SMSF professionals are being reminded that a critical component of keeping an LRBA at arm’s length – its interest rate – has increased.
ATO Practical Compliance Guideline (PCG) 2016/5, released in April 2016, outlines the safe harbour terms that SMSFs can structure their LRBAs to ensure it is consistent with an arm’s length dealing, thereby avoiding the non-arm’s length income (NALI) provisions.
One of the vital requirements relates to the interest rate that is charged under the arrangement.
For real property, the interest rate is the RBA Indicator Lending Rates for banks providing standard variable housing loans for investors.
As noted by SuperConcepts’ Peter Burgess, the applicable rate for 2016-17 and later years is the rate published for May immediately prior to the start of the relevant financial year.
As recently published by the RBA, the relevant rate for May 2017 is 5.80 per cent, up from 5.65 per cent the previous year.
“This will be the rate used by the ATO in 2017-18 to determine whether the interest rate associated with a related party LRBA, which has been used to acquire real property, is consistent with an arm’s length dealing,” Mr Burgess said.
For 2017-18, the applicable rate for related party LRBAs used to acquire listed securities is 7.80 per cent, which Mr Burgess explained is equal to the rate applicable to related party LRBAs used to acquire real property plus 2 per cent.
“In order to maintain eligibility for safe harbour, a related party LRBA is required to be established and maintained in accordance with the safe harbour terms throughout the LRBA. Practitioners and SMSF trustees should ensure the relevant adjustments are made to their related party LRBAs for 2017-18,” Mr Burgess said.
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