Retirees facing major ‘conundrum’ with LRBA measures
SMSF trustees hoping to make large non-concessional contributions to pay off property loans before retirement may encounter serious setbacks once the LRBA measures become law, warns a technical expert.
Speaking at the SMSF Association’s Technical Day in Sydney on Thursday, MLC technical services manager Jenneke Mills said the changes outlined in the government’s Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 would affect all trustees approaching retirement with an outstanding LRBA on a property.
“It’s an ongoing test we are going to need to be aware of for clients – you can’t say they are in the clear and can get a loan because they are under preservation age, because as soon as they retire it is going to be included [in their super balance],” Ms Mills said.
“Even if it’s not a related party loan, if it’s through a bank or an arms-length lender, in that case it will still be counted toward their total super balance (TSB) once the member has met a full condition of release.”
This is a particular problem for trustees who had planned to make a lump sum NCC to pay off an LRBA as their fund enters pension phase, since their TSB would be adjusted to include the outstanding LRBA and they may then breach the $1.3 million cap, Ms Mills explained.
“If a client wants to make a NCC and has $1.2 million in their fund you might say ‘great’, but if the outstanding balance of the loan is suddenly added to make the balance $1.6 million, you can’t make that contribution,” she said.
“That might not be a problem, but what if your client has entered into this LRBA and they had anticipated that as they were approaching retirement they were going to make a large NCC to help the fund extinguish some of that debt, that’s when it becomes a problem.”
SMSF Alliance principal David Busoli agreed that the preservation age rules were problematic, calling for the government to grandfather arms-length LRBAs entered into before 1 July 2019.
“The LRBA amendments were designed to prevent the artificial reduction of a member’s TSB by reintroducing withdrawn money as loans, [but] included are loans from legitimate third-party lenders once the member has triggered a preservation release such as retiring after age 60 or merely reaching age 65,” Mr Busoli told SMSF Adviser.
“The member may well have intended to make NCCs to pay off the loan but, due to the amendments, won’t be able to do so without selling the property. No attempt has been made to deal with this conundrum, either before or now.”
Ms Mills mentioned one workaround would be for the member to trigger the bring-forward rule to make excess contributions, but this would only be possible for those trustees who still passed the work test after 65.
While the government had flagged increasing the preservation age to 67 in this year’s federal budget, legislation for this measure had not yet reached the parliament, she said.
