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Sladen Snippet – do intermediary LRBAs count for the total super balance add back provisions?

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An intermediary limited recourse borrowing arrangement (LRBA) differs from a standard LRBA in that the bare trustee, rather than the SMSF trustee, enters into an LRBA borrowing as principal with a lender.  There are a number of potential advantages to using an intermediary LRBA, including:

  • the loan does not have be limited recourse;

  • the simplicity of having the asset and loan in the same entity;

  • potentially more favourable loan terms; and

  • potentially access to a wider range of lenders.

Intermediary LRBAs historically breached the in-house asset rules, until the ATO released a legislative instrument (discussed here). Specifically, the legislative instrument ensures that an investment in related trust that is in connection with an intermediary LRBA, and that complies with section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act), is excluded from being an in-house asset, provided certain criteria are met.

But are intermediary LRBAs caught by the total superannuation balance (TSB) ‘add back’ provisions in section 307-230 of the Income Tax Assessment Act 1997 (ITAA97). Under the add back provisions, a portion of the outstanding balance of an LRBA is added to a member’s TSB where the member has satisfied a condition of release with a nil cashing restriction, or where the member has interests supported by an asset subject to a related party LRBA.

Section 307-231 ITAA97 defines LRBA for the purposes of the add back provisions. For the add back provisions to apply, the superannuation provider in relation to the fund must have a borrowing that is covered by the exception in subsection 67A(1) of the SIS Act. Importantly, section 995-1 ITAA97 defines a superannuation provider (for a superannuation fund) as the trustee of the fund. That is, it does not appear to cover the situation where the super fund trustee does not have the borrowing, like under an intermediary LRBA, where the super fund trustee maintains the borrowing of the bare trustee.

Arguably then, an intermediary LRBA would not be covered by section 307-231 ITAA97, as it is the bare trustee, rather than the SMSF trustee, which has the borrowing and, therefore, the intermediary LRBA loan is not counted for the TSB add back provisions. That said, care should be taken before members rush out to take advantage of this “loophole” as we would expect there would eventually be legislative changes to fix this issue.

To discuss or for further information please contact:

Phil Broderick
Principal
M +61 419 512 801 | T +61 3 9611 0163  
E: pbroderick@sladen.com.au           

Philippa Briglia
Senior Associate
T +61 3 9611 0173
E pbriglia@sladen.com.au

Phil Broderick