Practitioners around the nation feel an interest charge of between 7 and 8 percentage points above the Reserve Bank of Australia (RBA) cash rate would be suitable to demonstrate a related-party loan had been conducted at arm’s length, according to a survey conducted by leading SMSF legal firm DBA Lawyers.
The study presented practitioners with two scenarios regarding a $1.5 million loan over 15 years, including principal and interest with a loan-to-valuation ratio of 100 per cent. In addition, the loan included personal guarantees from both SMSF members and a mortgage granted over the asset being acquired by the super fund.
The first situation involved the purchase of a 50 per cent tenants-in-common interest property. Here participant responses indicated the average of the margin that should be added to the RBA cash rate was 7.24 percentage points.
The result means an interest rate of 9.24 per cent would be applicable to a related-party loan to acquire this type of asset and have it categorised as an arm’s-length transaction.
The second circumstance involved using the borrowed amount to purchase 100 per cent of the units in a unit trust that will invest in property. Given these parameters, practitioners indicated the average of the margin that should be added to the RBA cash rate was 7.93 percentage points. This translates to a total interest charge of 9.93 per cent on the related-party loan for the transaction to be treated as arm’s length.
The study was conducted between March and April and the results were presented at the DBA Lawyers Strategy Seminar in Sydney last week.
