The Government has moderated its approach to the treatment of limited recourse borrowing arrangements under the new superannuation balance cap regime, introducing a bill last week that makes no reference to including outstanding LRBA balances in a member’s total super balance.
In April the Government issued a consultation paper, which set out measures designed “to 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 draft proposal was that an individual’s share of the outstanding balance of an LRBA would be included in their total superannuation balance.
The Government is concerned to make sure that SMSF trustees do not use borrowing strategies to get around the new transfer balance cap.
The cap, which takes effect in July, limits the total value of capital that can be transferred into the tax exempt retirement phase of superannuation to $1.6 million.
However, the bill introduced last week, Treasury Laws Amendment (2017 Measures No.2) Bill 2017, only says repayment of LRBA amounts will generate a credit in a pension transfer balance account. This is a significant change from the draft.
An information memorandum accompanying the bill says: “An individual will receive transfer balance credit where a superannuation provider makes a payment in respects of an LRBA that increases the value of a superannuation interest supporting a retirement phase superannuation income stream.
“This change ensures that the transfer balance cap captures the shift of value that occurs where liabilities arising from the LRBA are paid using accumulation phase assets.
“It is not necessary to determine the total value of a particular superannuation interest supporting a superannuation income stream in order to calculate the amount of a transfer balance credit for the repayment of a related LRBA.”
The measure will only apply to borrowing arrangements entered into after July 1. The bill includes a transitional provision, so that the new rule will not apply to the refinancing of an existing borrowing.
Limited recourse borrowing arrangemnnts are an exception to the general prohibition on borrowing that applies to superannuation funds. The trustee must use the funds to purchase a single asset, to be held in a separate trust.
If the loan defaults the lender’s rights are limited to the assets held in the separate trust, with no recourse to other assets held in the super fund.