How to move employee shares into super

SMSF technical expert and columnist for The Australian newspaper
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Employee Share Ownership Plans (ESOPs) aren’t as popular in Australia as they are in the US, but many businesses listed on the ASX have at least one ESOP and some have several, with the most generous offered to senior executives.

Larger businesses typically use this remuneration tool to bolster company performance by improving employee morale, engagement and participation.

If you’ve bought or received shares from your employer in the past, there’s a good chance you may want to move them into your self-managed super fund in order to access the tax benefits of super. Let’s take a look at how to do this. But first, a little background information.

Two ways to buy

It’s impossible to generalise about these types of schemes, but there are two key features of most ESOPs:

  1. either the scheme will offer immediate access to company shares, for free or at a significant discount, if certain benchmarks have been met each year; or
  2. a scheme will give employees an option (or opportunity) to purchase company shares at some future date for a specific price called a strike price.

With options, the strike price is often set at a discount to the current share price and employees are given a specified period of time to buy the shares.

Prior to the Global Financial Crisis (GFC) many companies had a strike price of about 70% to 80% of their pre-GFC share price. When the GFC whacked share prices, many executives found that their ESOP strike price was above the listed share market, making the ESOP options awarded during this period worthless.

Some ESOPs involve the use of stapled securities and these might be a company share and unit trust that will own assets used by the company.

It’s handy to know that ESOPs are taxed under special provisions and some minor concessions are offered, however, we won’t focus on these rules in this article.

ESOPs and SMSFs

So what does all this have to do with superannuation and SMSFs in particular?

Those fortunate to participate in an ESOP probably want to find a way to access the super tax concessions with their allocated company shares or options.

At a basic level there are three issues to consider.

Firstly, if your employer isn’t listed on the ASX or other recognised overseas exchange, then you can’t sell your employer shares – or any options in that company – to your super fund because the law doesn’t allow your fund to acquire such assets from you or a related party, which includes your employer in most cases.

Secondly, you must be able to make the contribution to your super fund (for example, you must be aged under 75.)

Thirdly, the shares or options must be acquired at net market value. If you transfer the shares for less than the market value, then the difference is deemed to be a contribution and must be reported to the ATO for excess contributions tax assessment purposes.

Next step

Let’s say you own shares through an ESOP, your employer is listed on the ASX, and you meet the conditions above.

If you’ll be contributing the shares to your super fund, then check where you sit in relation to the Concessional Contribution Cap or Non-Concessional Contribution Cap. You will look to use the Concessional Contribution Cap if you’re able to claim the deemed contributions as a tax deduction.

Can your fund buy ESOP directly?

If your employer plans to offer you company shares, it may be possible for your SMSF to buy them. You’ll need to make sure the scheme permits this and the shares will typically be considered personal contributions to your fund.

Now suppose you don’t own the company shares, but you’re offered share ‘options’ under your employer’s ESOP and the plan allows you to nominate a super fund. If your SMSF trust deed allows it, then you can assign, transfer or surrender the rights under the option to your SMSF trustee. In this case, the contribution is the asset being acquired.

This type of contribution is what the ATO calls the ‘substantive asset’.

As you might have gathered, this is a reasonably complex area. I suggest you seek good advice or Tax Office SMSF Specific Advice before proceeding with any ESOP transaction and your super fund.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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