Members of self-managed superannuation funds will have their share of any limited recourse borrowing arrangement counted as part of their total superannuation balance, under changes proposed by the Government.
The Treasury has issued a consultation paper, Superannuation Tax Integrity Measures, and draft legislation covering superannuation taxation measures. The key measure deals with LRBAs
The paper says that in the process of implementing last year’s superannuation reform package, concerns were raised about the ability of SMSF members to use LRBAs to circumvent the transfer balance cap and total super balance rules.
For example, SMSF members may have been able to use LRBA repayments to circumvent the transfer balance cap by shifting value into the earnings-tax free retirement phase.
In response to this, the Government legislated to ensure that repayments of LRBAs entered into on or after July 1, 2017, would count towards the transfer balance cap where they shift value into the retirement phase.
A second concern related to the ability of an SMSF member to use an LRBA to reduce their total super balance, allowing them to make additional non-concessional contributions.
The draft legislation issued last week amends sections of the Income Tax Assessment Act, with the effect that a member’s share of the outstanding balance of an LRBA entered into on or after July 1 this year will be included their TSB.
A member’s TSB is based upon the value of their superannuation interests.
Under current legislation, the liability under an LRBA reduces a member’s TSB by reducing the amount available for commutation or withdrawal. The new measure will cancel out this effect, so that a member’s TSB will not be affected by whether their fund has an LRBA liability or not.
“This approach reflects that additional assets acquired under an LRBA will generally produce additional untaxed earnings and capital appreciation for the fund on an ongoing basis,” the consultation paper says.
The paper provides the following example:
- Laura is the sole member of her SMSF, which holds $2 million in accumulation phase. She takes a lump sum of $500,000 from her SMSF, which reduces her TSB to $1.5 million. Laura then lends the $500,000 on commercial terms back to her SMSF under an LRBA.
- The fund uses $1 million of its existing assets and the borrowed $500,000 to acquire an investment property.
- Under the current law Laura’s TSB is $1.5 million. As the SMSF repays the LRBA, the net value of the fund will increase.
- Under the proposed new law, Laura’s TSB would be $2 million, compromising the net value of the property, other assets of the fund and the $500,000 outstanding loan balance.
- The change will have an impact on Laura’s ability to make non-concessional contributions. Under the current law, with a TSB of $1.5 million, Laura can make non-concessional contributions of up to $100,000.
- Under the new rules, once a TSB reaches $1.6 million a member can no longer make non-concessional contributions.
- Under the new law, with a TSB of $2 million, Laura cannot make non-concessional contributions.
This measure will apply to new LRBAs entered into on or after the new law commences on July 1.