The Government released legislation yesterday to ensure LRBAs are not used by small funds to circumvent the pending new super caps. If nothing else the release demonstrates, yet again, the growing complexity of retirement saving in Australia.

LRBAs or ‘Limited Recourse Borrowing Arrangements’ are an authorised exception to the prohibition on small funds borrowing. To protect member savings the lender’s recourse must be limited to the asset(s) acquired with the borrowed funds.

The caps on super from 1 July 2017 will be essentially twofold. First, the transfer balance cap: not more than $1.6 million can be transferred into tax exempt pension phase. Second, the total super balance cap: once you have $1.6 million in super, both accumulation and pension phase, you can’t make further non-deductible (‘non-concessional’) contributions to super.

So if an LRBA asset supports a pension, it would make good sense to pay down the loan from 15% taxable accumulation phase assets/funds and maintain your tax exempt pension phase assets. Well you still can, but this legislation will now treat these payments as transfers to pension phase, and count them towards your $1.6 million transfer balance cap. Fair enough.

More difficult to rationalise is the proposal for LRBAs and the total super balance cap. Rather than count the net asset value of an LRBA towards this cap, this legislation will add back the outstanding liability so as to count the gross value. So if your SMSF buys a rental property for $1 million using $200,000 of its own money and a bank loan of $800,000, the amount counted against your total super balance cap is the full $1 million value of the property.

The total super balance cap measure is all the more difficult to understand given that an investment through a geared managed fund would only be counted at net asset value.

This is not to mention that the gross LRBA asset value effect on total super balances could also limit your ability to carry forward unused concessional (tax deductible) contribution cap space i.e., not possible if your total super balance exceeds $500,000.

It’s hard to contain ripple effects – even of a simple cap, … or three!