There is a common misconception as to how a total superannuation balance (TSB) is calculated. This misconception can mean that, although an individual’s ‘net’ balance might be well under $3M, they might still be liable to the announced new tax on $3M+ balances!
Here’s a very simple example: consider Jenny. She is 65 years old. All of her super is in one SMSF. The SMSF has one asset, a bank account, with a balance of $2 million. She is the sole member of the SMSF. She is not receiving a pension from the SMSF.
Jenny’s TSB is probably $2 million.
Accordingly, you would think the new tax on $3M+ balances is not even close to affecting Jenny.
However, what if Jenny’s SMSF:
- borrows $4M under a limited recourse borrowing arrangement (LRBA) and
- uses the cash and the borrowings to buy a $6M asset?
It is a misconception that Jenny’s TSB is still $2M because the SMSF’s net assets remain unchanged. This is incorrect. Jenny’s TSB has in fact been significantly altered and is now $6M! I elaborate.
One modification relates to certain LRBAs in certain circumstances. This modification can be seen as somewhat unintuitive. Accordingly, practitioners must be careful to not just rely on ‘gut feel’ intuition.
A member’s TSB is more than just the sum of items such as the member’s accumulation phase values, etc.
A member’s TSB also includes the ‘LRBA amounts’ for certain LRBAs.
In a nutshell, for some LRBAs, some or all of the ‘outstanding balance’ is also added when calculating a member’s TSB. This might happen where a member has attained age 65, is retired, or the lender is an associate.
If so, the formula for the LRBA amount (ie, how much to add to the member’s TSB) is as follows:
‘Outstanding balance’ x ‘Value of your supported super interests’ ÷ ‘Value of all supported super interests’
These terms have the following meanings:
outstanding balance means the outstanding balance on the *borrowing at the time of working out your *total superannuation balance.
value of all supported super interests means the sum of the *values at that time of all *superannuation interests in the *regulated superannuation fund that are supported by the asset or assets that secure the *borrowing.
value of your supported super interests means the sum of the *values at that time of each *superannuation interest of yours that is supported by the asset or assets that secure the *borrowing.
Accordingly, in the Jenny example above, in addition to the value of Jenny’s accumulation phase value (ie, $2M, which is intuitive), the following ‘LRBA amount’ must be added in calculating her TSB:
$4M x $2M ÷ $2M = $4M
However, for those who want to get information from the ‘horse’s mouth’, please see ss 307-230(1)(d) and 307-231 of the ITAA. The full authorised version of this legislation is available at https://www.legislation.gov.au/Series/C2004A05138. Also, the explanatory memorandum that accompanied the Bill that ultimately inserted the modification is helpful too. The explanatory memorandum is available at https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r6368
Is this actually what the legislature intended?
Consider the following example, which I copy verbatim from the relevant explanatory memorandum (explanatory memorandum, Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 (Cth) 34–35 [3.36] — hyperlink above):
Sue and Peter are the only members of their SMSF. The value of Peter’s superannuation interests in the fund is $1.2 million. The value of Sue’s superannuation interests is $1.8 million. All of the assets of the fund that support their interests are cash.
Sue and Peter have both retired and therefore satisfy a condition of a release with a nil cashing restriction.
The SMSF acquires a $3.5 million property. The SMSF purchases the property using $1.5 million of its own cash and borrows an additional $2 million using limited recourse borrowing arrangements.
The SMSF now holds assets worth $5 million (being the sum of the $1.5 million in cash and the $3.5 million property). The fund also has a liability of $2 million under the limited recourse borrowing arrangements.
Of its own cash that it used, 40 per cent ($600,000) was supporting Peter’s superannuation interests and the other 60 per cent ($900,000) was supporting Sue’s interests. These percentages also reflect the extent to which the asset supports Peter and Sue’s superannuation interests.
Peter’s total superannuation balance is $2 million. This is comprised of the $600,000 of cash that still supports his superannuation interest, the 40 per cent share of the net value of the property (being $600,000), and the 40 per cent share of the outstanding balance of the limited recourse borrowing arrangements (being $800,000).
Sue’s total superannuation balance is $3 million. This is comprised of the $900,000 of cash that still supports her superannuation interest, the 60 per cent share of the net value of the property (being $900,000), and the 60 per cent share of the outstanding balance of the limited recourse borrowing arrangements (being $1.2 million).
I observe that under the legislature’s example above, Sue’s interest was $1.8M just before the LRBA and then her TSB is $3M immediately after entering the LRBA.
Is this how the ATO practically implements this law?
Consider the following commentary and example from ATO document quick code reference QC 20439 (https://www.ato.gov.au/super/self-managed-super-funds/in-detail/smsf-resources/smsf-technical/limited-recourse-borrowing-arrangements—questions-and-answers/?page=9)
Outstanding LRBA amount included in your TSB
When you need to include your share of the outstanding amount of an LRBA in your TSB, the amount is a proportion of the total outstanding balance based on your share of the super interests supported by the LRBA. The proportion is calculated by determining the ratio of the total super interests supported by the borrowing that are attributable to you.
Example: working out the LRBA amount included in a member’s TSB
Kevin is aged 65 years old and is a member of an SMSF with an outstanding LRBA as at 30 June.
Kevin is calculating his TSB for 30 June 2019 and needs to know his share of the outstanding LRBA amount to include in the calculation of his total super balance.
Kevin’s account balance at 30 June is $400,000 which is 75% supported by the assets that secure the LRBA.
The SMSF’s total outstanding balance of the LRBA at 30 June 2019 is $200,000 and the total fund assets that are supported by the assets that secure the LRBA is $800,000.
Kevin works out his LRBA amount at 30 June 2019 as following:
Outstanding LRBA balance × (value of Kevin’s interests supported by the assets that secure the LRBA ÷ value of fund’s interests supported by the assets that secure the LRBA)
$200,000 × ($400,000 × 75%) ÷ $800,000 = $75,000.
Kevin’s SMSF will report $75,000 as the LRBA amount for Kevin in the member section of the SMSF annual return for the 2018–19 financial year.
I observe that under the ATO’s example above, Kevin’s TSB is more than just his $400,000 account balance. It is probably at least $475,000, due to the addition of the LRBA amount.
There are numerous ‘modifications’ in calculating a person’s TSB. These can be relevant where an LRBA is involved, and might have very important implications if the new tax on $3M+ balance is ultimately implemented as announced.
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Bryce Figot ([email protected]) Special Counsel, DBA Lawyers
10 March 2023