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NALI/NALE

Employee share schemes may not attract NALI

employee share NALI

Having an SMSF participate in an employee share scheme may not automatically trigger the NALI provisions should an acquisition discount be involved.

A specialist lawyer has indicated a particular paragraph contained in a law companion ruling (LCR) issued last year may allow SMSFs to participate in employee share schemes (ESS) without triggering the non-arm’s length income (NALI) provisions.

DBA Lawyers special counsel Bryce Figot recognised most ESS shares are issued at a discount which would lead to the discounted amount being recognised as a contribution and invoking the NALI provisions seeing the assets were acquired at less than market value.

However, he pointed out paragraph 51 of LCR 2021/2 may mean this is not necessarily the case.

“If there is a discount policy and you just take advantage of a discount policy that is provided to all employees, partners, shareholders, or office holders, does that mean the discount arrangement will still be on arm’s lengths terms? Well [section 51 says] it will still be on arm’s length terms.” Figot told attendees of an SMSF update webinar held on Friday.

He reiterated the NALI rules are triggered “if as a result of a scheme the parties to which are not dealing at arm’s length”.

“So when I read paragraph 51 of [LCR 2021/2] it sounds like [if you are participating in an ESS then] you are dealing at arm’s length.”

According to Figot, the discount may not be treated as a contribution either because an ATO draft on the ruling on contributions stipulates the regulator does not believe the discount should be treated in this manner.

“So [the discount] might be neither a contribution nor non-arm’s length income,” he noted.

While acknowledging this anomaly in the current SMSF rules is valid, Figot warned advisers to be cognisant of the intended spirit of LCR 2021/2 paragraph 51.

“I don’t want to put too much weight on this [because] I think it was designed for accounting fees…not for employee share schemes,” he concluded.

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