LRBA loophole for SMSFs removed

Self-managed superannuation funds will be prevented from circumventing contributions caps through the use of limited recourse borrowing arrangements under new Budget measures.

Announced in the Federal Budget this week, from 1 July 2017, the outstanding balance of a limited recourse borrowing arrangement (LBRA) will now be included in a member's total annual superannuation balance.

Additionally, the repayment of the principle and interest of a LRBA from a member's accumulation account will be credited in the member's transfer balance account.

In effect this will make some SMSF members think twice about taking on a LRBA to invest in property, as this may trigger the $1.6 million transfer balance cap in retirement.

ATO statistics show that SMSFs currently hold $24.3 billion in LRBAs, with these financial instruments being predominantly used to invest in residential and non-residential property in an almost 50-50 split.

SMSF Association head of policy Jordan George said that the while the association understands the government's desire to ensure the tax changes to super have integrity; they remain concerned with the current form of the LRBA changes.

"In its current form, the legislation may have significant negative effect on the ability of SMSFs to use an LRBA," George said.

"We believe the government could find other ways of preventing SMSF members from moving money around to get around the limits on non-concessional contributions - mainly through limiting the use of related party loans."

From 1 July 2018, the government will also seek to reduce opportunities for members to use related party transitions on non-commercial terms.

"The non-arm's length income provisions will be amended to ensure expenses that would normally apply in a commercial transition are included when considering whether the transaction is on a commercial basis," Budget documents said.

According to the government, this measure will ensure that the 2016-17 Superannuation Reform Package "operates as intended."

Last month, Shadow Treasurer Chris Bowen called for banning of all direct borrowing by SMSFs to "cool an overheated housing market."

The LRBA measure is estimated to increase treasury revenue by $4 million, while the related-party transaction measures will add $20 million.

Read more: new BudgetFederal BudgetJordan GeorgeShadow Treasurer Chris BowenSMSF AssociationSuperannuation Reform Package
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