Total superannuation balances now include outstanding LRBA balances

A new Act^[1] has introduced changes affecting an SMSF member's total superannuation balance if the SMSF has entered into a limited recourse borrowing arrangement (LRBA) on or after 1 July 2018. Under the changes, in certain circumstances a member's share of the outstanding balance of LRBA will be added to their total superannuation balance.

This article will explain in what circumstances the changes will apply and how they will affect a member's total superannuation balance.

What is the change affecting a member's total superannuation balance?

Before the change in the law, amounts outstanding under an LRBA where not included as part of an individual's total superannuation balance. Instead, if an LRBA was in place then only the net value of the relevant asset (i.e. its market value less the debt) was included.

Under the new law, the 'total superannuation balance' test is amended so that an individual's total superannuation balance also includes the member's share of the outstanding balance of the LRBA. This proportion is based on the individual's share of the total superannuation interests that are supported by the asset that is subject to the LRBA.

The change has been introduced to address the risk of members using LRBA's to facilitate a recontribution strategy i.e. where members withdraw money from their accumulation account and borrow that same amount under an LRBA so that they do not exceed one of the total superannuation balance tests.

What is a total superannuation balance?

The total superannuation balance reflects the total amount which a member has in superannuation. It is calculated by adding together the value of the assets a member has in their accumulation account and in their pension phase accounts. The total superannuation balance is important to consider when determining whether a member can, amongst other things:

• make a catch-up concessional contribution into their SMSF;
• make a non-concessional contribution into their SMSF; and
• receive a tax offset for making a contribution into their spouse's SMSF.

Further information can be found in our earlier article here.

Which members are affected by the change?

The change applies to LRBA's entered into on or after 1 July 2018 where the member whose superannuation interests are supported by assets to which an LRBA relates and:

• the member has satisfied one of the following conditions of release: retirement, terminal medical condition, permanent incapacity or attaining the age of 65; or
• the LRBA is between the fund and one of its associates (e.g. any entity that benefits under the SMSF such as a member and the associates of those members).

Refinances of loans entered into before 1 July 2018 are not affected by the changes, provided that the amount borrowed under the refinance is not greater than the amount outstanding before the refinance.

An example

An example of how the new changes work is as follows:

An SMSF has 2 members, Sally and Patricia who each have a total superannuation balance of $1.8 million and $1.2 million respectively where the only assets are cash. The SMSF enters into an LRBA after 1 July 2018, borrowing $2 million in order to acquire a property worth $3.5 million. The remaining $1.5million is funded through the super saving of the members as follows: Sally contributes $900,000 of her super savings and Patricia contributes $600,000. Sally's interest in the property is 60% and Patricia's interest is 40%.

Sally's total superannuation balance is $3 million which consists of the $900,000 super savings still remaining in her accounts, the 60% share of the net value of the property being $900,000 and her 60% share of the outstanding balance of the LRBA being $1.2 million.

Before the law was introduced, Sally's total superannuation balance would remain at $1.8 million.

Advisers should be careful when calculating a member's total superannuation balance and should now turn their mind to the fact that an outstanding amount of an LRBA may also need to be taken into account.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw article on a range of topics