TR 2010/1DC offers promising news for ESS and SMSFs, says law firm

Mr Figot said the 2016 guidance states that “when shares acquired under an ESS are transferred to an SMSF at less than market value, the acquisition results in a super contribution because the capital of the fund increases and the purpose of the acquisition is to benefit a member, or members, of the fund”.

However, there is a “high degree of certainty” this could change based on the draft guidance released in TR 2010/1DC in July last year, he said. 

TR 2010/1DC, which was previously under consultation, sets out the Commissioner’s proposed compliance approach for determining when a contribution has been made to a superannuation provider where the non-arm’s length income rules apply. The ATO website suggests that the draft guidance is set to be finalised by the middle of this year. However, numerous professional bodies have been waiting for greater clarity on the ATO guidance material to supplement LCR 2021/2 before being in a position to make any meaningful submission in relation to TR 2010/1DC.

The draft guidance states that in circumstances where an SMSF purchases an asset under a contract at less than market value, the  superannuation provider has incurred [NALE] under a non‐arm’s length dealing for the purposes of  applying the NALI provisions in section 295‐550. 

“We do not consider that the difference between the  consideration paid (if any) and the market value represents an in specie contribution being made as the  asset has been acquired under the terms of the contractual agreement and not through an in specie contribution,” TR 2010/1DC states.

Mr Figot said the draft guidance is saying that instead of being a contribution, its now just non-arm’s length income.

However, Mr Figot said paragraph 51 of TR 2010/1DC may offer some good news. 

Paragraph 51 states that a complying superannuation fund might enter into arrangements that result in it receiving discounted prices. Such arrangements, it states, will still be on arm’s length terms where they are consistent with normal commercial  practices, such as an individual acting in their capacity as trustee (or a director of a corporate trustee) being entitled to a discount under a discount policy where the same discounts are provided to all employees, partners, shareholders or office holders”

“So if there’s a a discount policy, and you just take advantage of that discount policy that is provided to all employees, partners and shareholders or officeholders. Does that mean the arrangement will still be on arm's length terms?” Mr Figot questioned.

“This [guidance] suggests, yes, it will still be on arm's length terms. It sounds like you are dealing at arm’s length.

“So, it might be neither a contribution or non-arm’s length income.” 

However, many ESSs are only offered to a particular class of employee, eg, senior managers and executives rather than to all employees and, in certain cases, shares may be offered to greater than say 75% of permanent employees who have completed at least 3 years of service (for example, as required by s 83A-105 of the ITAA 1997). Thus, unless ESS discounts are offered to all employees or all office holders or all shareholders, as relevant, the SMSF is unlikely to be able to rely on the discount concession in paragraph 51 of LCR 2021/2.

Mr Figot gave an example of an employee in a standard type of ESS arrangement pays $0.85 instead of a $1. 

“It’s not impossible that it's not going to be a contribution and its not going to be NALI. It might seem a bit too good to be true, but that does seem to be what the ATO might be saying right now. However, the ATO do not appear to have finalized its view as numerous professional bodies have submitted that the ATO should abide by its long established position that has been reflected since TR 2010/1 that issued in 2010, ie, that a discount on the acquisition of a share under an ESS should be treated as a contribution by the member. Thus, we're going to have to watch this space,” he said. 

He stressed, that TR 2010/1DC is still in draft form, so for the time being the safest approach is to pay market value.

This means that where things currently stand, where shares acquired under an ESS are transferred to an SMSF at less than market value, it will be considered a contribution under TR 2010/1 and NALE under LCR 2021/1 unless the discount is available to all employees rather than a certain cohort of employees giving rise to non-arm’s length income, he cautioned. 

“You may have to have an intermediary, where the shares go to the employee, and there's probably some kind of escrow or escrow type arrangements where the employee can't then turn around and sell those shares, but hopefully they can still transfer them to a related party,” said Mr Figot.

“So presumably you get the $1 share for 85 cents as the employee, and then you turn around and sell it to the fund for a dollar and that also works nicely for listed securities. Unfortunately if its not a listed security, you've got to grapple with section 66 and expert advice should be obtained before an SMSF acquires an unlisted security under an ESS or from a related party.”

Mr Figot also warned SMSF professionals that if their SMSF is receiving discounted accounting fees, then from 1 July 2022, they will need to have a well documented discount policy for all employees,  partners, shareholders or office holders.