Repayments of SMSF borrowings will have an impact on the fund’s transfer balance cap, under draft amendments to the new super rules released by the Government last week.
The amendments will also change the way limited recourse borrowing arrangements are reflected in a fund member’s total superannuation balance, increasing the balance if an asset that supports their superannuation interests is subject to an LRBA
The amendment to Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016, which was released for consultation last week, is 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,” according to an explanatory memorandum accompanying the draft.
“The changes also ensure that where a fund has an LRBA in place, the total value of its assets is properly accounted for in working out individual members’ total balances,” the memorandum says.
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.
Peter Burgess, a technical specialist at SuperConcepts, says: “It appears this change is being made to overcome situations where an SMSF member withdraws a lump sum amount from their fund and then ends back the money to the SMSF to purchase an asset through an LRBA, and in the process circumvent the contribution caps by allowing the member to keep their net balance below the total super balance threshold.”
The amendment creates an additional “transfer balance credit”, which will arise where the repayment of the LRBA shifts value between accumulation phase interests and retirement phase interests in a fund.
Adrian O’Shannessy, a director of law firm Greenwoods & Herbert Smith Freehills, says: “If an LRBA asset supports a pension, it would make good sense to pay down the loan from taxable accumulation phase assets and maintain tax-exempt pension phase assets.
“This legislation will now treat these payments as transfers to pension phase and count them towards your $1.6 million transfer balance cap.”
The calculation of the total superannuation balance will take into account the outstanding balance of an LRBA that is entered into by the trustee of a regulated super fund that is an SMSF or has fewer than five members.
As a result, a member’s total balance is increased by the share of the outstanding balance of an LRBA related to the assets that support their superannuation interests.
An information memorandum released with the draft amendment says: “This treatment is consistent with the way transfers from accumulation phase assets are treated when a superannuation income stream is commenced.”
O’Shannessy says: “This is more difficult to rationalise. Rather than count the net asset value of an LRBA towards this cap, this legislation will add back the outstanding liability so as to count the gross value.
“If your SMSF buys a rental property for $1 million, using $200,000 of its own money and a bank loan of $800,000, the amount counted against your total super balance will be the full $1 million value of the property.”
Importantly, the amendments only apply to borrowings entered into on or after transfer balance cap changes take effect.