05/06/2018

A new piece of legislation giving effect to proposed measures announced during the 2018 Budget in respect of limited recourse borrowing arrangements (‘LRBA’) is currently being discussed by Parliament.

What are the new rules?

It is proposed that a member’s share of the liability under a limited recourse borrowing arrangement entered into after 1 July this year will be included in the calculation of their total superannuation balance (‘TSB’) immediately before the end of the financial year.  This means that in a fund with several members, the outstanding loan balance will need to be proportioned among them in order to be added to the member’s respective TSB.

If a member’s TSB reaches $1.6 million, the member is unable to make non-concessional contributions.

However, only members who have satisfied an unrestricted condition of release or those whose interests are supported by assets subject to a related party loan will be affected by the new rules.

The measures are intended to stop arrangements circumventing the new TBS cap rules.  These generally involve a member who has satisfied a condition of release withdrawing a certain amount which is then lent back to the SMSF by way of a related party loan. The withdrawal allows a member to reduce their TSB to below $1.6 million, thereby making them eligible to make further non-concessional contributions while also allowing the SMSF to use the cash towards the purchase of the asset.

What about refinancing?

An existing LRBA which is refinanced after 1 July 2018 will remain unaffected by these measures provided the security under the new loan is still the asset acquired under the old LRBA and the amount for the refinance is equal or lesser than the outstanding balance on the existing arrangement.  A greater amount would likely qualify as a brand new arrangement to which the new rules would apply. Similarly, a refinancing to a related party loan would also likely be caught.

What can the fund do?

The trustee can repay the loan to extinguish the liability before 1 July.  

Member is over the age of 65: unfortunately, not much can be done in this situation as members cannot change their age.

Member reached preservation age and retired: if a member is between their preservation age and the age of 65, they may decide to come out of retirement. What this means varies with each member’s employment history and age so it is best to seek advice from a professional adviser.

LRBA with a related party loan: the option here would be to refinance the loan with a commercial lender before 1 July. This may not be as easy as it seems and practical considerations may pose a few hurdles. These include the ability for the fund to secure finance and make the necessary repayments (as the interest rate charged by the commercial lender may be higher than the current rate), particularly where the asset subject to the loan isn’t the standard real estate type.

For a new LRBA, the trustee should try and secure finance before 1 July 2018 so the new rules do not apply to the arrangement. However, as commercial lenders generally need a few weeks to get the loan documentation drawn up and executed, time may be quickly running out for this alternative.  

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or info@townsendslaw.com.au to see how we can assist.