Speaking in a recent webinar, DBA Lawyers special counsel Bryce Figot said given the measure is essentially a tax on unrealised gains based on the proposed methodology for the earnings calculation, it could have significant impacts on illiquid assets in higher balance funds.
Mr Figot explained if SMSF clients have large, lumpy illiquid assets such as real estate that also has low yields, this measure could create difficulties for the fund.
“The government isn’t saying that they’re trying to force SMSFs to liquidate residential real estate, but that could be the practical implications of this,” Mr Figot warned.
SMSF members with certain types of limited recourse borrowing arrangements (LRBAs) could also be impacted by the proposed $3 million threshold, even though the actual equity in the fund may be below $3 million, he added.
Mr Figot gave the example of Jenny, who had a total super balance of $2 million all in cash. Jenny is the sole member of the SMSF.
Jenny then borrows $4 million under a related-party LRBA in order to buy real estate for $6 million.
“If the lender is an associate under ITAA 1936 s 318(3) or Jenny has satisfied certain conditions of release, her total super balance is now $6 million just by engaging in the borrowing arrangement,” he stated.
“She’s now well within that tax net.”
Mr Figot gave another example of how members could unexpectedly be captured under the proposed threshold.
“Imagine Jenny borrows from an unrelated party instead and she’s only 40. Suddenly she’s horribly injured to the point where she is permanently incapacitated. From one day to the next she suddenly jumps into this regime,” he warned.
“Isn’t that brutal, that just by being permanently incapacitated and having an LRBA means your total super balance could just jump up significantly. I’d say that’s an unintended consequence.”
Greg please look into how the Total Superannuation Balance (TSB) is calculated. The members balance in the SMSF accounts isn’t necessarily the members TSB. In certain circumstances the outstanding balance from LRBAs are added back to the member balance (in the accounts) to calculate the TSB.
Please look into how the Total Superannuation Balance (TSB) is calculated. The members balance in the SMSF accounts isn’t necessarily the members TSB. In certain circumstances the outstanding balance from LRBAs are added back to the member balance (in the accounts) to calculate the TSB.
If a SF has $2m in cash and borrows $4m to buy a property, the NET assets are unchanged —[b] this is cost base[/b], however, if property value up to 7.5M as at 30.06.202*, then, member balance is 3.5M..bad luck
No Mr Figot, your analysis is simply not correct. If a SF has $2m in cash and borrows $4m to buy a property, the NET assets are unchanged – ie, $6m – $4m = $2m. No change. If the investment is a good one, then that equation will change ( hopefully for the better) over time. But a $2m SF balance does not change to a $6m super balance after the borrowing.
this response sounds logical but there are certain instances in super rules where the borrowing component does not reduce the amount for assessment purposes. Given the numerous questions now thrown up by the implementation of this announced policy, this is now another one on the list.
Dear Greg
Thank you for your comment. However, with the greatest of respect, I do believe that the article is correct and your comment is incorrect. I appreciate the common sense and logical approach you have adopted in forming your views. However, I suspect you might not have considered the impact of ss 307-230(1)(d) and 307-231 of the Income Tax Assessment Act 1997 (Cth).
I have written article an elaborating, as well as including examples from Treasury and the ATO. I understand that SMSFAdviser will probably publish this article in the next day or so.
Please contact me if you want to discuss further: Direct number: 03 9092 9406 or Email: bfigot@dbalawyers.com.au
Regards
Bryce
For those interested, the article elaborating (which I referred to above) is now available at [url=http://https://www.smsfadviser.com/strategy/22174-correcting-a-misconception-how-tsbs-are-calculated-with-certain-lrbas][/url]
Regards
Bryce