SMSF members looking at partaking in an employee share scheme (ESS) or employee share offer (ESO) must check what is on offer as not all offers of shares from an employer will be acceptable within a fund, a technical expert has warned.
SuperGuardian education manager Tim Miller said while the difference between an ESS and ESO may not appear significant, and even employees may use them interchangeably, they were regarded differently by the ATO in regards to their place within an SMSF.
“Employee share schemes are defined by tax law as an employee entitlement that a company is providing to all or a subset of employees within a company as some form of remuneration or reward for service,” Miller said this week during an online presentation into related-party assets.
He said these arrangements often lead to questions as to whether an SMSF can acquire shares that have been provided by an ESS and in most cases that is not possible.
“The reason is because in most situations we are talking about unlisted companies and unrelated companies and are not satisfying the definition of a listed security, nor of an in-house asset,” he said.
“What you are effectively doing is taking a right that has been provided to an employee and transferring that right to their SMSF so the fund is ultimately acquiring that right and that is going to be a breach of tax law.”
He said in contrast SMSFs were able to acquire shares under an ESO because an application had to be made for the shares and the company issuing them had the right to accept or deny that application.
“Some auditors did question that transaction, asking if an SMSF would has the ability to acquire those shares if it wasn’t for the employee working there, and thus giving the fund access to the transaction, but that doesn’t change the nature of the acquisition and the acquisition rules only look at who you are acquiring the asset from,” he said.
“We went through the process of applying for SMSF-specific advice from the ATO as to whether or not an acquisition under an ESO was acceptable or whether it was a breach of section 66 [of the Superannuation Industry (Supervision) Act].
“The ATO said because there is no effective arrangement in place where the employees get that entitlement, regardless of whether they apply or not, and because the application can be accepted or declined, and it’s non-related, as well as not an acquisition from a related party, the transaction is acceptable.
“It’s one of those scenarios that I would say to SMSF members to be mindful of what you’re actually acquiring because most of these employee share offers will actually use words like ‘employee share scheme’, and so be certain you’ve got access to all the materials and then the ATO will be able to make the assessment on your behalf.”