Many SMSFs have used a “limited recourse borrowing arrangement” (LRBA) as part of a gearing strategy to build members’ retirement savings, allowing the funds to borrow to buy high-value growth assets, typically real estate.
However, proposed new laws that seek to count a portion of an SMSF’s loan balance towards some members’ own “total superannuation balance” (TSB) may create liquidity headaches for those members.
Under these proposals, an SMSF’s outstanding LRBA loan balance will, in some cases, be included when calculating a member’s TSB. This means some members’ TSBs will increase, which may have significant consequences for the members and the fund. If enacted, these laws will apply to any new LRBAs entered into on or after 1 July 2018.
A member’s TSB is a calculated amount that essentially reflects the value of all their superannuation interests – broadly, both their accumulation and retirement phase interests.
An increase in a member’s TSB can have many consequences as the TSB is an eligibility threshold for superannuation measures such as whether you can make non-concessional contributions (NCCs).
Under the proposed new laws, a member’s proportionate share of their SMSF’s outstanding LRBA loan balance will be included in their TSB if the asset acquired under the LRBA supports the superannuation interests of that member.
A further requirement is that either the member has satisfied one of the several conditions of release such as retirement, a terminal medical condition or attaining age 65, or the lender under the LRBA is a related party of the fund.
If an SMSF relies on members’ contributions to help fund its LRBA loan repayments, the SMSF might have difficulty repaying the loan if one or more members becomes ineligible to make NCCs (or to “bring forward” as many NCCs as originally planned). Likewise, the LRBA may impact the ability to make other types of contributions such as “catch-up” contributions due to a member’s TSB increase. This liquidity issue might also affect the SMSF’s ability to meet its other liabilities, such as minimum annual pension payments.
If you are considering an SMSF borrowing strategy or need to review an arrangement already put in place on or after 1 July 2018, contact us to discuss how the proposed new laws will affect you. We can help you to quantify the impact, plan for any liquidity issues that may arise and explore refinancing or other strategies.