The Australian Taxation Office (ATO) has recently spelt out its stance on the acquisition of equities by a self-managed superannuation fund (SMSF) originally issued to a related party by way of an employee share scheme (ESS).
Under an ESS, employees are often given the opportunity to acquire shares, stapled securities or rights in the company they work for. Usually the employee participating in an ESS will get to purchase the equities or rights from the employer at a discounted price or sometimes for no consideration at all.
While an SMSF is prohibited from acquiring certain assets from a related party, such as a member of the fund, their relatives, their business partners or any standard employer sponsor of the fund, listed securities do not fall into this category.
However, shares purchased under these circumstances must be bought at market value, placing ESS arrangements in a unique position.
As such, the ATO has made it clear when an SMSF acquires shares through an ESS, the difference between the market price and the consideration, that is the discounted amount, will be treated as a contribution toward the fund.
Furthermore, the contribution will be treated as a personal contribution to the SMSF. The logic behind this position is that the acquisition of the shares or rights under the ESS is offered to the employee. Subsequently, the employee then surrenders those rights to the SMSF or exercises those rights, but nominates the SMSF as the vehicle in which to receive the shares.
As the employee will more often than not be a salaried employee, the application of the 10 per cent rule will not apply in these circumstances.
The most likely outcome will therefore see the discount treated as a non-consessional contribution to the SMSF. As a result, the fund members in question will also have to be mindful of the application of the contributions caps.
