Late last week, the government released draft legislation that proposes to amend the LRBA rules for SMSFs, for fear that they may be improperly used to circumvent the contribution caps.
The government is proposing that these changes apply to LRBAs put in place on or after the first day of the financial quarter that occurs after the day the changes receive royal assent.
Any transfer balance credits as a result of a loan repayment will only arise in situations where the repayment results in an increase in the value of the superannuation income stream, explained SuperConcepts’ general manager – technical services and education Peter Burgess.
“In other words, a transfer balance credit will only arise where there are accumulation and pension interests in the fund and it can be shown that all or some part of the loan repayment has come from the accumulation interest,” Mr Burgess told SMSF Adviser.
“If the fund’s assets are only supporting a superannuation income stream, then any loan repayments will not give rise to a transfer balance credit because there has been no increase in the value of that interest. The reduction in the LRBA liability has simply been offset by a corresponding reduction in cash. It’s shifts in value between the accumulation and pension interests that this measure is designed to catch.”
While the changes are not as broad as some feared, they appear to be more complex than originally thought.
“SMSFs will need to report loan repayments sourced from an accumulation interest regularly to the ATO, possibly even monthly, and where there are both accumulation and pension interests in the fund, the trustees will need to determine and only report the portion of the loan repayment that has been taken from an accumulation interest,” Mr Burgess said.
“In regard to the requirement to include the outstanding loan balance in the calculation of the member’s total super balance, where there are two or more members in the fund, a formula will be used to determine how much of the outstanding loan balance at 30 June should be added to each member’s total super balance.”
The SMSF sector has hit out at what appears to be another proposal looking to restrict borrowing in an SMSF, particularly in light of the huge volume of changes that advisers and accountants have had to address with their clients following last year’s federal budget.
Director of Verante Financial Planning, Liam Shorte, told SMSF Adviser that changes to LRBAs hit his small business clients hard.
He uses LRBAs to implement effective succession plans for his clients, and proposals such as these put those valid and legal strategies on shaky ground.
“We look to help in succession planning and passing businesses from one generation to the next as part of retirement planning. Often, the younger generation can’t afford to buy the business and the business property but the parents need the income for their retirement. We look at moving the business property into the SMSF of the older generation often with an LRBA,” Mr Shorte said.
“The idea is to sell just the business to the children and use those funds to pay down the LRBA before or at retirement and then the parents lease the unencumbered property back to the business. This allows the children to build a business without the capital outlay for the premises, ensuring they have borrowing capacity for growth in the business and provides the parents with a steady lease income stream in retirement.
“We don’t want people taking debt into retirement, so getting the proceeds of the sale of the business into the SMSF to pay down the loan is crucial.”
Yet, another change to LRBAs points to a government that wants to ban borrowing in super, but doesn’t want to admit it, said Heffron SMSF Solutions’ head of customer, Meg Heffron.
“This is death by a thousand cuts. If we have come to the view that borrowing is dangerous ... then ban it. I happen to think that’s wrong. But if that’s the view we’ve come to, then ban it. But don’t keep doing stuff like this to just squeeze these people into a corner,” Ms Heffron told SMSF Adviser.
Addressing the government’s concerns that SMSF members could use LRBAs to bend the new contribution rules, Ms Heffron said there is little evidence to suggest that has or ever will be the case.
“The vast majority of people who use these arrangements are doing very sane, very responsible things,” she said.