LRBA amendments 'inequitable' says Tax Institute
The Tax Institute has urged the government not to proceed with its proposed amendments for LRBAs, as the changes will have adverse and over-reaching long-term consequences and cause confusion for trustees.
In a submission to Treasury in relation to the superannuation taxation integrity measures, The Tax Institute (TTI) said the amendments should not proceed.
The submission said the proposed amendments were not required as the contribution caps already adequately address the issue the NALI (non-arm's length income) proposals seek to address.
“TTI believes that the contribution rules already adequately deal with the acquisition of assets by superannuation funds for no consideration or insufficient consideration,” said the submission.
“In our opinion, it is inappropriate to tax all subsequent income and gains derived from such assets under the NALI rules and the proposed amendments should not proceed on this basis.”
If the NALI amendments do proceed, The Tax Institute argued that the provisions should only apply to income from assets acquired in the 2018/19 year or later.
“Otherwise, the rules operate with retrospective effect. Further, for many assets already acquired, there are regulatory prohibitions on selling assets and re-acquiring them from a related party at arm’s length which will prevent a fund from self-correcting,” said The Tax Institute.
“In addition, even if such restructuring is permitted there are likely to be significant transaction costs. Therefore, it is important that the changes be prospective only.”
It also noted that the penalties for NALI under section 295-550 are excessive compared to other anti-avoidance rules and should be reduced.
“The penalty may result in up to 67.5 per cent of all the income earned being lost as a result of increasing the tax rate from 0 per cent to 45 per cent, plus a 50 per cent penalty rate,” the submission said.
“Penalties under section 295-550 should also be proportionate to the mischief and should only be applied to the extra net income, rather than the entire income.”
It also said that the amendments should eliminate any possibility of the dual application of both the new NALI provisions and a limited recourse borrowing arrangement (LRBA) counting towards a member’s total superannuation balance.
“Only one penalty provision should be able to be applied,” it said.
It also said the inclusion of outstanding LRBA debt towards the total super balance was inequitable because it disadvantages SMSFs compared to other superannuation funds, and the government should therefore not proceed with it.
“Other superannuation funds frequently invest into geared vehicles, which can even be captive investment trusts. Their gearing does not count towards members’ total superannuation balance and the same approach should apply to gearing an SMSF through a LRBA.
“Fair and equitable treatment should be maintained across the different sectors of the industry,” the submission said.
The amendments may also create confusion for members about the quantum of their superannuation, because their TSB (total super balance) will not equal their account balance, The Tax Institute said.