On 24 May 2018, the Federal Government has released draft legislation Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018. It contains the proposed amendment from 1 July 2018, to include certain limited recourse borrowing arrangements (LRBAs) in calculating a member’s total superannuation balance. The current proposed amendment is less adverse on its impact than the previous draft.
SMSF and LRBA
Since 2007, superannuation laws have allowed an SMSF to borrow from lenders like banks or from related parties, including members. An LRBA is a borrowing in which the lender has limited claims on the loan in the event of default. For an SMSF, if the loan defaults, the lender is limited to seeking compensation via the specific asset acquired with the loan. As such, the lender has no recourse to the other assets held in the SMSF.
The total superannuation balance (TSB) is used by the non-concessional contribution cap rules, the unused concessional cap carry forward rules, the definition of disregarded small fund asset rules, and in the spouse tax offset.
Why is the LRBA included in calculating the TSB?
The Government has been concerned that SMSF members were using LRBAs to get around their $1.6 million transfer balance cap (TBC) by shifting values from accumulation phase interests to retirement phase interests in a superannuation fund via LRBA loan repayments. Another concern was the ability to use an LRBA to reduce the members’ TSBs, allowing them to make more non-concessional (after-tax income) contributions.
When is the LRBA included in calculating the TSB?
There are two instances for an SMSF in which the LRBA is included in calculating the TSB, they are:
- A member has satisfied a condition of release with no cashing restriction, eg, age 65, or
- The lender of the LRBA is a related party of the SMSF.
Note however, a member is only affected by the proposed measure where the LRBA increase causes the member’s TSB to go over the $1.6 million TBC. This limits the member from making non-concessional contributions.
How is the LRBA included in calculating the TSB?
Members of SMSFs will have their share of the LRBA counted as part of their TSB. The increase to a member’s TSB is equal to the member’s proportion of the outstanding balance of the LRBA. The formula to work out the member’s proportion is as follows:
The value of the member’s interest in an asset subject to the LRBA
Total value of the asset
The proposed measure will not apply to the following:
- Pre-1 July 2018 LRBA loans, including where these loans are subsequently refinanced.
- Post-1 July 2018 LRBA loans over assets under contracts that were entered into prior to 1 July 2018.
Note however, the refinancing of the LRBA loans cannot be greater than the outstanding balances of the current loan contracts.
For those SMSFs already in the process of having their LRBA contracts being finalised, it may be worthwhile to have them entered into before 1 July 2018 to avoid the impact of these changes.
This article was co-authored by Bill Leung, HLB Mann Judd Melbourne.