Government releases super tax measures for consultation

The Government has released its draft legislation regarding taxation integrity measures for the superannuation system.

The consultation paper addresses two specific measures: the first concerns a member's share of the outstanding balance of a limited recourse borrowing arrangement in their total superannuation balance (TSB). The second, Minister for Revenue and Financial Services Kelly O'Dwyer explained, "ensures that non-arm's length expenditure is taken into account when determining whether the non-arm's length income (NALI) taxation rules apply to a transaction."

O'Dwyer said these measures are intended to ensure that "related party transactions cannot be used to circumvent contribution caps. They are not intended to prevent the use of LRBAs."

The paper uses an example to illustrate the effect of the new laws: it presents Laura, as the sole member of her SMSF, holding $2 million in accumulation phase. It then assumes that Laura withdraws a lump sum of $500,000 from her SMSF on 1 June 2019, which reduces her TSB to $1.5 million.

On 30 June 2019, Laura then lends that $500,000 back to her SMSF under an LRBA. The SMSF then uses $1 million of its existing assets and the borrowed $500,000 to acquire a $1.5 million investment property.

Under the current law, Laura's TSB at June 30 is $1.5 million. This comprises the net value of the property - $1.5 million minus the $500,000 LRBA - and the other assets valued at $500,000. Because her TSB is below the $1.6 million cap, Laura could then make further non-concessional contributions of up to $100,000.

Furthermore, as the LRBA is repaid by the SMSF, the net value of the fund would increase, bringing it closer to the $1.6 million cap. Just prior to reaching the threshold, though, Laura could withdraw another lump sum, enter into a new LRBA and acquire another asset, thereby reducing her TSB again, allowing for further contributions.

With the new law in place, Laura's TSB would be $2 million at 30 June, which comprises the net value of the property ($1 million), the other assets valued at $500,000 and the $500,000 loan balance of the LBRA. Because of this, she would be unable to circumvent the contribution cap as above; she could not enter into a new LRBA arrangement in order to make new non-concessional contributions that year.

"The policy intent of the new rules is that, if the gross assets of the member exceed $1.6 million, the member will not be able to make non-concessional contributions," the paper explains.

"This will mean that people can use non-concessional contributions to repay LRBAs that build total superannuation asset holdings up to $1.6 million per member, but not beyond that level. If the gross balance is above $500,000, they will not be able to make catch-up concessional contributions."

Read more: LauraLRBASMSFGovernmentFinancial Services Kelly O'DwyerLBRAMinister for Revenue
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