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Related Party LRBA Interest Rates Lowered

Since 2017, SMSF trustees with related party limited recourse loan agreements have had two options.

Trustees are obliged to demonstrate that their related party loans are maintained on a commercial basis. In order to do so, they can choose to either benchmark the arrangement against a loan offer from an arm’s length party, or they can integrate the safe harbour terms nominated by the ATO in Practical Compliance Guideline 2016/5 (“PCG 2016/5”).

The vast majority of trustees have taken the latter option, and this has led to the annual tradition of revisiting interest rates every July. This is because, under PCG 2016/5, interest rates must be readjusted at the beginning of every financial year.

For real estate, PCG 2016/6 mandates an annual interest rate equal to the RBA’s indicator lending rate for banks providing standard variable housing loans for investors.

The good news is that the rate for the new year has been lowered to 5.10%. This is down from this year’s rate of 5.94%. This reverses a trend over the last few years whereby the safe harbour rate continued to increase even as interest rates generally decreased.

Interest rates for listed securities should add a margin of 2%. Therefore, related party loans for listed securities should charge 7.10% from 1 July.

There are no safe harbour terms for any other class of asset other than real estate and listed securities.

Trustees should take the time to ensure their monthly loan repayments are adjusted starting from July. Trustees may choose to also record the interest rate change in a trustee minute, although this is not expressly required by PCG 2016/5.

If you have any questions, or would like to know more, please email our Legal Senior Associate Christian Chenu or call 1800 333 143.