Importantly, the amendments, if they become law, will only apply to borrowings entered into on or after the act containing the changes receives royal assent. That is, existing LRBAs and LRBAs entered into between now and royal assent, will not be affected.

Importantly, the amendments (if they become law) will only apply to borrowings entered into on or after the Act containing the changes receives Royal Assent. That is, existing LRBAs, and LRBAs entered into between now and royal assent, will not be affected.

What are the changes?

Broadly, Treasury tells us that:

The amendments will address concerns about the ability of SMSF members to use LRBAs to circumvent contribution caps and effectively transfer accumulation growth to retirement phase that is not captured by the transfer balance cap.

They elaborate further at 1.2 of the draft explanatory memorandum:

The changes ensure that the transfer balance cap rules apply appropriately where there is a repayment of a limited recourse borrowing arrangement that transfers value from accumulation interests into retirement phase interests. The changes also ensure that where a fund has limited recourse borrowing arrangements in place, the total value of its assets is properly accounted for in working out individual members’ total superannuation balances.

Why are they being introduced?

It seems that Treasury is pre-empting what it sees as potential strategies to exploit an LRBA to ‘funnel’ funds from accumulation into pension phase via loan repayments. Conceivably, the fund would meet its repayments under the loan by taking funds from accumulation. The asset being acquired under the LRBA would be allocated to pension phase for a particular member (presumably by the fund trustee noting this allocation at the time of purchase and presuming that the fund deed allows for this), with the value of that asset at that time being recorded as a credit to that member’s transfer balance account. As the LRBA is paid off using funds from the accumulation phase, the value of the property would increase, thereby allowing for an increase in the tax-free pension phase without affecting the relevant members’ transfer balance account.

The further changes contained in the exposure draft seek to prevent the above strategy being used by creating an additional category of transfer balance credit. As stated in 1.18 of the draft explanatory memorandum:

This credit will arise where the repayment of an LRBA shifts value between accumulation phase interests and retirement phase interests in a superannuation fund that is a self-managed superannuation fund, the amount of the credit that an individual member receives is equal to the increase in the value of their retirement phase superannuation interests.

Changes are also being proposed to the total superannuation balance rules. Currently, the concept of ‘total superannuation balance’ (TSB) as introduced by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 is calculated by adding together:

• The accumulation phase value of all superannuation interests that are not in the retirement phase;
• The transfer balance in their transfer balance account, subject to certain modifications (but not where the balance is less than nil); and
• The amount of each rollover superannuation benefit that is not reflected in the individual’s accumulation
phase or transfer balance.

The further changes propose that a member’s TSB be increased by the share of the outstanding balance of an LRBA related to the assets that support their superannuation interests.

The details – TBC credit

The transfer balance credit for LRBA repayments will broadly operate as follows:

• An individual will receive a transfer balance credit where a superannuation provider makes a payment in
respect of an LRBA that increases the value of a superannuation interest that supports a superannuation
income stream of which they are a retirement phase recipient (i.e. pension);
• The credit arises at the time of the payment; and
• The amount of the credit that the individual receives is the amount by which the superannuation income
stream increased in value.

What doesn’t count as a credit?

• A repayment sourced from assets that support the same superannuation interest will not give rise to a
transfer balance credit (because the reduction in the LRBA liability is offset by a corresponding reduction, therefore there is no increase in value of the superannuation interest supporting a superannuation
income stream);
• Repayments made from other sources (e.g. rental income from the property being acquired under the LRBA) do not give rise to a transfer balance credit because they do not result in a net increase in the value of the superannuation interest that supports the superannuation income stream; and
• Defined benefit pensions: the transfer balance credit for LRBA repayments will not apply to the extent that
a repayment is made in respect of an asset supporting a superannuation interest related to a defined benefit income stream (because the right to payments that an individual has under a defined benefit income stream is unaffected by the assets or investments of a fund).

The details – TSB

Under the proposed changes, the amount by which an individual’s TSB is increased is equal to a proportion 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.

These new changes impose further administrative burdens on advisers. As stated at 1.38 of the draft explanatory memorandum:

The connection between an asset of a fund and an individual member’s superannuation interests relates to the way in which the fund has allocated its assets to meet its current and future liabilities in relation to the member’s interests. The test requires a fund to determine which of its LRBA assets support which members’ interests, as well as the extent to which those interests are supported.

In contrast to the 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 the TSB to apply. This is because the TSB assigns a value to all of an individual’s superannuation interests in a fund, regardless of whether or not those interests are in the retirement phase.

Which LRBAs will be covered?

As stated above, the amendments, if they become law, will only apply to borrowings entered into on or after the act containing the changes receives royal assent. That is, existing LRBAs and LRBAs entered into between now and royal assent, will not be affected.

Philippa Briglia, lawyer and Bryce Figot, special counsel, DBA Lawyers