When drafting a new law, legislators try very hard to make the law as explicit as possible so the law achieves its aim and is not interpreted or applied in ways that were never meant to be: the so-called “unintended consequences” we often hear about in policy debates. Inevitably, clever people find loopholes in these laws and exploit them to achieve their own aims. Laws that impose limits and restrictions, in particular, are closely examined for potential loopholes.
The new superannuation laws have been closely scrutinised and the government is already aiming to close loopholes to prevent superannuation fund members getting around the new laws which take effect from July 1.
Here are three potential loopholes in the new super rules:
1. The “total superannuation balance” law is already under siege. From July 1 a superannuation fund member’s total balance must be below $1.6 million in order to make non-concessional contributions into their superannuation fund. One strategy to overcome this restriction is for a member to withdraw money from their self-managed superannuation fund and pay themselves a lump sum superannuation benefit to reduce their superannuation balance. The money withdrawn is then loaned back to their SMSF under a Limited Recourse Borrowing Arrangement to acquire an asset. This allows a member to keep making non-concessional contributions into their SMSF by keeping their balance below the $1.6m limit each financial year.
2. The “$1.6m transfer balance cap” is also a law in which loopholes have been identified. The cap limits the amount a superannuation fund member can have in their total retirement pension account. The cap is based on the net asset value and not on the actual asset value. This means, if an asset is worth $2m but it has a $500,000 debt (such as an LRBA) attached to it, the asset’s net worth is only $1.5m. This allows the member to put more assets and money into their retirement pension account while their balance is below $1.6m.
3. There is also an issue where a member pays the outstanding debt of an SMSF’s asset that is funding both the accumulation account and retirement pension account, by paying the outstanding loan from money in the accumulation account. As the LRBA is paid off using money from the accumulation account, the value of the asset in the pension account would increase and see the member obtain an increase in the tax-free pension account without affecting the transfer balance cap.
The government is concerned that these strategies may be used to get around the total superannuation balance and the transfer balance cap. As a result, the government will amend the law so that the outstanding balance of an LRBA each year will be included in the calculation of a member’s total superannuation balance.
Crucially, the amount included will be the proportion of the outstanding loan based on the member’s share of the asset.
The draft legislation for the above amendments states that the changes will only apply to LRBAs entered into by SMSFs after the act receives royal assent. Therefore, existing LRBAs and LRBAs entered into now and before the act takes effect will not be affected.
23 May 2017