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The SMSF member is a director of multiple listed companies.
Before the company was listed in the ASX, the member purchased 100,000 units of convertible notes of the company in the SMSF’s name. When the company went to IPO, it offered $0.25/share to public. The director converted the convertible notes into shares and escrowed shares for $0.16/share. Also, the director was granted options for free as part of directorship. All those investments are in the SMSF’s name. The director has around 0.63% shares of the listed company.
Please advise:
1. Is the listed company a standard employer of the director?
2. Did the SMSF comply with the S109 arm’s length transactions?
3. Is there any other audit risks need to be considered?
Hi Linda
A standard employer sponsor under the SIS definition section 16 is an employer that:
"contributes, or would contribute, wholly or partly pursuant to an arrangement between the employer and a trustee of the regulated superannuation fund".
I would assume the SMSF is not a standard employer sponsored fund as the employer does not make contributions under an "arrangement".
In relation to section 109 you would need to review the transactions in relation to whether they have been made on an arm's length / commercial basis.
In relation to other risks the main risks I see are:
1) section 66 of SIS possibly not being complied with. That is an asset cannot be acquired from a member unless it meets an exception such as:
"the asset is a listed security acquired at market value".
2) have the NALI / NALE rules been complied with?
If shares / options have been acquired at less than market value (eg discounted or for free) then the NALE rules would apply.
Re the NALE rules refer LCR 2021/2 - "Non-arm’s length income – expenditure incurred under a non-arm’s length arrangement".
Thanks
SMSF AAA