Limited recourse borrowing arrangements have allowed many SMSFs to successfully invest in assets they otherwise would not have been able to acquire. However, proposed new laws that seek to count a portion of an SMSF's loan balance towards some members' own "total superannuation balance" may create liquidity headaches for some members.
In the last decade, many SMSFs have used a "limited recourse borrowing arrangement" (LRBA) as part of a gearing strategy to build members' retirement savings. An LRBA is a special type of loan that allows SMSF trustees to borrow to buy an asset – typically real estate. Gearing strategies have been particularly attractive to SMSF members who feel constrained by the current contributions caps.
However, draft laws will create some planning issues for new LRBAs entered into on or after 1 July 2018.
Under these proposals, an SMSF's outstanding LRBA loan balance will, in some cases, be taken into account when calculating a member's total superannuation balance (TSB).
This means some members' TSBs will increase, which may have significant consequences for the members and the fund.
Why is a member's TSB important?
A member's TSB is a calculated amount that reflects the value of all their superannuation interests – both their accumulation and retirement phase interests. It is an important concept for all fund members as it is used as a threshold to qualify for various superannuation measures, including:
How will an LRBA affect a member's TSB?
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 (to some extent) the superannuation interests of that member and either:
Planning a borrowing?
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 and plan for any liquidity issues that may arise.
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