The Government has passed the following integrity measures to ensure SMSF trustees don’t circumvent certain tax and superannuation provisions:
1. Expanding the non-arm’s length income (NALI) rules so that SMSFs are taxed at 45% where an SMSF has entered into an arrangement and the parties are not dealing at arm’s length and either:
- The SMSF’s expenses are less than would have been incurred had the parties been dealing at arm’s length, or
- There is no loss, outgoing or expense incurred by the SMSF where one would have been expected if the parties had been dealing at arm’s length.
SMSF trustees must therefore be aware that income derived from circumstances where undervalued expenses are involved will be treated as NALI and taxed at 45%. As a result, SMSF trustees should examine their investments to ensure all expenses are the same as if there had been a dealing on an arm’s length basis.
These changes apply to the 2018/19 and later income years.
2. The total superannuation balance (TSB) rules will be amended to include a member’s share of the outstanding balance of a limited recourse borrowing arrangement (LRBA) where either or both of the following are met:
- The individual has satisfied a condition of release with a nil cashing restriction (e.g. retirement, permanent incapacity, attaining age 65, etc)
- The lender is an associate (or ‘related party’) of the SMSF.
An increase in a member’s TSB by their share of the outstanding balance of an LRBA can create liquidity issues for the SMSF. For example, if the member was planning on making future non-concessional contributions to enable their SMSF to pay off an LRBA but they are prevented from making further contributions due to their TSB, this may affect the SMSF’s ability to repay the LRBA and meet other ongoing expenses.
Thus an SMSF considering acquiring an asset via an LRBA should carefully consider:
- The effect on each member’s TSB where the members satisfy or are about to satisfy a condition of release with a nil cashing restriction, and
- The lending options available as borrowing from an associate of the SMSF means the outstanding LRBA balance will be included in their TSB calculation.
The amendments apply to new borrowings entered into on or after 1 July 2018.