SMSF Rental to Children?

Question:
Myself and my husband have purchased a rental unit using the majorityof our self managed super fund. Can we rent this unit to our children if they enter into a lease agreement and pay rental market value for the property? Are our (adult) children considered members of the fund?

Answer:
Related parties were really heavily legislated for in 1999 with the Superannuation Legislation Amendment Acts 3 & 4 which broadened the defined of related parties.

The essential answer is NO.

This is regardless of the arms length rental being paid. Please note the ATO Interpretive Decision below:ATO ID 2002/659

Issue
Has a contravention of Division 3 of Part 8 of the Superannuation Industry (Supervision) Act 1993 (SISA) occurred when a self managed superannuation fund (SMSF) leased residential property to the member/s of the SMSF and the value of the leased property compared to the total assets of the fund exceeded the in-house asset limits set out in Division 3 of the SISA?

Decision
Yes, a contravention of Division 3 of the SISA has occurred when the SMSF leased residential property to the member/s of the SMSF.


Facts
The SMSF owns a residential property. After 23 December 1999 the SMSF leased the property to the member/s of the fund for residential purposes.

Reasons for Decision
Under section 71 of the SISA an in-house asset of a SMSF 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 is where the asset subject to the lease or lease arrangement is used in a business carried on by the member or some other person.

Subsection 10(1) of the SISA provides that a member of a fund is a related party of the fund.

As the lease arrangement was between the members of the SMSF in their personal capacity and the trustees of the SMSF, the asset will be considered an in-house asset. A contravention of the SISA will occur if the market value ratio of the SMSF's in-house assets exceeds 10 percent of the value of the total assets of the fund at the end of the 1999-2000 year of income.

Date of decision: 21 May 2001

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Legislative References:

Superannuation Industry (Supervision) Act 1993 Section 71 Subsection 10(1)

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