The Turnbull government has moved to crackdown on the amount of debt SMSFs take on to invest in property by including the leverage in their superannuation balance and transfer caps.
Self-managed superannuation funds (SMSFs) that have limited recourse borrowing arrangements (LRBAs) will be hit from July 1 this year, when the arrangements will be included in a member’s total superannuation balance and transfer balance cap.
About $24 billion in SMSF assets are subject to LRBA arrangements, accounting for about 3.4 per cent of all SMSF assets.
The government says SMSF members can use LRBAs to get around contribution caps and, in effect, transfer growth in assets from the accumulation phase into the pension phase without triggering the $1.6 million transfer balance cap.
The budget papers state that the outstanding balance of an LRBA will now be “included in a member’s annual total superannuation balance and the repayment of the principal and interest of an LRBA from a member’s accumulation account will be a credit in the member’s transfer balance account”.
The papers state this measure will make sure that the 2016-17 Superannuation Reform Package does what it is supposed to – as will measures announced to address related-party transactions.
The budget papers also state that the government will move to reduce incidences of fund members using related-party transactions on non-commercial terms to avoid costs and increase superannuation savings. Also, non-arm’s length income provisions will be amended to include “expenses that would normally apply in a commercial transaction” when considering whether a transaction is on a commercial basis. The changes are designed to limit the ability of friends and family members to make deals that skirt the tax laws.
Together, the LRBA and related-party transaction measures will add roughly $24 million to Treasury revenue over four years.
It was a recommendation of the 2014 Financial System Inquiry that the government outright ban all borrowing within superannuation, which the inquiry’s chair David Murray has argued has the potential to become a systemic risk. The Turnbull government rejected this recommendation.
Members of SMSFs will potentially benefit from measures introduced to improve housing affordability, which allow contributions of up to $300,000 to superannuation from the proceeds of selling a home and downsizing.
The downsizer contribution will be allowed in addition to contributions currently allowed under existing rules and caps, and will be exempt from the age test, the work test and the $1.6 million balance cap for making non-concessional contributions. However, a budget fact sheet states: “Any change in the person’s superannuation balance as a result of this measure will count towards the age pension assets test.”