The interest rate for SMSFs relying on the safe harbour terms set out by the ATO in PCG 2016/5 for their related-party limited recourse borrowing arrangements has increased by 25 basis points to 5.35 per cent for the 2022-23 financial year.
This follows the recent increase in the cash rate target by 25 basis points to 35 basis points.
The interest rate set out under the ATO’s safe harbour terms is based on the Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors.
The annual rate is based on the rate published for the month of May that is immediately before the start of that financial year.
The RBA Indicator Lending Rate for standard variable housing loans for investors jumped from 5.10 per cent in April to 5.35 per cent for the month of May.
Up until this latest change, Smarter SMSF chief executive Aaron Dunn said the rate had remained at 5.10 per cent for the past two financial years.
“This [incremental change] means that all those related party loans that operate within the SMSF industry are going to have to ensure they move in line with that interest rate,” said Mr Dunn.
Alternatively, SMSF trustees can demonstrate that their loan is on arm’s length by providing evidence that it is on terms consistent with a commercial arrangement that they have been offered, he noted.
Mr Dunn said it is important that funds document their decisions and ensure they adjust their repayments accordingly.
it was written, “Alternatively, SMSF trustees can demonstrate that their loan is on arm’s length by providing evidence that it is on terms consistent with a commercial arrangement that they have been offered, he noted”….I was on the understanding it had to be based on the RBA rates, when did it change? if the trustee is borrowing money at rates currently 3% and lending it to the SMSF on the same terms at 3% literally not benefiting, that was unacceptable. The above quote seems opposite.
That scenario is unlikely. He says the SMSF has to prove the related party loan (e.g. from members) is on terms consistent with a commercial offer (made to the SMSF). Members are likely to receive more favourable terms than an SMSF because the SMSF has to abide by SIS Act etc., whereas there’s no LRBA requirements for banks to worry about when lending to individuals.
In a practical example, the bank may take security over a family home plus personal guarantees (over all other unencumbered assets), & therefore provide a loan at a cheaper rate than it would to an SMSF. In that example you could borrow at the lower personal rate, then on-lend to the SMSF under the same terms & conditions that a bank has offered to the SMSF. The two rates should not be the same.
A trustee that lends money to a related party (in house asset / member) will be highly unlikely to persue the borrower into liquidation / bankruptcy, which makes the SIS Act inconsistent with the intended aims.