We have been asked to provide our opinion on the compliance issues with a SMSF water parking with a related party. The parking is when the permanent water holder has carry over space on their license and charge a parking fee to have another party perch their water on the license. This is in the NSW Murray river irrigation area where the water entitlements are stapled to the land. The situation has been described as follows:

the parking may be very similar to writing a call option over some shares held by the fund. Take away the obligation to sell the asset, and replace with the fact that the allocation available to the fund will be lower in 2025. Therefore, its not acquiring, but foregoing the entitlement to do something themselves.

1. The asset of the SMSF is the water entitlement. The fund has the ability to have water on its license carried over to 2025.

2. If they’ve used the allocation, you can now buy the water on temp transfer, and hold as carry over to trade in 2025.

3. In this case the fund is not wanting to take the risk of buying water now to trade in 2025

4. However is happy to assign the parking spot for a fee.

5. The water broking industry is busy at present with arranging parking for people wanting to carry over more than their license can handle. There is a spot price for this type of transaction.

6. The transaction is to a related party.

7. The fund is earning additional income over the funds assets at no risk

8. The sole obligation of the fund is to transfer the water back to the counter party in July.

Stepping through an example:

The irrigator buys water on market today for say $10

Pays to park the water on another license (owned by SMSF) at say $120

In July, the SMSF transfers the water back to the irrigators license and delivers the water to farm.

The water price is capped at the $130 / ML

It provides the irrigator with certainty over their program now without buying in at the temp price in July – September.

The amount of water parked and carried over is coming out of the 2025 allocation available to the SMSF. Hence the price to park is factoring in a value on what the water would be next year.

I was thinking sole purpose test, potentially s109 non arm's length dealings issues and maybe NALI? in-house asset issues until the water allocation is used?

Is there a way that this could be done without compliance breaches?