Trustees of self-managed superannuation funds who are thinking of using a limited recourse borrowing arrangement to fund the purchase of an asset for their fund have until July 1 to set up their LRBA without falling under new law that may limit their ability to continue contributing to their fund.
Last week, the Government tabled a bill that will require some trustees to include the outstanding balance of an LRBA in their total superannuation balance.
Treasury Laws Amendment (2018 Superannuation Measures No1) Bill 2018 amends the total superannuation balance test so that, in certain circumstances, it takes into account the outstanding balance of a limited recourse borrowing arrangement that is entered into by an SMSF trustee.
As a result, a member’s total superannuation balance may be increased by the share of the outstanding balance of an LRBA commenced after July 1. The increase only applies to members who have satisfied a condition of release with nil cashing restriction, or those whose interests are supported by assets that are subject to an LRBA between the super fund and its associate
The amount by which a member’s total super balance is increased is equal to a proportion of the outstanding balance if the LRBA. This proportion is based on the member’s share of the superannuation interests that are supported by that asset that is subject to the LRBA.
Michael Hallinan, a special counsel in superannuation at Townsends Business & Corporate Lawyers, says the change will limit the opportunity for some SMSF members to make non-concessional contributions and will eliminate that opportunity for others entirely.
This is because once a fund member’s total super balance reaches $1.6 million they can no longer make non-concessional contributions.
The Government is concerned to make sure that SMSF trustees do not use borrowing strategies to get around transfer balance cap and total super balance rules. Members who have met a condition of release could have withdrawn funds from their SMSF and then loaned the money back to the fund via an LRBA, potentially allowing further non-concessional contributions to be made.
“Timing is everything. It is last call for grandfathered LRBAs,” Hallinan says.
He says current LRBAs can be refinanced after July without triggering the application of the new measure. However, the loan amount under refinancing cannot be greater than the payout figure under the current loan contract.
“If the refinanced amount is greater, it is arguably a new LRBA,” he says.
SMSF Association chief executive John Maroney says the Government has softened its stance on the issue since the change was first proposed.
“The original proposal would have captured all LRBAs, not just those SMSFs the Government is seeking to prevent from manipulating the TSB rules,” Maroney says.
In an example provided in the explanatory memorandum accompanying the bill, Sue and Peter are members of an SMSF. Peter’s balance is $1.2 million and Sue’s is $1.8 million All the assets of the fund are in cash.
Sue and Peter are both retired and therefore satisfy a condition of release with a nil cashing restriction.
The SMSF acquires a $3.5 million property, purchased with $1.5 million of cash and a $2 million LRBA. The assets of the fund are now $5 million.
Under the new rules, Peter’s balance goes to $2 million, made up of hs share of the remaining cash balance ($600,000), his share of the net value of the property ($600,000) and his share of the outstanding balance of the LRBA ($800,000).
Sue’s total super balance is $3 million. Neither of them would be able to make any more non-concessional contributions.