SMSFs should not plan on exploiting a loophole in tax laws under which intermediary limited recourse borrowing arrangement (LRBA) loans appear not to be included in the total super balance (TSB) add-back provisions, according to an SMSF legal expert.
Sladen Legal principal Phil Broderick said the gap had become visible following the release of an ATO legislative instrument that ensured intermediary LRBAs no longer breached the in-house asset rules, but did not bring them under the TSB add-back provisions of the Income Tax Assessment Act 1997 (ITAA97).
“The legislative instrument ensures that an investment in a related trust that is in connection with an intermediary LRBA, and that complies with section 67A of the Superannuation Industry (Supervision) (SIS) Act 1993, is excluded from being an in-house asset, provided certain criteria are met,” Broderick said in a blog post on the firm’s website.
“But are intermediary LRBAs caught by the TSB add-back provisions in section 307-230 of the ITAA97?”
He noted that under those provisions, a portion of the outstanding balance of an LRBA was added to a member’s TSB where the member had satisfied a condition of release with a nil cashing restriction, or where the member had interests supported by an asset subject to a related-party LRBA.
Section 307-231 of the ITAA97 defines an LRBA for the purposes of the add-back provisions, and for those to apply the superannuation provider in relation to the fund must have a borrowing that is covered by the exception in subsection 67A(1) of the SIS Act, he added.
“Importantly, section 995-1 of the ITAA97 defines a superannuation provider (for a superannuation fund) as the trustee of the fund,” he said.
“That is, it does not appear to cover the situation where the super fund trustee does not have the borrowing, like under an intermediary LRBA, where the super fund trustee maintains the borrowing of the bare trustee.”
He noted this would likely put intermediary LRBAs outside the TSB provisions, but also expected this would not remain the case for long.
“Arguably then, an intermediary LRBA would not be covered by section 307-231 of ITAA97, as it is the bare trustee, rather than the SMSF trustee, which has the borrowing and, therefore, the intermediary LRBA loan is not counted for the TSB add-back provisions,” he said.
“That said, care should be taken before members rush out to take advantage of this ‘loophole’ as we would expect there would eventually be legislative changes to fix this issue.”