Adding back LRBA balance to Total Super Balance

6 Jun 2018

Lyn Formica

Head of SMSF Technical & Education Services

In the lead up to 30 June 2017 you may recall the Government announcing that they intended to amend the Total Superannuation Balance provisions in situations where an individual was a member of an SMSF with a limited recourse borrowing arrangement (LRBA) in place. Specifically the Government had intended for a share of the fund’s outstanding loan balance to be apportioned to each affected member and counted towards their Total Superannuation Balance.

This “adding back” of the loan balance may have restricted the ability of affected individuals to:

  • make further non-concessional contributions to superannuation without exceeding their cap,
  • trigger a “bring forward” for non-concessional contributions,
  • utilise the “catch up” of unused concessional contribution rules, or
  • segregate the fund’s assets for tax purposes.

Due to backlash at the time, the proposals were referred for further consultation.

A Bill has now been introduced into Parliament to give effect to the Government’s proposals [Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018]. In a pleasing move, the “adding back” of a proportion of the outstanding loan balance will only apply where the LRBA was entered into on or after 1 July 2018 and:

  • the individual, whose superannuation interests are supported by the asset held under the LRBA, has met a condition of release with a nil cashing restriction (ie reached age 65, retired, is permanently incapacitated or is terminally ill or injured), or
  • the lender is a related party of the fund members.  

Younger individuals who enter into an LRBA where the lender is a commercial lender (or indeed an unrelated party) may not be affected by these measures (unless they were say terminally ill).

The proportion added back is intended to be based on the individual’s share of the total superannuation interests that are “supported” by the asset held under the LRBA, as calculated by the following formula:

Outstanding loan balance x (value of that member’s supported superannuation interests/value of all supported superannuation interests)

In cases where only one member’s interests in the fund are supported by an asset held under an LRBA, the entire outstanding loan balance at a particular 30 June would be added to the member’s Total Superannuation Balance at that 30 June.

Among other things, this new measure would ensure that any SMSF member that had met a relevant condition of release could not:

  • withdraw funds in order to reduce their Total Superannuation Balance below $1.6m, then
  • lend money to their SMSF to acquire an asset under an LRBA, and subsequently
  • make additional non-concessional contributions tax effectively (ie their non-concessional contributions cap would be $nil).

And note, the legislation would capture any new LRBA for individuals in this position, not simply those where a related party lends money to the fund.

Consider the following examples.

Example 1

Josh (52) is the sole member of his SMSF which holds $1m in accumulation phase. His SMSF enters into an LRBA in July 2018 to acquire a property worth $1.2m. The SMSF pays $600,000 of the acquisition costs from its assets and borrows to pay the remaining $600,000.

At 30 June 2019, the value of the SMSF’s “other” assets remained the same, the property had increased to $1,210,000, and the amount of the outstanding loan was $599,000.

At acquisition time 30 June 2019

Assets

“Other” Assets

$400,000

$400,000

Property

$1,200,000

$1,210,000

$1,600,000

$1,610,000

Liabilities

LRBA loan

($600,000)

($599,000)

Net assets

$1,000,000

$1,011,000

Josh’s account balance

$1,000,000

$1,011,000

If Josh’s SMSF had borrowed from an unrelated party his Total Superannuation Balance at 30 June 2019 would be $1,011,000 and:

  • His non-concessional contributions cap for 2019/20 (ie the following year) would be $100,000, and
  • He would have the ability to trigger a “bring forward” in 2019/20 with a $300,000 bring forward amount.

In contrast, if Josh’s SMSF had borrowed from a related party his Total Superannuation Balance at 30 June 2019 would be $1,610,000 (ie $1,011,000 + the outstanding loan balance of $599,000) and:

  • His non-concessional contributions cap for 2019/20 (ie the following year) would be $Nil, and
  • He would not be able to trigger a “bring forward” in 2019/20.

In Josh’s case, the identity of the lender may play a critical role in the event that his SMSF needs additional contributions in order to meet its obligations under the LRBA loan agreement 

Example 2

Laura (age 66) is working full-time and is the sole member of her SMSF, which holds $2m in accumulation phase.

She withdraws a lump sum of $500,000 on 1 June 2019 which reduces her total accumulation account balance to $1.5m on 30 June 2019.

On 30 June 2019, Laura lends $500,000 to her SMSF under an LRBA and the SMSF acquires a property for $1.5m (using $1m of its remaining $1.5m funds and the $500,000 borrowed funds) and the position of her SMSF is as follows.

30 June 2019

Assets

“Other” Assets

$500,000

Property

$1,500,000

$2,000,000

Liabilities

LRBA loan

($500,000)

Net assets

$1,500,000

Laura’s account balance

$1,500,000

Under current law, Laura’s Total Superannuation Balance at 30 June 2019 would be $1.5m and, as this is less than $1.6m, her non-concessional contributions cap in 2019/20 would be $100,000. In the future, as the SMSF repays the LRBA loan, the net value of the SMSF will increase and Laura’s Total Superannuation Balance will again approach $1.6m. However, prior to reaching $1.6m, she could withdraw another lump sum and enter into another LRBA to acquire another asset. The withdrawal would again reduce her Total Superannuation Balance enabling additional non-concessional contributions.

Under the proposed law, regardless of the identity of the lender, Laura’s Total Superannuation Balance at 30 June 2019 would be $2m (ie $1.5m + the outstanding loan balance of $500,000). As a result her non-concessional contributions cap would be $Nil in 2019/20. Withdrawing funds and entering into a new LRBA would no longer increase Laura’s capacity to make non-concessional contributions.