Many public and private companies nowadays offer employees the ability to participate in their employee share scheme (ESS) providing employees shares, stapled securities or rights (including options) to acquire holdings at a discount as part of their employment benefits. Typically, when these shares or rights are acquired under an ESS, they are acquired at less than market value.
The area of employee share schemes continues to be on the ATO’s radar, in particular with appropriate disclosure of income tax obligations and various superannuation law requirements including contribution caps, related party acquisition rules and non-arms length income. Following on from Taxpayer Alert TA 2010/3, the ATO has recently published an important questions and answers (Q&A) page on their website regarding SMSFs & employee share scheme arrangements.
Let’s take a look at the following example to help identify some of the key issues expressed within the latest Q&A and also in the previous taxpayer alert, TA 2010/3, ‘non market value acquisition of shares or share options by a self-managed superannuation fund’. Please note that this post does not consider the tax issues of employee share schemes; refer to ATO website for further information)
Kate is an employee of ABC Co Limited, a public listed company on the Australian Stock Exchange (ASX). She has been invited to participate in the company’s employee share scheme (ESS), which entitles her to receive both shares and options (rights to acquire) at less than market value. ABC Co allows for Kate or an associate (including the Trustee of her SMSF) to acquire shares and/or share options in the company. Kate is considering using her SMSF to hold these assets.
Some of the important considerations for Kate in her decision include:
- Consistent with the Commissioner’s views expressed within TR 2010/1, where the ABC Co employee share scheme says Kate can nominate her SMSF to receive shares and options and the fund trustee pays no consideration or less than the market value consideration for the shares or share options, the acquisitions by the SMSF results in a super contribution for Kate as the amount is benefiting her as a member of the fund;
- Contributions made of the shares or share options to Kate’s SMSF would typically be classified as a personal contribution (member) as she has been granted personal rights to receive those shares or share options at a discount to the market value and she surrenders those rights to her SMSF or exercises those rights but nominates her SMSF to receive them;
- Where Kate exercises her share options and then issues the shares to her SMSF, the amount will count as a personal contribution equal to the market value at the time of her ABC Co shares.
- Unless allowed under the exception contained within subsection 66(2) of the SIS Act, Kate’s SMSF must not intentionally acquire an asset from a related party, regardless of whether the asset is a contribution or purchased. The exception for off-market transfers does currently extend to listed shares on an approved exchange. The ability to undertake an off market share transfer has recently been extended to 30 June 2013 (see, previous blog post)
- The dividend income derived by Kate’s SMSF under the arrangement may be ‘non-arm’s length income’ for the purposes of section 295-550 of the ITAA 1997 where the shares are acquired in a scheme where each of the parties are not dealing with each other at arms-length. Non-arm’s length income would mean the dividends are subject to a higher rate of tax (45%).
Given the above considerations, it is important for Kate to appropriately consider all of the income and superannuation law requirements to ensure that she doesn’t prejudice the complying status of her SMSF.
- Stronger Super reforms for SMSFs delayed to 1 July 2013 (thedunnthing.com)