Changes to LRBAs

Bruce Brammall, 7 August, 2019, Eureka Report



SUMMARY: Restrictions on contributions for SMSFs with LRBAs are about to increase. What you need to know now for fresh borrowings.

DIY super investors might be forced to sell other fund assets to repay property loans, under new laws designed to further restrict contributions.

The Morrison Government has re-introduced legislation to restrict contributions for some users of limited recourse borrowing arrangements (LRBAs) in self-managed super funds.

The new rules, if passed, mean that, in some circumstances, the outstanding amount of the loan will be added to a member’s total superannuation balance (TSB) for the purposes of making contributions.

This may restrict members’ abilities to make both concessional and non-concessional contributions, as they relate to TSBs.

The new rules will only apply to properties purchased from 1 July, 2018.

Further, it will only impact those who have used related party loans (ie, not loans from regular lenders) and those looking to make contributions when they have met a “nil cashing restriction” condition of release, such as attaining age 65, or turning 60 and retiring.

The changes are proposed in the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019, which was reintroduced to the new parliament late last month, after being abandoned prior to the May Federal election. The laws have been watered down since they were first proposed in the 2017-18 Federal Budget.

The underlying reason for the new contributions restrictions is essentially to stop a few rorts that had emerged via clever strategies.

Funds had been allowed to potentially make considerable related party loans to their super funds to purchase assets, then “forgive” those loans, to the tune of the non-concessional contribution limit (currently $100,000) a year, to reduce the loans.

There was also the potential to use withdrawal and recontribution strategies tax-effectively.

Examples – TSB and NCCs

Take a 64-year-old, still working, who has $1.2m in super, with a $600,000 loan with a major bank for a property. The loan is ignored for the purposes of making NCCs, because their loan is not with a related party and they haven’t hit a “nil cashing restriction” trigger.

If the same situation was repeated a few years later, when our member is now 67 and has met a “nil cashing restriction”, they would not be able to make contributions to super, other than the $25,000 concessional contributions, if they had met the work test. Their TSB would include the $600,000 debt and they would have a total TSB of $1.8 million, even though their “net” interest was only $1.2 million.

Examples – TSBs and the catch-up provisions

Next, we’ll take a 50-year-old with a smaller SMSF, but with a loan.

If the member had $400,000 with a bank loan of $300,000, their TSB would be considered $400,000 for the purposes of using the “five-year catch-up” provisions.

However, if it was a related party loan (from themselves or an associate to the super fund), their TSB would be $700,000 and they would be unable to use the catch-up provisions.

Example – two member funds

This one comes straight from the supporting notes to the legislation.

Two members. Peter has $1.2m in his account, while Sue has $1.8m. They are both retired.

They take out a loan of $2m to purchase a $3.5m property. Equity and loans in the property come in proportion to their balances.

The fund’s total balance is now $5m, of which $2m is Peter’s TSB and $3m is Sue’s TSB. As they both have nil cashing restriction super balances, due to both being retired, neither are eligible to make further NCCs.

Removing the “net” effect

The rules effectively remove the netting out of the loan on balances under certain circumstances. The intent of the legislation is to stop those with bigger balances getting around the limits associated with the $1.6m TSB. And to limit some strategies that had been (cleverly and legally until this legislation is passed) promoted by some SMSF experts.

I have only covered the main areas on this highly complex topic. It is designed to have impacts on other areas, but they are, relatively, likely to hit very few in the grander scheme of things. However, if you have strayed into some of these areas with your SMSF, seek expert legal opinion before going on.

To reiterate, the government is only introducing these changes for LRBAs that were entered into on or after 1 July 2018.

If you have an LRBA, whether related party or a High Street Bank arrangement, prior to that time, this legislation will not impact on those arrangements.

Importantly, this includes if you simply refinance an LRBA that was entered into prior to that time point.

Strategies for those affected

Many who still have LRBAs when they approach 65 might previously have sought to use NCCs to help pay back, or pay out in total, via the use of NCCs.

Careful consideration, leading into retirement, will now be required.

Affected super funds might have to consider alternate ways to pay down the loan at some point, such as using other available cash in the super fund, or to sell other assets of the fund, to pay down the debt.

Don’t forget if selling assets in pension phase, if all of your assets are covered in your transfer balance account, these assets can be sold capital gains tax free.

Most importantly, make an appointment with a knowledgeable adviser if any of these raise flags for you and your SMSF.


The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: .


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