It is important to remember these new changes only apply to new LRBAs entered into from 1 July 2018. If SMSFs have a client with an existing LRBA, they won’t be impacted by this change. For SMSFs in the middle of refinancing an existing arrangement from 1 July 2018, that won’t bring them under these new rules.

But Mr Howard reminded if it is a new arrangement from July 2018 and where the LRBA is with an associate of the fund such as a related party arrangement, or the member has satisfied a condition of a release with a nil cashing restriction such as retirement from preservation age, then this will apply.

“Remember, the outstanding debts in the value of that debt will count towards the member’s total superannuation balance, so while their member entitlement in the fund might be one thing, their total superannuation balance is grossed up by the value of the debt under this type of situation,” Mr Howard said.

“This could present a problem for SMSFs for a number of reasons, because total superannuation plugs into any number of contribution-type scenarios these days.”

In an LRBA example structure provided, consider clients that have got an SMSF where they’ve got $300,000 cash, $1.7 million in property, a loan of $1.1 million and net assets or net member benefits of $900,000.

The balances between the two members are $650,000 (72.23 per cent) for member 1 and only $250,000 (27.7 per cent) for member 2.

When thinking about the best strategic approach, Mr Howard said that as it is well below the $1.6 million threshold, there are no issues making large non-concessional contributions (NCCs) and doing bring-forwards, but there needs to be greater preparation once something like a condition of release sets in.

“All of these things could play into total superannuation balance. Now you’ll see that the percentages there will also reflect the LRBA or the member’s share of the LRBA to give what is a much higher total superannuation balance,” he said.

“Now, this won’t apply unless it is a new arrangement from 2018, if it is a borrowing from a related party or the member has met a condition of release.

“So, you might have clients that find themselves in this position, for example, where they hit age 65 with a full condition of release and all of a sudden the value for debt counts towards their total superannuation balance, and now that might then blow up strategies such as making large NCCs to pay down that debt.”

Mr Howard said these changes restrict NCCs, and considering member 1, they’re now not going to be able to make a bring forward as a result of having a total super balance of $1.44 million certainly as of today.

“It’s definitely going to affect extra contributions to pay down the debt and, personally, I think that’s the biggest trap,” he explained.

“You can find yourself in a position where you’re planning to make large contributions and, all of a sudden as a result of meeting a condition of release, we can’t do that.

“What I thought about recently is, if you have a client who has a TPD and now needs to access this super and they made a TPD conditional release where they’ve got an arrangement like this, all of a sudden we may not be able to put large NCCs in.

“Catch-up concessionals is also an impact as, certainly, member 2 could make catch-up concessional prior to the value of the debt counting, but now they’re now not going to be able to make it.”

There will also definitely be situations where this is going to lead to contribution issues due to the concessional impact, according to Mr Howard. 

“Where you’ve got an LRBA here of $1.1 million, if you’ve got older members you know the rent is not going to pay that down too quickly and it doesn’t have to be cleared completely. But you will often have a contribution strategy to help manage that debt before we move into retirement, and they need to start drawing down that ever-increasing account-based minimum pension rate,” he said.