Retirement income entities : Lease arrangement between members and their self managed superannuation fund after 11 August 1999

Whether the transitional arrangements in section 71C of the Superannuation Industry (Supervision) Act 1993 (SISA) apply to a lease arrangement between a member and a self managed superannuation fund (SMSF)?

Yes, the transitional arrangements in section 71C of the SISA apply to real property subject to a lease arrangement between a member and a SMSF where the arrangement was entered into on or after 11 August 1999 and on or before 23 December 1999.

The SMSF owns a residential property.

During the 2000 financial year the property was tenanted for a period of three weeks by a member of the SMSF. The period of three weeks tenancy occurred in September 1999 (one week), and two consecutive weeks in December 1999 and January 2000 commencing before 23 December 1999.

Real property subject to such a lease arrangement, at all times that it is subject to the arrangement, will not count as an in-house asset for the period commencing 11 August 1999 and ending 30 June 2001. A 'lease arrangement' includes any agreement, arrangement or understanding in the nature of a lease (other than a formal lease) between the trustee of a fund and another person, under which the other person uses, or controls the use of, property owned by the fund.

Section 71 of the SISA states that an in-house asset of a superannuation fund includes 'an asset of the fund subject to a lease or lease arrangement between the trustee of the fund and a related party of the fund.' The only exception, not relevant here, is real property of an SMSF subject to a lease or a lease arrangement which is business real property of the fund throughout the period of the lease or lease arrangement.

Under subsection 10(1) of the SISA a 'related party' of a superannuation fund includes a member of the fund.

Subsection 71(1) of the SISA will operate to make the real property of the SMSF, subject to the September 1999 and December 1999 lease arrangements between the fund and the member, an in-house asset of the fund during the times it was subject to these lease arrangements. However, subsection 71C(2) of the SISA provides that where real property of a fund is subject to a lease arrangement, or any uninterrupted sequence of lease arrangements, commencing after 11 August 1999 and on or before 23 December 1999, then the real property subject to the arrangements will not be an in-house asset at any time before 1 July 2001.

Therefore, as the three weeks tenancy with the member of the SMSF was entered within the transition time (between 11 August 1999 and 23 December 1999) the asset is not considered to be an in-house asset during the times it was subject to the arrangements.

However, any real property subject to a new lease arrangement between the member and the SMSF entered into after 23 December 1999 would be an in-house asset. The only exception is where the arrangement forms part of an uninterrupted sequence of lease arrangements between the fund and the member where the first arrangement commenced on or before 23 December 1999.