LRBAs to be included in Total Super Balance and Transfer Balance Cap

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Limited Recourse Borrowing Arrangements (LRBAs) will be included in the calculation of the Transfer Balance Cap and Total Superannuation Balance, if an exposure draft released by Treasury for consultation is legislated.

Treasury says the exposure draft, Treasury Laws Amendment (2017 4 Measures No. 2) Bill 2017: limited recourse borrowing arrangements, includes changes “being progressed as part of a package of amendments to address concerns that have been raised in the implementation of the superannuation reform tax package”.

“The amendments will address concerns about the ability of SMSF members to use LRBAs to circumvent contribution caps and effectively transfer accumulation growth to retirement phase that is not captured by the transfer balance cap.”

“The changes ensure that the transfer balance cap rules apply appropriately where there is a repayment of a limited recourse borrowing arrangement that transfers value from accumulation interests into retirement phase interests. The changes also ensure that where a fund has limited recourse borrowing arrangements in place, the total value of its assets is properly accounted for in working out individual members’ total superannuation balances.”

The SMSF Association said it was concerned about the changes, but welcomed that the amendments would only apply to LRBAs entered into after the legislation receives Royal Asset and not existing LRBAs. According to the SMSF Association the Government took this position after it was “strongly advocated” for by the Association.

However the Association also said that as the Total Superannuation Balance can restrict members from making non-concessional contributions the proposed changes could make it difficult for future LRBAs to be paid off.

“The SMSF Association is concerned by these amendments and their effect on trustees, especially the total superannuation balance amendments on those planning to use an LRBA to acquire business real property as part of their retirement strategy in the future.”

The draft Explanatory Materials include two examples of how the new rules would work:

Example 1.1 – repayment for assets solely supporting retirement interests

Bob is 65 and is the only member of his SMSF. Bob’s superannuation interests are valued at $3 million and are based on cash that the SMSF holds.

Bob’s SMSF acquires a $2 million property. This property is purchased after 1 July 2017 using $500,000 of the SMSF’s cash and an additional $1.5 million that it borrows through an LRBA.

Bob then commences an account-based superannuation income stream. The superannuation interest that supports this superannuation income stream is backed by the property, the net value of which is $500,000 (being $2 million less the $1.5 million liability under the LRBA). Bob therefore receives a transfer balance credit of $500,000 under item 2 of the table in subsection 294-25(1).

In the first year, Bob’s SMSF makes monthly repayments of $10,000. Half of each repayment is made using the rental income generated from the property. The other half of each repayment is made using cash that supports Bob’s other accumulation interests.

At the time of each repayment, Bob receives a transfer balance credit of $5,000, representing the increase in value of the superannuation interest that supports his superannuation income stream.

Example 1.2– total superannuation balance where there is more than one member

Peter and Sue are the only members of their SMSF. The value of Peter’s superannuation interests in the fund is $1 million. The value of Sue’s superannuation interests is $2 million. All of the assets of the fund that support their interests are cash.

The SMSF acquires a $3.5 million property. The SMSF purchases the property using $1.5 million of its own cash and borrows an additional $2 million using an LRBA.

The SMSF now holds assets worth $5 million (being the sum of the $1.5 million in cash and the $3.5 million property). The fund also has a liability of $2 million under the LRBA.

Of its own cash that it used, 40 per cent ($600,000) was supporting Peter’s superannuation interests and the other 60 per cent ($900,000) was supporting Sue’s interests. These percentages also reflect the extent to which the asset supports Peter and Sue’s superannuation interests.

Peter’s total superannuation balance is $1.8 million. This is comprised of the $400,000 of cash that still supports his superannuation interest, the 40 per cent share of the net value of the property (being $600,000), and the 40 per cent share of the outstanding balance of the LRBA (being $800,000).

Sue’s total superannuation balance is $3.2 million. This is comprised of the $1.1 million of cash that still supports her superannuation interest, the 60 per cent share of the net value of the property (being $900,000), and the 60 per cent share of the outstanding balance of the LRBA (being $1.2 million).

Submissions in response to the exposure draft are due by Wednesday 3 May 2017. The draft materials were only publicly released on Thursday April 28.

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