Exposure draft legislation has been released proposing integrity measures for limited recourse borrowing arrangements (LRBAs) as part of the Government's super reform legislation.
The exposure draft, Treasury Laws Amendment (2017 Measures No 2) Bill 2017, proposes the inclusion of LRBAs in a fund member's total superannuation balance and the $1.6 million pension transfer balance cap. The proposed changes seek to address concerns about self managed superannuation fund (SMSF) members' ability to use LRBAs to circumvent contribution caps and effectively transfer accumulation growth to retirement phase that is not currently captured by the transfer balance cap regime. Importantly, the amendments will only apply in relation to borrowings entered into on or after the Bill commences.
The draft legislation will amend the transfer balance cap rules to create an additional transfer balance credit. This credit will arise where the repayment of an LRBA shifts value between an accumulation phase interest and a retirement phase superannuation income stream interest in an SMSF. The amount of the credit that an individual member receives will be equal to the increase in the value of their retirement phase interests. The credit will arise at the time of the repayment.
Note that a repayment of an LRBA sourced from assets that support the same superannuation interest will not increase the value of that interest. This is because the reduction in the LRBA liability is offset by a corresponding reduction in cash. Therefore, repayments made under these conditions will not give rise to a transfer balance credit, as there is no increase in the value of the income stream interest. However, if the repayment is sourced from other assets (eg assets that support separate accumulation interests that the individual has in the fund), then there will be no offsetting decrease in the value of the retirement phase superannuation interest, meaning that its overall value will be increased by the repayment amount. In such cases, the transfer from the other assets would not result in a credit to the transfer balance account under the current transfer balance credit items in s 294-25 of the Income Tax Assessment Act 1997 (ITAA 1997). The proposed new transfer balance credit for LRBA repayments seeks to addresses this gap by ensuring that the transfer balance cap takes into account the increase in value occurring through the repayment.
The proposed transfer balance credit for LRBA repayments will only apply to SMSFs and other funds with fewer than five members (such as small APRA funds). It will not apply to larger super funds, which are unlikely to have a direct connection between a specific asset of the fund and the superannuation interests of an individual member. Note also that the transfer balance credit is not intended to directly affect the borrowing arrangements that a fund can enter into, or the manner in which it repays any such arrangements.
The draft legislation will also amend the "total superannuation balance" definition in s 307-230 of the ITAA 1997 to take into account the outstanding balance of an LRBA that an SMSF enters into. From 1 July 2017, an individual's total superannuation balance will be used to determine eligibility for various super concessions, including the $1.6 million balance limit for making non-concessional contributions and whether an SMSF can apply the segregated method.
The proposed changes will result in an individual member's total superannuation balance being increased by the share of the outstanding balance of an LRBA related to the assets that support their superannuation interests. This proportion will be based on the individual's share of the total superannuation interests that are supported by the asset that is subject to the LRBA. While an individual's total superannuation balance can generally be measured "at a time", it is generally only relevant at the end of a particular income year on 30 June.
For the increase to apply to an individual's total superannuation balance, the SMSF must have used the borrowing to acquire one or more assets, and any such assets must support the superannuation interests of an individual at the time the total superannuation balance is determined.
The connection between an asset of a fund and an individual member's superannuation interests is determined in relation to how the fund has allocated its assets to meet its current and future liabilities in relation to the member's interests. This test will require the SMSF trustee to determine which of its LRBA assets support which members' interests, as well as the extent to which those interests are supported.
The outstanding balance of an LRBA is the amount still owing under the LRBA. Where an individual has a superannuation interest supported by an asset that is subject to an LRBA, the increase to their total superannuation balance is based on their share of this outstanding balance.
In contrast to the pension transfer balance credit for repayments of an LRBA, there is no requirement that particular superannuation interests be in the retirement phase for the increase to total superannuation balance to apply. This is because the total superannuation balance assigns an appropriate value to all of an individual's superannuation interests in a fund, irrespective of whether those interests are in the retirement phase.