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.