Aaron Dunn, chief executive of Smarter SMSF, said in a recent online update that before 30 June, it is advisable to “spend time and effort” reviewing existing arrangements with any limited recourse borrowing arrangements.
“I say that broadly because of the current interest rate market we have, but specifically looking at our related party arrangements and compliance with the Commissioner’s safe harbour terms that are within PCG 2016/5,” Dunn said.
“It should be noted that in the current year, we have a 9.35 per cent rate and a 2 per cent premium for listed shares against that real property, and are therefore expecting to see an adjustment being made for the 2025-26 year. What that amount is, we don’t know yet, because we have seen one interest rate adjustment, but are potentially expecting a further interest rate adjustment in the May period.”
Dunn continued that in a falling interest rate market, it is advisable to revisit arrangements with clients because the ATO safe harbour rates would arguably be significantly higher than what can be obtained in the marketplace.
“I think rates probably have a six in front of them now in some instances, and I suspect they will be dropping into the lower sixes in the not too distant future, whereas some clients might be, in a related-party sense, locked into these arrangements in potentially the nines for another year,” he said.
“That provides a fairly significant difference between what the market’s telling us and what the regulations are actually forcing these related party loans to do.”
Tim Miller, technical and education manager for Smarter SMSF, said if the interest rate can’t be benchmarked against something else, and the client remains with a related party loan, they could potentially trigger a non-arm’s length issue for the fund in relation to income.
“In this whole non-arm’s length environment, there are certain grandfathering concepts, and if people aligned their LRBAs with the PCG, then they’re effectively immune from those NALI requirements,” he said.
“But people looking at making changes now that are outside of what the PCG suggests, at least put themselves in the target of the ATO, if they don’t follow commercial arrangements.”
Dunn added that it’s also important to check the length of the term on related-party arrangements.
“Some of these may have been around since these laws came in around 2010 or may predate 2010. If you have a 15-year safe harbour on a loan term, you’re going to be almost there, or potentially there already for that loan, and it doesn’t give an opportunity in the safe harbour environment to be able to refinance, because that is the maximum term you must comply with” he said.
“If you do repay the loan, it doesn’t force you to move the asset from the trust back to the SMSF. In a lot of instances, you would probably see that likely being done, but there’s no mandated obligation.
“There is a legislative instrument that, in essence, provides further in-house relief in that regard.”
