Under the scheme, the employee is able to take up the entitlement themselves or nominate an associate to take up the share entitlement. If his SMSF were to take up the shares, what would be the consequences from a superannuation perspective?
An employee share scheme is a scheme under which shares or options in a company are provided to an employee or their associate in relation to the employee's employment. We are often asked the question whether an employee could nominate their SMSF as the entity to acquire the shares/options under the employee share scheme.
Where 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 generally considers the following transactions to have occurred:
Acquisition of Asset from Related Party
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.
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%).
Determining whether or not the shares/options are in fact acquired from the employee or the employer will require a review of all of the facts & circumstances of the offer. If trustees or their advisers are in any doubt, we recommend they request SMSF Specific Advice from the ATO.
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.
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.
The trustee of the fund will need to ensure the employee is eligible to make contributions to superannuation (eg under age 65, aged between 65 & 74 and satisfies the “work test”). This contribution would then generally be counted against the employee’s non-concessional contribution cap (which, depending on the employee’s circumstances, could be $nil).
In summary, where the shares/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/options are not listed securities, SMSF trustees should exercise considerable caution before allowing the fund to be nominated to take up the entitlement.