-arm’s length income risk,” he cautioned.

“The second we’re talking about a non-listed business, there is a huge danger that we must be aware of, and that is NALI.”

If a super fund invests in the company, even if it buys it at market value, if someone then works for the company at below-market wages, NALI will arise because the distribution that the unit trust pays is lower than what it would have been if all the parties were dealing with each other at arm’s length.

NALI could also arise in situations where someone lends to the company at below-market rates.

Mr Figot also noted there are a lot of companies who issue equities because they can’t afford to pay wages yet.

“If that’s the sort of company we’re talking about, that’s not an appropriate thing for an SMSF to invest in,” he stated.

SMSFs warned on NALI dangers with employer share schemes
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Miranda Brownlee

Miranda Brownlee

Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.

Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.

You can email Miranda on: [email protected]momentummedia.com.au
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