Strategies flagged for TSB measure for LRBAs
SMSFs who are set to be impacted by the proposed total superannuation balance for limited recourse borrowing arrangements should consider some of their options for restructuring the loan, says an industry lawyer.
If the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 is passed by the government, Joseph Cheung from DBA Lawyers warns that SMSFs that have entered into new LRBA arrangements on or after 1 July 2018 will need to consider the impact of the total superannuation balance (TSB) measure.
The measure, if passed, will mean that for members with a related party loan or who have met a relevant condition or release, the outstanding balance of their LRBA will be calculated in their total superannuation balance.
Mr Cheung said that SMSFs considering acquiring an asset through an LRBA therefore need to consider whether the proposed lender is an associate of the SMSF, and if so, what the potential impact of the law will be.
“Careful planning, analysis and cash flow projections may be necessary before an SMSF trustee can make an informed decision about whether to enter into an LRBA,” the lawyer said.
“If the lender is an associate of the SMSF and the member’s TSB is affected, the SMSF trustee may need to consider whether there are any strategies available to manage the increase in the relevant member’s TSB that results from their share of the outstanding balance of an LRBA.”
One possible strategy, Mr Cheung explained, may be to refinance the outstanding balance of an LRBA to borrow from a lender that is not an associate of the SMSF. However, there could be some traps with this.
“It is important to note that even if an LRBA can be refinanced with a lender that is not an associate of the SMSF, the proposed law can still operate to increase a member’s TSB where the LRBA has not been repaid by the time that a member satisfies a relevant condition of release with a nil cashing restriction,” the lawyer warned.
“Under these circumstances, the member’s share of the outstanding balance of the LRBA will increase their TSB. Accordingly, careful planning and monitoring is required even after an LRBA is refinanced with a lender that is not an associate of the SMSF.”
Where the lender is not a natural person, such as a company, the SMSF could also consider restricting the lender so that it is no longer an associate of the SMSF, the lawyer explained.
“This is a complex strategy and the SMSF trustee should seek expert advice before making a decision to restructure,” Mr Cheung said.