Treasury Laws Amendment (2018 Superannuation Measures No.1) Bill 2019 has received Royal Assent and in relation to the TSB changes is effective from 1 July 2018. Those very organized SMSFs with new LRBAs that have already lodged their 2019 SMSF Annual Return may need to lodge an amendment.
We’ve known for a while that this measure was coming – it was contained in a Bill introduced last year but lapsed when the Federal Election was called. This is one of the first significant superannuation measures to be legislated since the Coalition were re-elected.
From 1 July 2018, a person’s Total Superannuation Balance (TSB) will, in certain circumstances outlined below, include the outstanding Limited Recourse Borrowing Arrangement (LRBA) amount attributable to each member’s interest where the SMSF has an LRBA that was entered into from this date.
Members caught by this measure will be those where:
- the lender under the LRBA is an associate of the SMSF (note the definition of “associate” is the same as the definition of “Part 8 associates” in the Superannuation Industry (Supervision) Act), OR
- the member of the fund has met a full condition of release (ie a condition of release with a nil cashing restriction such as reaching age 65, retirement, permanent incapacity, or terminal medical condition).
LRBA with an Associate
In this case, all members of the fund whose interest is supported by the asset purchased with the LRBA must include their portion of the outstanding balance of the LRBA in their TSB calculation.
Members who have met a full Condition of Release
These members must include the outstanding LRBA amount attributable to their super interest in their TSB calculation. Any other members of the fund who have not met a condition of release would not have their TSB amount adjusted.
Importantly, this measure is intended to only apply to LRBAs that were entered into from 1 July 2018 – not those that started before that date. Pre 1 July 2018 LRBAs which are refinanced post 1 July 2018 are also generally excluded.
Why is being aware of this change important?
A member’s TSB affects eligibility for several entitlements and needs to be considered when advising on or implementing superannuation strategies. For example:
- Ability to make non-concessional contributions (NCCs): a member’s TSB at 30 June has a direct impact on their NCC cap the following year. If TSB is $1.6 million or more at 30 June, their NCC cap is nil the following year.
- Catch up concessional contributions (CCs): since 1 July 2018, unused concessional contributions can be carried forward for up to five years. The ability to use those carried forward contributions is dependent on TSB – where TSB was $500,000 or more on 30 June, carry forward CCs cannot be utilised in the following year.
- Segregated asset method: this determines the ability for a fund to use the segregated method in calculating its exempt current pension income. Where a fund has member(s) in retirement pension phase, and any members have TSB of $1.6 million or more on 30 June, the fund must use the non-segregated approach to determine ECPI the following year.
- Work test exempt contributions: these can only be made where the member’s TSB was less than $300,000 the previous 30 June.
- Spouse tax offset: from 2017/18 additional eligibility requirements apply to be entitled to the tax offset in that the receiving spouse must have a TSB of less than $1.6 million the previous 30 June.
- Government co-contribution: from 1 July 2017, in order to qualify for a co-contribution, a member’s TSB must be below $1.6 million the previous 30 June.
How is a member’s portion of an LRBA reported?
The 2019 SMSF Annual Return instructions have been amended. Item Y of Section F (Member Information) must include the outstanding LRBA amount attributable to the member for TSB purposes.
Enter at Y the total value of the outstanding LRBA amounts attributable to the member at 30 June 2019 where the LRBA was entered into on/after 1 July 2018 (and was not the eligible refinancing of a pre 1 July 2018 LRBA) and:
- the lender under the LRBA is an associate of the fund, or
- the member has met a nil cashing condition of release.
Attributing LRBA amounts to members
This is best shown in an example. Kyle and Kelly are members of their SMSF which does not allocate particular assets to particular members – they share in all assets proportionately.
In the 2018/19 year, the SMSF purchased a property for $2 million funded by $1,000,000 from the SMSF’s cash and $1,000,000 borrowed from Kyle’s father under an LRBA arrangement.
At 30 June 2019 their balances are:
- Kyle: $800,000 all preserved (66.67%)
- Kelly: $400,000 all preserved (33.33%)
This is represented by:
Net assets of fund
Kyle’s “share” of the outstanding loan is 66.67% of $1 million, or $666,667 and Kelly’s is 33.33% of $1 million, or $333,333.
These amounts are reported at item Y in the member information sections.
Kyle’s revised TSB will be $1,466,667 made up of:
$800,000 - his balance per his member statement
$666,667 - his share of the outstanding loan amount
Kelly’s revised TSB will be $733,333 being:
$400,000 - her balance per her member statement
$333,333 - her share of the outstanding loan amount
For Kelly, this means that next year she will not be eligible to utilise her catch up contribution amounts, whereas prior to the LRBA she could have as her TSB was below $500,000. Kyle’s ability to bring forward NCCs will be limited due to his increased TSB.
Their SMSF has already lodged its 2019 SMSF Annual Return and as such may need to lodge an amended one to reflect this changed TSB amount. The ATO will contact affected funds.
How do I find a client’s TSB for the previous 30 June?
Tax agents can lookup their client’s TSB information using their Online services, and individuals can look it up on MyGov. However, SMSF members affected by this new law will probably find that their TSB for 30 June 2019 is currently inaccurate. The ATO advise they are updating their systems and TSB won’t be accurate until at least March 2020. Members affected will need to calculate what their own TSB was on 30 June 2019.
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