House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Housing and Assistant Treasurer, the Hon Michael Sukkar MP)

Chapter 3 - Limited recourse borrowing arrangements

Outline of chapter

3.1 The amendments in Schedule 3 amend the total superannuation balance rules that were enacted through the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016.

3.2 The changes support the operation and integrity of the total superannuation balance rules to ensure that, in certain circumstances involving limited recourse borrowing arrangements, the total value of a superannuation fund's assets is taken into account in working out individual members' total superannuation balances.

3.3 All legislative references in this Chapter are to the ITAA 1997 unless otherwise stated.

Context of amendments

3.4 The Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (the Amending Act) enacted the Government's superannuation reform package that was announced in the 2016-17 Budget.

3.5 The amendments contained in Schedule 3 relate to the definition of total superannuation balance that was included in that package.

Total superannuation balance

3.6 The concept of 'total superannuation balance' was introduced by the Amending Act. The term is defined by section 307-230 and, with some modifications, is designed to reflect the total value of all interests that an individual has in the superannuation system.

3.7 To determine an individual's total superannuation balance, the following amounts are added together:

•

the accumulation phase value of all superannuation interests that are not in the retirement phase;

•

the transfer balance in their transfer balance account, subject to certain modifications (but not where the balance is less than nil); and

•

the amount of each roll-over superannuation benefit that is not reflected in the individual's accumulation phase or transfer balance.

3.8 The total superannuation balance is used by the non-concessional contribution cap rules, the unused concessional cap carry forward rules, the definition of disregarded small fund asset rules (which is relevant for determining whether a fund can use the segregated method in calculating its exempt current pension income), and in the spouse tax offset.

Limited recourse borrowing arrangements

3.9 'Limited recourse borrowing arrangements' (limited recourse borrowing arrangements) are an exception to the general prohibition on borrowing that applies to the trustees of regulated superannuation funds contained in subsection 67(1) of the SIS Act.

3.10 The exceptions for limited recourse borrowing arrangements are provided by sections 67A and 67B of the SIS Act. Section 67A relates to borrowing arrangements that the trustee of a registered superannuation fund uses to acquire an 'acquirable asset' and section 67B extends the exception to replacement assets.

3.11 The term, 'acquirable asset' is defined by subsection 67A(2) as a single asset that is not money and that is not prohibited from being acquired under any Act. Subsection 67A(3) also extends sections 67A and 67B so that they apply to a collection of identical assets in the same way as they apply to a single asset (for example, a collection of shares of the same class in a single company).

3.12 In addition to the requirement about the rights and interest that a trustee has in an acquirable asset, subsection 67A(1) contains conditions about limiting any rights against the trustee for a default on the arrangement to rights in respect of the acquirable asset.

Summary of new law

3.13 Schedule 3 amends the total superannuation balance test so that, in certain circumstances, it takes into account the outstanding balance of a limited recourse borrowing arrangements that is entered into by the trustee of a regulated superannuation fund that is an SMSF or that has less than five members.

3.14 As a result of these changes, an individual member's total superannuation balance may be increased by the share of the outstanding balance of a limited recourse borrowing arrangement, commenced after 1 July 2018, related to the assets that support their superannuation interests. However, the increase only applies to members who have satisfied a condition of release with a nil cashing restriction, or those whose interests are supported by assets that are subject to a limited recourse borrowing arrangement between the superannuation fund and its associate.

Detailed explanation of new law

3.15 An individual's total superannuation balance may be increased by an amount if an asset that supports one or more of their superannuation interests are subject to limited recourse borrowing arrangements. [Schedule 3, items 1 and 2, paragraph 307-230(1)(d) and subsection 307-231(1)]

3.16 The amount by which an individual's total superannuation balance is increased is equal to a proportion of the outstanding balance of the limited recourse borrowing arrangements. This proportion is based on the individual's share of the total superannuation interests that are supported by the asset that is subject to limited recourse borrowing arrangements. [Schedule 3, item 2, subsections 307-231(2) and (3)]

3.17 This increase to an individual member's total superannuation balance ensures that it more accurately reflects the overall values of the assets in a superannuation fund that support the individual's superannuation interests.

3.18 The addition to the total superannuation balance identifies a limited recourse borrowing arrangement that a fund has by reference to a borrowing under an arrangement that is entered into by a regulated superannuation fund and which is covered by the exception in subsection 67A(1) of the SIS Act. [Schedule 3, item 2, paragraph 307-231(1)(a)]

3.19 These increases only apply in respect of limited recourse borrowing arrangements commenced after 1 July 2018 where:

•

a member whose superannuation interests are supported by assets to which the limited recourse borrowing arrangements relate has satisfied a condition of release specified in paragraph 307-80(2)(c) (that is, a condition of release with a nil cashing restriction); or

•

the limited recourse borrowing arrangements are between the fund and one of its associates.

[Schedule 3, item 2, paragraph 307-231(1)(e)]

3.20 Further, the increase to an individual's total superannuation balance can only occur where the limited recourse borrowing arrangements were entered into by a superannuation provider of a regulated fund that is an SMSF or that has less than five members. [Schedule 3, item 2, paragraph 307-231(1)(d) and subsection 307-231(4)]

3.21 For the increase to apply to an individual's total superannuation balance, a regulated superannuation fund must have used the borrowing to acquire one or more assets, and any such assets must support the superannuation interests of an individual at the time at which the total superannuation balance is determined.

3.22 The connection between an asset of a fund and an individual member's superannuation interests relates to the way in which the fund has allocated its assets to meet its current and future liabilities in relation to the member's interests. The test requires a fund to determine which of its limited recourse borrowing arrangements assets support which members' interests, as well as the extent to which those interests are supported. This assessment builds on the framework that already exists for funds in tracking the way in which income from its assets is allocated between the interests of its members.

3.23 Although an individual's total superannuation balance can generally be measured 'at a time', it is only relevant at the end of a particular income year. This is because the non-concessional contribution cap rules, the unused concessional cap carry forward rules, the disregarded small fund asset rule and the spouse tax offset rule test an individual's total superannuation balance either 'just before' or 'immediately before' the start of the income year (see paragraphs 290-230(4A)(b), 291-20(3)(b), 292-85(2)(b) and 295-387(2)(c)). This means that the outstanding balance of a limited recourse borrowing arrangement only needs to be identified at the end of an income year for the purposes of adding a share of that outstanding balance to an individual's total superannuation balance.

3.24 It should also be noted that artificially manipulating the allocation of assets that are subject to limited recourse borrowing arrangements against particular superannuation interests at a particular time may be subject to the general anti-avoidance rules in Part IVA of the ITAA 1936 where such allocations formed part of a scheme that had the dominant purpose of obtaining a tax benefit.

3.25 The outstanding balance of the limited recourse borrowing arrangements is the amount still owing under the limited recourse borrowing arrangements. Where an individual has a superannuation interest that is supported by an asset that is subject to limited recourse borrowing arrangements, the increase to their total superannuation balance is based on their share of this outstanding balance.

3.26 Including this proportion of the outstanding balance in a member's total superannuation balance prevents double counting of the outstanding balance from occurring where more than one member has an interest supported by an asset that was acquired through limited recourse borrowing arrangements.

3.27 Where only one member's interests are supported by an asset, the proportion will be equal to 1, meaning that an amount equal to the outstanding balance is added to the member's total superannuation balance.

Members with a nil condition of release

3.28 Applying the amendment in the case of limited recourse borrowing arrangements that involves a member that has satisfied a nil condition of release addresses the risk of using limited recourse borrowing arrangements to facilitate a re-contribution strategy. In this context, a member who does not wish to exceed one of the total superannuation balance tests could withdraw an amount of their interests from superannuation and then, in their capacity as trustee, arrange for the fund to borrow an equivalent amount under limited recourse borrowing arrangements.

3.29 The SIS Act and SIS Regs contain the rules that determine when an individual can voluntarily withdraw amounts from superannuation. Specifically, regulations 6.18, 6.19 and 6.20 of the SIS Regs provides that a member's benefits in a superannuation fund may be cashed on or after the member satisfies a condition of release, subject to any cashing restriction as to the amount or form of the payment (in this context, a 'nil' cashing restriction means there are no restrictions on the amount that can be released to a member). The conditions of release and their related cashing restrictions are contained in the table in Schedule 1 to the SIS Regs.

3.30 The conditions with nil cashing restrictions that are covered by these amendments through the reference to paragraph 307-80(2)(c) are those referred to in items 101 (retirement), 102A (terminal medical condition), 103 (permanent incapacity), and 106 (attaining age 65).

3.31 Where the increase applies solely because one or more members have satisfied a nil condition of release, the increase is only applied in respect of those members. This means that the increase does not apply to other members who have not satisfied such a condition, despite the fact that their interests may be supported by the same assets to which the limited recourse borrowing arrangements relates.

3.32 However, if a member has satisfied a condition of release with a nil cashing restriction, they are required to take into account each limited recourse borrowing arrangement that their superannuation fund has in respect of assets that support their superannuation interests. [Schedule 3, item 2, paragraph 307-231(2)(a)]

Limited recourse borrowing arrangements with associates

3.33 Applying the amendments in the case of limited recourse borrowing arrangements that is with an associate of the superannuation fund ensures that the additional amount is included in a member's total superannuation balance where there is an increased risk that the terms of the limited recourse borrowing arrangements are inconsistent with those that would have been entered into between independent parties. This approach supplements the broader changes to the non-arm's length income rules discussed in the previous chapter.

3.34 In working out whether the limited recourse borrowing arrangements are with an associate of the superannuation fund, the definition of associate as it relates to a trustee in subsection 318(3) of the ITAA 1936 applies. This definition covers any entity that benefits under a trust (for example, the members of a superannuation fund), as well as the associates of those entities.

3.35 Where the adjustment applies because the limited recourse borrowing arrangements are with an associate, all members whose interests are supported by the assets to which the limited recourse borrowing arrangements relate will have their total superannuation balance adjusted.

3.36 In contrast, a member who has not satisfied a condition of release only needs to count the outstanding balance of limited recourse borrowing arrangements that are entered into between their fund and its associates. [Schedule 3, item 2, paragraph 307-231(2)(b)]

Example 3.1 - total superannuation balance where there is more than one member

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).

Reporting the outstanding balance of limited recourse borrowing arrangements

3.37 The amendments also extend the matters that may be included in information that is reported by the trustee of a superannuation fund to the Commissioner to include limited recourse borrowing arrangements amount that relates to an individual's total superannuation balance. [Schedule 3, item 3, paragraph 390-5(9)(e) in Schedule 1 to the TAA]

3.38 Although the matters covered by subsection 390-5(9) in Schedule 1 to the TAA do not limit the information that the Commissioner of Taxation can request, this amendment makes it clear that this will be information that a fund will be required to report.

3.39 Because the information relates to the liabilities that a fund has in respect of its assets, the outstanding balance of the limited recourse borrowing arrangements is information that will be already known by the trustee of a regulated superannuation fund. However, although this information will now need to be identified on a member basis, trustees will only have to do so in respect of the end of a particular income year.

Application and transitional provisions

3.40 The changes to the total superannuation balance test apply to borrowings arising under contracts entered into on or after 1 July 2018. They do not apply to the refinancing of the outstanding balance of borrowings arising under contracts entered into prior to 1 July 2018, or to borrowings arising under a contract that was entered into prior to 1 July 2018. [Schedule 3, item 4]

3.41 The changes in respect of matters that may be included in information that is reported by the trustee of a superannuation fund do not have a specific application provision and therefore apply from commencement. However, as the information that must be reported is the amount of a member's 'limited recourse borrowing arrangements amount', there will be nothing for a fund to report until members begin to have limited recourse borrowing arrangements amounts (that is, in respect of periods that commence on or after 1 July 2018).