The exclusion of limited recourse borrowing arrangements (LBRA) from the total super balance (TSB) calculations used to derive the Division 296 tax on superannuation earnings raises questions as to why they cannot be removed in other situations, an SMSF lawyer has noted.
DBA Lawyers special counsel Bryce Figot said LRBAs would not figure in the process to calculate an individual’s Division 296 tax and even where they may push a member’s TSB well beyond the $3 million threshold.
Figot pointed out the explanatory memorandum for the Division 296 bill that was presented to the last parliament stated that for the purposes of the impost, an LRBA was to be disregarded to ensure tax is only calculated on net assets.
“Now that’s great, but it does make me wonder, if we’re removing the LRBA TSB modification for Division 296 tax purposes, why not just always remove it?” he said during a webinar late last week.
“I think it shows the LRBA modification for TSB is the most … whatever… I won’t get into it as I’m not here to write tax law.”
During the online session, he gave an example of Jenny, who was the sole member of an SMSF with a cash balance of $2 million who then borrows $4 million under an LRBA to purchase a $6 million real estate asset.
“What is Jenny’s TSB? Well, if the lender is an associate under section 318(3) of the Income Tax Assessment Act 1936 and/or if Jenny has satisfied certain conditions of release, such as retirement or reaching age 65, her TSB is $6 million,” he said.
“However, that’s only her TSB for general TSB purposes. So is Jenny affected by the Division 296 tax?
“The answer is no. The bill actually carves out a special modification for LRBAs for TSB purposes, but not when it comes to TSB for Division 296 tax.”
