If you’re looking to an SMSF for favourable tax treatment of shares as part of an employee share scheme, there’s some important measures to have in place to ensure everything remains above board.
So you’ve worked for a new start-up company for a few years on less than a moderate income, but it’s starting to take shape and you’ve been offered some shares as part of an employee share scheme. You’ve got so much confidence in what’s going on in the company, you’re thinking of putting them in your SMSF to access favourable tax treatment. Can you do it and what decision do you make? As usual the answer is that it just depends on your situation. But if you don’t understand the rules and necessities entirely, seek advice or you could end up in hot water.
It is possible for you to nominate your SMSF to receive shares or options as part of an employee share scheme. However, there are limits whether they will finally make it as an asset of your SMSF. It will depend on:
- your total superannuation balance on 30 June in the previous financial year,
- meeting a work test if you are 65 or older, and
- the shares or options to be transferred.
How the ATO treats these arrangements
The ATO considers the value of the shares or options you transfer to your SMSF as part of an employee share scheme to be personal contributions. This occurs because you surrender your entitlement to the shares or options to your SMSF, or you have nominated that your SMSF receive them. If your SMSF is required to pay for part of the cost of the shares or options, the amount paid by the SMSF is not part of the contribution.
You need to be careful, as you can end up with excess contributions tax penalties applying if the value of the shares or options treated as contributions exceeds your non-concessional or concessional contributions cap. Your total superannuation balance as at 30 June in the previous year will determine the amount of non-concessional contributions that you can make to super.
If your total super balance is greater than $1.6 million, your non-concessional contributions cap is $nil and penalties will apply. This means the transfer of shares or options to your SMSF may not be possible. But, if your total super balance is less than $1.6 million and you are under 65, you may have access to the bring forward rule that can allow you to make non-concessional contributions of up to $300,000 over a fixed three-year period. Once you are 65 and you meet a work test, your non-concessional contributions cap is $100,000 if your total super balance is less than $1.6 million.
Michael has been offered shares in a public company, Spinning Wheels Ltd, which have a value of $50,000 and he would like to have them transferred to his SMSF as a non-concessional contribution. His total superannuation balance on 30 June in the previous financial year was over $1.6 million. This means that if his SMSF is nominated to receive the shares the value would be an excess non-concessional contribution and subject to penalty. Michael’s non-concessional contributions cap is $nil because his total superannuation balance is greater than $1.6 million.
Daniel is 65 and his employer, Big Steel Limited, has offered him shares as part of an employee share scheme which have a value of $200,000. As Daniel is older than 65 and meets the work test of 40 hours in 30 consecutive days, his non-concessional contributions cap is $100,000 depending on whether his total superannuation balance as at 30 June in the previous financial year is less than $1.6 million. This means that Daniel could transfer only $100,000 worth of shares in Big Steel Limited to his SMSF without being penalised for excess non-concessional contributions.
What shares can be transferred?
Whether shares or options can be transferred will depend on the terms of your employee share scheme. It may permit your SMSF or an associate, such as a relative, to receive the shares or options.
The type of shares or options is important because the ATO considers the transfer your SMSF to be personal contributions and there are limits on what can be transferred from your name to your SMSF. When it comes to employee share schemes, it is possible to transfer shares or options in companies listed on an approved stock exchange or those in unlisted companies that are controlled by related parties such as private companies controlled by your family or relatives. If related parties do not control the company, then the shares or options cannot be transferred to your SMSF.
Control of a private company is where you, the fund trustee or relatives, own more than 50% of the shares in the company either directly or indirectly. Even if you can transfer the shares or options, you need to be careful that your SMSF doesn’t breach the in-house asset rule. This happens if the value of any related party investments held by your SMSF are greater than 5% of the value of your SMSF.
In examples one and two above, a public company has been used as part of the employee share scheme. The transfer of the shares can take place providing the members meet the contribution tests. In the following two examples involving private companies, the situation is different where related parties control the company and where they don’t.
Martha is an employee of IT Startup Pty Limited and has been offered 10,000 shares as part of an employee share scheme. She doesn’t own any shares in the company and neither do any of her relatives.
As Martha will not control the company if she participates in the employee share scheme, it is not possible to nominate her SMSF to receive the shares.
Ivan’s family hold a majority interest in Engineering Excellence Pty Limited and they have decided to establish an employee share scheme to allow employees access to the company’s success. As an employee, Ivan will participate in the scheme.
As Ivan’s family, who are related parties for superannuation purposes, control the company he will be able to nominate his SMSF to receive the shares providing he meets the contribution rules and the fund will not breach the in-house asset rule after the transfer takes place.
If you are eligible for shares or options as part of an employee share plan, then nominating your SMSF will involve many things to consider. The terms of the share plan are a good starting point, but you will also need to think about the type of shares or options, whether they can be accepted by your SMSF and the impact of complying with the superannuation rules before it can go ahead. Tax and super advice seems worthwhile to sort out whether it will be to your advantage.
Subscribe below to SMSF News to receive my latest articlesGraeme Colley, Executive Manager, SMSF Technical and Private Wealth, SuperConcepts
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