Limited Recourse Borrowing - Government modifies proposal

The proposal to include the outstanding debt of a limited recourse borrowing arrangement in the total superannuation balance of participating members has been substantially modified.

Now the outstanding debt of a limited recourse borrowing arrangement will only be included in the total superannuation balance of participating members if either the lender is an associated party of the superannuation fund, or where the participating member has satisfied an unrestricted release condition. 

Where the lender is an associate of the superannuation fund, it is irrelevant that the LRBA arrangement is on arm’s length terms or satisfies the safe harbour guidelines.

Where the participating member has satisfied an unrestricted release condition (typically, attained age 65, is retired for superannuation purposes, or is permanently incapacitated) it is irrelevant whether the participating member is in pension phase or not.

The significance of including the outstanding balance of an LRBA in the total superannuation balance of a participating member is that the non-concessional contribution cap, the ability to make catch up concessional contributions and the ability of the participating member to utilise the "three year bring forward" of non-concessional contributions may be adversely affected.  However, the concessional contributions cap, the CGT contributions cap and the downsizer contribution cap of the participating member will be unaffected.  These caps are unaffected as they are not determined by the total superannuation balance.

As the relevant total superannuation balance for contribution cap purposes is the balance immediately before the start of the current financial year (so the contribution caps for 2018/19 are determined by the total superannuation balance as at 30 June 2018), the LRBA debt included in the total superannuation balance is the amount of the debt as at 30 June 2018.  If the LRBA debt would otherwise be included in the total superannuation balance, then repaying the LRBA debt before 30 June will ensure that no debt is included in the total superannuation balance.

Example

Bill and Bert are members of the B and B SMSF.  The SMSF entered into an LRBA on 1 December 2018 and as at 30 June 2019 the outstanding debt in respect of the LRBA is $400,000.  While both Bill and Bert have attained age 55, they have not as yet commenced any pension from their SMSF.  While the LRBA satisfies the “safe harbour guidelines” the lender is an associate of the SMSF.  Bill’s only superannuation interest is in the SMSF and the balance (not taking into account the LRBA) is $800,000.  Bert’s only superannuation interest is in the SMSF and the balance (not taking into account the LRBA) is $1,490,000.

Will the measure apply to the arrangement?  If so what will be the impact on Bill and Bert?

For the measure to apply – a number of conditions must be satisfied:
First – the debt must have occurred on or after 1 July 2018.  This first condition is satisfied.  If the LRBA had commenced before 1 July 2018, the measure would not have applied at all: in this case the LRBA would have been "grandfathered" under the measure.

Second - either the participating members have satisfied an unrestricted release condition or the lender is an associate of the Fund.  This second condition is satisfied as the lender is an associate of the Fund.  If the lender was not an associate (or the loan had been refinanced by a non-associated lender) then the measure would not have applied.

The measure applies to the LRBA.  Consequently Bill and Bert’s “share” of the LRBA debt will be added to their total superannuation balances.

As the asset acquired by the LRBA is treated as supporting both Bill and Bert’s superannuation interests, their relevant shares will be determined by the proportion which their respective super balances bears to the total value of the Fund.  Bill’s portion will be about 35% ($800,000/$800,000 plus $1,490,000).  Bert’s portion will be about 65% ($1,490,000/$800,000 plus $1,490,000). 

Impact on Bill

Including 35% of the $400,000 will increase Bill’s total superannuation balance by $140,000.  Bill’s balance will then be $940,000 ($800,000 plus $140,000).  At this level of balance, Bill will not be affected: his contribution caps for 2019/20 will be:

Bill is ineligible to have a carry forward of unused concessional contributions as his total superannuation balance (even without the inclusion of the LRBA debt) exceeds $500,000.

While Bill is too young to have the benefit of the downsizer contribution cap, this cap is not affected by the total superannuation balance.

Impact on Bert

Including 65% of the $400,000 will increase Bert’s total superannuation balance by $260,000.  Bert’s balance will then be $1,750,000 ($1,490,000 plus $260,000).  At this balance level, Bert will be adversely affected and his contribution caps for 2019/20 will be reduced as follow:

               
Bert is ineligible to have a carry forward of unused concessional contributions as his total superannuation balance (even without the inclusion of the LRBA debt) exceeds $500,000.

Like Bill, Bert is too young to have the benefit of the downsizer contribution cap. However this cap is not affected by the total superannuation balance.

For the purposes of this example, the contribution cap figures for 2018/19 have been used as the figures for 2019/20.