Speaking at an event in Sydney, Townsends Business & Corporate Lawyers special counsel Michael Hallinan explained that the government’s proposed measure to include the debt of an LRBA in the determination of a member’s total super balance could prevent some SMSFs making non-concessional contributions and potentially undertaking strategies that involve borrowing.
“The implication is that it will adversely affect the non-concessional contribution cap space of participating members - it could either reduce it or could even it eliminate it,” he warned.
“More importantly it may prevent the participating members from utilising the bring forward rule for non-concessional contributions.”
Given that the new measure only applies to an LRBA if the LRBA was commenced on or after 1 July, timing is critical, said Mr Hallinan.
“While only the exposure draft legislation has been released to date, the consultation period has now closed and we expect the legislation to enter Parliament in bill form during budget session,” he said.
SMSF practitioners with clients who are considering these strategies, therefore may want to encourage their clients to undertake these strategies before the end of the financial year, he said.
“Do it before 30 June 2018, this is a last golden opportunity. So if your clients are seriously thinking about an LRBA this may be an opportunity for them to implement their investment strategies and undertake an LRBA arrangement,” he said.
While there’s no doubt that LRBAs will be grandfathered where the arrangement was settled on or before 30 June 2018, he said, it is still unclear how these arrangements will be treated where the trustee starting the transaction in some way before 1 July 2018 but the settlement occurred on 1 July or later.
“The intelligent answer is that you just settle on or before 30 June and you’ll therefore avoid having to deal with these types of questions," he said.
Simply entering into a contract of sale he said might not be enough to argue that the arrangement was commenced before 1 July 2018.
Similarly, while entering into a loan agreement might be one step, he said, the arrangement is a borrowing so it’s only commenced where there has been a drawdown on that loan agreement.
The trustee making a decision to undertake a geared acquisition would certainly not be considered to be commencing an LRBA, he said.
“That’s just an internal decision of the trustee to do something. It’s a bit like a New Year’s resolution to go on a diet - simply because you made a decision to start a diet, doesn’t mean you’ve started a diet,” he said.
“So the safe thing is to settle and complete on or before 30 June 2018.”