Investing in an SMSF comes attached with a level of responsibility. SMSF trustees are required to formulate an investment strategy and then regularly review that strategy. In addition, an SMSF needs to understand which investments come with additional responsibilities, and there are a few!
Super reform and investing in an SMSF
Whilst the superannuation reform measures were predominantly about taxation, some of the measures directly impact fund investments. Existing limited recourse borrowing arrangements (LRBAs) are largely unaffected, however, the same can’t be said for new arrangements. LRBAs entered into post 1 July 2017 may impact a client’s transfer balance account, although this is avoidable. Similarly, subject to passage of legislation, post 1 July 2018 LRBAs may impact the capacity to make non-concessional contributions. They will almost certainly impact an individual’s ability to carry forward unsued concessional contributions. These measures may not have an immediate impact but given the long term nature of LRBAs, what trouble lies ahead?
Transfer Balance Account
Those clients that enter into an LRBA post 1 July 2017 may impact their Transfer Balance Account in certain circumstances. If a fund segregates an LRBA to a pension account, perhaps to ensure they don’t exceed the $1.6m cap, where repayments come from can impact the transfer balance account. It’s not about whether you should or shouldn’t segregate, it’s about understanding the consequences. Repayments from an accumulation interest will impact the transfer balance account.
Total Superannuation Balance
Treasury’s initial “strategy” reasoning for including LRBAs in a member’s total superannuation balance were odd. The likelihood that people would take money from super to then lend it back to super to avoid it being counted so then they could contribute more seemed a little excessive. However, if the value of an LRBA is incorporated into a member’s total superannuation balance this will have consequences. Those consequences will impact small SMSFs as much as larger SMSFs.
It’s not just LRBAs
There are certainly issues ahead for those that invest via LRBAs, but other investments will be impacted as well. Whether it is the ability for some funds to segregate for tax purposes, versus others, or dealing with related party transactions to ensure everything is on an arm’s length basis, the industry needs to be as diligent as ever to remain compliant. With the ATO keeping a close eye on the use of fund reserves the requirement to review a fund’s investment strategy goes far deeper than undertaking an annual review.
Don’t forget CGT!
While you get your head around the impact super reform has on investing in an SMSF, don’t forget CGT. While most funds will have already made a decision about whether to apply the transitional CGT relief, now attention must be turned to investment activity beyond 1 July 2017. For those funds that have applied relief, the 12 month CGT discount rule has been reset meaning any actual sales during the 2017/18 year might be impacted.
Overall, there is plenty to contemplate in 2017/18 and well beyond. Those funds that invest via LRBAs must understand the full impact the arrangement may have on a member’s contribution ability. Further, the ATO will be watching out for funds that implement reserving strategies to avoid or lessen the burden some of the super reform measures introduce.
There certainly are interesting times ahead.