David Busoli, principal of the SMSF Alliance, said the 2024 safe harbour designated interest rates for related party limited recourse loans, have increased sharply to 8.85 per cent for property loans and 10.85 per cent for listed equity loans.
But he said trustees should check their loan documentation before adjusting any repayment options as they may have a five-year fixed interest rate term with an unexpired period yet to run.
“If the increase must be applied then there will be a greater cash flow draw on the SMSF which should be manageable within the SMSF’s current cash flow bolstered, if necessary, by further contributions,” he said.
“If not, then the asset may need to be sold or the loan refinanced at a lower rate with an arm’s length lender.
“Incongruously, once an alternative lender has committed to such a refinance, the SMSF may adopt their lower rate for the related party loan leaving the proposed new lender less than impressed.”
Mr Busoli said the increase in interest rate, which is tax-deductible to the SMSF at a maximum of 15 per cent, will be taxable to the related party at their marginal rate with a corresponding increase or decrease in the client’s overall tax position depending on what their marginal rate actually is.
“As a side issue, related party limited recourse debts, and arm’s length borrowings where a member has triggered their unrestricted non-preserved status, are counted as assets for the purposes of calculating a member’s total super balance,” he said.
“This might prevent a member from utilising their unused concessional contributions or maximising their non-concessional contribution capability by breaching the requisite total super balance cap when their pro rata share of the debt is added to their actual member balance.
“Hopefully, as part of the changes proposed regarding the extra tax on member accounts in excess of $3 million, this unjustifiable inclusion of a fund debt in a member’s total super balance will be removed.”
