Issue
Will a contravention of subsection 66(1) of the Superannuation Industry (Supervision) Act 1993 (SISA) occur if a trustee of a self managed superannuation fund (SMSF) acquires an interest in an afforestation arrangement from a related party of the fund?
Decision
Yes. A contravention of subsection 66(1) of the SISA will occur if a trustee of a SMSF acquires an interest in an afforestation arrangement from a related party of the fund.
Facts
A related party of a SMSF holds an interest in an afforestation arrangement.
The afforestation arrangement provides for the growing of trees on an identified area of land, the maintenance, harvest and sale of the trees and a right to proceeds of that sale.
The trustees of the SMSF intend to acquire the interest in the afforestation arrangement from the related party.
Reasons for Decision
Subsection 66(1) of the SISA prohibits a SMSF from acquiring an asset from a related party of the fund unless one of the exceptions in subsection 66(2) of the SISA applies.
Acquisition of 'business real property' from a related party is one of the exceptions provided by subsection 66(2) of the SISA, provided that it is acquired at market value.
Business real property is defined in subsection 66(5) of the SISA. The definition requires real property to be used wholly and exclusively in one or more businesses (whether carried on by the SMSF or not).
The interest in the afforestation arrangement is not just the interest in the real property. The afforestation arrangement involves the interest in the real property and an agreement with another entity with respect to the management of the property, the planting of the trees, their maintenance and their eventual harvest and sale. The interest in the real property cannot be assigned separately from the agreement with the other entity. As a result the afforestation agreement is not business real property.
Therefore, the SMSF will contravene subsection 66(1) of the SISA if it acquires the interest in the afforestation arrangement from a related party of the fund.
It should be noted that subsection 66(2A) of the SISA may allow for the acquisition of the afforestation arrangement where the asset is an in-house asset and its acquisition does not result in the level of in-house assets held by the fund exceeding the level permitted by Part 8 of the SISA.