SMSF practitioners need to be cautious when dealing with clients who have a limited recourse borrowing arrangement (LRBA) and meet particular conditions of release as these two factors may close off future contributions to their fund.
MLC TechConnect technical services manager Julie Steed noted the debt from the LRBA would actually be viewed as an asset in cases where the member met a specific condition of release.
“If I have an LRBA on or after 1 July 2018 and it’s a related-party loan, or the member has met a condition of release with a nil cashing restriction, and the LRBA is over the asset supporting the member’s benefit, then the member’s share of the LRBA debt is added back to their total super balance,” Steed said at the recent SMSF Association National Conference 2025 in Melbourne.
“I don’t have any accounting qualifications, but this is the only time I can think of where a debt is treated as an asset, so it is something easy for people to overlook, even SMSF specialist practitioners.”
To highlight the potential problems this could create in the SMSF in the future, she provided the example of Leo, who had a heart attack and his health declined to the point he was unable to continue his career as a neurosurgeon.
“Leo meets all of the criteria for being permanently incapacitated. He acquired his loan with a proper lender, so it’s not a related-party loan, but he has met a condition of release with the nil cashing restriction,” she said.
“In his fund he’s got cash and shares of $600,000 plus a property worth $1.4 million and an outstanding balance of $400,000 in his LRBA. It would appear his account balance is $1.6 million, but because we have to add back his LRBA, his total super balance is $2 million.
“As at 30 June 2024, if we looked at his account balance of $1.6 million, Leo would be eligible to make a $360,000 non-concessional contribution in the 2024/25 year, but because we’ve added back that $400,000 debt, his total super balance is above the $1.9 million cap, so his non-concessional cap in 2024/25 is zero.”
