NALI ruling shows documentation vital to employee share scheme

“One of the issues with NALI/E changes is their impact on the general employee share plan provisions where nominations to an SMSF would be placed at real risk,” he said.

“While the government says it supports these types of arrangements, it is not really encouraging it now with the NALE changes.”

In this ruling, a two-member SMSF and a friend voted member B to the board of a company. The member became a director of that company that issued shares and options, all of which had nil value.

The company subsequently acquired businesses with funds raised from preference share issues. The options issued to B’s SMSF had a nil value at that time due to the net position of the company. The company was eventually acquired by a third party. One of the terms of the acquisition was that any issued options and preference shares would need to be paid out before the completion of the sale.

“The company therefore paid out the SMSF and cancelled the options. The fund declared the option cancellation proceeds as NALI in its annual tax return before seeking a private ruling to pursue its position,” Mr Butler said.

“The ATO declared that this was a capital gains event, more specifically a C2 event which happens if there is ownership of an intangible which is either being redeemed or cancelled; being released, discharged or satisfied; expiring; or being abandoned, surrendered or forfeited.”

Mr Butler said the ATO ruled that, since the member had no influence or control in respect of the company, the transactions were conducted at arm’s length and the consideration received by the fund was arm’s length, NALI did not apply.

“Getting options in a company with nil value and then getting a payout with linkage to directorship is a positive position for taxpayers. Generally, there is the fear that if you get shares or equity in a private company for a low price then it could be NALI, however, this confirms that in this position, where there was no influence or control and the member did not have any impact on the price, that it was seen to be acting at arm’s length,” Mr Butler said.

“It is also a positive sign for SMSFs that there is some scope for applying for a private ruling where facts and circumstance warrant. However, it is best to obtain expert advice before applying for a ruling.”

Mr Butler said many private companies try to encourage employee engagement by aligning performance with shares and SMSFs are often considered a popular vehicle for investing in a company.

“However, there are several factors to be wary of, such as where discounted shares are issued as a return for ‘sweat’ (or an employee’s labour) and the related party rules,” Mr Butler said.

“Even though the shares or options may come from a third party such as a company, people often overlook the arrangement between the company and the employee where the company provides shares or options to a super fund pursuant to an arrangement with the employee. This may contravene the prohibition in s66 of the SIS Act.”

He added that with employee share schemes, shares are typically issued at a discount to the market and there can be a question over whether this discount would automatically be considered NALI/E. The fund becomes entitled to the discount solely due to the employment relationship and this may not be considered at arm’s length by the ATO.

“That is the big issue and in this private ruling request it appears the members were advised to get super and tax advice because the ATO’s position in this area is not that clear.”