Narrower but still potentially catastrophic: Including your SMSF borrowing (LRBA) in your total superannuation balance

The Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 contains updated provisions to include an additional increase to a member’s ‘total superannuation balance’ when an SMSF has outstanding borrowings. The rules are narrower than originally proposed and will apply where either:

• the borrowing is from a related party; or
• the member has satisfied an unconditional condition of release.

These are alternatives, and it is not necessary to have both to trigger the new credit. The new rules still have the potential to apply in a wide range of situations.

If passed in the current format, the new rules mean that all new LRBAs with related party borrowings will give rise to the additional increase to a member’s ‘total superannuation balance’.

The additional increase to a member’s ‘total superannuation balance’ will also arise for new LRBAs if there is an amount outstanding under an LRBA once the member turns 65, ‘retires’, is ‘permanently incapacitated’ or satisfies the terminal medical condition of release, regardless of who the lender is.

More detail

If the Bill is passed in its current format, a share of the outstanding amount of a borrowing under an LRBA will be added to an SMSF member’s ‘total superannuation balance’, increasing it beyond the ordinary calculations.

This will apply where:

• there is an amount outstanding under an LRBA that complies with section 67A;
• the assets secured by that debt support the member’s superannuation interest; and
• either:
  • the borrowing is from an ‘associate’; or
  • the member has satisfied one of the retirement, terminal medical condition, permanent incapacity or turning 65 conditions of release.

The result is that part of the outstanding debt under an LRBA is included as an additional amount when calculating ‘total superannuation balance’.

The amount for a member is that proportion of the outstanding debt that member’s superannuation interest supported by the secured assets bears to all members’ superannuation interests supported by the secured assets.

Commencement

The rules apply to new borrowings under contracts entered into on or after 1 July 2018.

A refinancing of a pre-1 July 2018 borrowing does not trigger the new rules. This is defined to be where:

• the original borrowing occurred under a contract entered into before 1 July 2018;
• the refinancing itself complies with the LRBA rules;
• the refinancing is secured by the same asset; and
• the refinancing is equal to or less than the amount outstanding under the old borrowing at the time of refinancing.

Consequences

The proposed measures have a number of potential consequences. Under the new rules (if passed) a member could find they now have a zero non-concessional cap in circumstances where that was not the case without these rules.

Earlier draft

An exposure draft of this proposal was released in May 2017, and the Bill is narrower than what was originally suggested. See our alert on the original proposal:

SMSFs, superannuation borrowing (LRBAs) and 2016 budget changes

If you would like to know how you or your clients will be affected by the new rules, please contact a member of our superannuation team.