Superannuation funds anti-avoidance
The Budget measures around Limited Recourse Borrowing Arrangements (LRBA) and non-arm’s length income are aimed at improving and maintaining the integrity of the superannuation changes that were introduced in the 2016 Federal Budget. These measures will likely limit the use of LRBA in Self-Managed Superannuation Funds (SMSFs).
LRBAs and the 2016 changes
From 1 July 2017 these proposals are intended to ensure that superannuants cannot utilise LRBAs to avoid the limitations imposed by the 2016 changes. Those superannuants who have LRBAs inside their SMSF will need to add any outstanding loan balance to their member accounts when calculating their Total Superannuation Balance. The Total Superannuation Balance is the threshold that determines whether an individual can make further non-concessional contributions to their fund.
As an example a SMSF member who has a member balance of $1.1 million and an outstanding LRBA loan balance of $500,000 will have a total superannuation balance of $1.6 million, and will therefore not be able to make further non-concessional contributions.
In addition, LRBA loan repayments will be ‘counted’ towards a member’s Transfer Balance Account (where the superannuant has a pension account). Where loans are repaid from a member’s accumulation member account, the repayment will be recorded as a credit against the member’s Transfer Balance Account.
Non-Arm’s Length Income
From 1 July 2018 these proposals are intended to ensure all transactions undertaken with an entity related to the superannuation fund or its members, are undertaken on commercial or arm’s length terms. The proposals require that ‘normal commercial expenses’ are considered as part of the assessment process, for determining whether a related party transaction is commercial.
Where a transaction is determined to not be undertaken on an arm’s length basis, any income arising from the arrangement (say rental income from property) is assessed as non-arm’s length income, and taxed at the top marginal tax rate in the superannuation fund.
These proposed superannuation measures are not likely to impact a significant number of SMSFs or superannuants. However, they do add further complexity to the 2016 superannuation changes which are already causing significant concern for individuals wanting to responsibly provide for their own retirement.