The treatment of limited recourse borrowing arrangements (LRBA) assets under current draft legislation will diminish the opportunities for SMSFs to implement well thought out strategies, an industry technical expert has warned.
The Exposure Draft for Treasury Laws Amendment (2017 Measures No 2) Bill 2017: limited recourse borrowing arrangements, released last week, proposes a repayment made from an SMSF accumulation account for an asset held under an LRBA being used to support an income stream will result in a transfer balance credit to arise.
In addition, the repayment must increase the value of the asset supporting an income stream for a resulting transfer balance credit.
This new LRBA treatment will only apply to LRBAs entered into after the amended legislation receives royal assent.
“It won’t affect existing LRBAs nor will it impact LRBAs from now until this date [of royal assent], but this is another attack on LRBAs in relation to SMSFs – the ATO and the government have this illusion that there’s going to be a massive property burst because of LRBAs entered into by SMSFs,” NowInfinity SMSF technical director Julie Dolan said during the firm’s Super Reform Series webinar held today.
“But it just does not stack up when you look at the figures that the ATO released, even recently, around the percentage of SMSFs that have actually got borrowings. It’s very, very insignificant.
“I personally hope it doesn’t go through because it’s yet another shake-up in our industry around very valid strategies with LRBAs, especially business succession, wanting to transfer commercial property, leasing it back to a related party where the next generation can come back through and run the business.
“LRBAs serve a really strong, purposeful, strategic role. If this change comes through, it’s really going to put a big dent in that and will potentially make it much more difficult for SMSFs to have LRBAs in place.”
Dolan added that ultimately the government should be encouraging policies that increased the net asset value of a super fund at retirement.
“But it just seems to be one hit at a time where the [government] is depleting those opportunities,” she said.
Furthermore, she warned of the administrative burden the change would bring.
“It will be another layer of admin hassles that we’ll have to deal with – trying to track what assets related to which members and in doing so, are they backed by an LRBA and if yes, what proportion relates to that specific member and then what is the increase to the total super balance,” she noted.
The change in treatment of LRBAs will no doubt be another significant change for the industry to get its head around, she said.
“What this means is there might be a commercial property, for example, that backs the retirement interest in the fund and the LRBA on that commercial property is repaid down by cash in the fund that’s sitting in accumulation phase,” she noted.
“The explanatory memorandum states that in this instance, what is happening is that those repayments in the accumulation phase are, in effect, transferring value from the accumulation phase to the retirement phase.
“So at that point in time, with any of those repayments it will be a credit item to the transfer balance cap reflecting those repayments.
“Now if those repayments were made via rent on that property, or they were made with a cash account that also supports the retirement phase of the fund, it’s not an increase.”
