Direct Property, LRBA

Safe harbour rate anomaly surfaces

SMSF; Safe harbour; rate

SMSF trustees with LRBAs may face a higher interest rate under safe harbour terms than those available in the market, a technical expert has warned.

SMSF trustees have been warned they may be charged a higher rate of interest on related-party loans if they follow Australian Taxation Office (ATO) safe harbour guidelines, despite a recent drop in the official cash rate.

SuperConcepts SMSF technical and strategic services executive manager Phil La Greca said the latest standard investor interest rate for residential property published by the Reserve Bank of Australia (RBA) had increased as at May 2019 from 5.8 per cent to 5.94 per cent for the 2019 financial year.

La Greca pointed out the rate is used for the limited recourse borrowing arrangement (LRBA) safe harbour rate under ATO Practical Compliance Guideline 2016/5 and its upward movement is in contrast to the recent reduction of the official cash rate from 1.5 per cent to 1.25 per cent.

These two rate movements have prompted trustees to review their current LRBA finance rates, he said, adding that SuperConcepts had received inquiries from trustees and administrators about how they could lower the rates paid by the fund at a time when better rates are available in the market.

“So even though official rates are falling, and could possibly fall further, it looks likely that rates for SMSFs with related-party loans will be charged higher interest if they follow the guidelines,” he said.

“We recommend trustees look around for the best deal possible in light of this new revision to ensure their funds are getting a bigger retirement benefit by paying lower expenses,” he said, highlithgting that new smaller LRBA providers were trying to establish themselves in the market with competitive rate offers.

He also questioned the timetabling and relevance of the standard investor interest rate change alongside quarterly rate announcements and their impact on the market.

“Another question is whether the annual benchmark review is relevant given the quarterly official rates revision tends to trigger changes in commercial rates,” he said.

“Safe harbour annual revisions are done annually for simplicity, but ultimately trustees and their advisers have a best interest duty to the fund or client, and that should provide a more active involvement in ensuring that the fund incurs the least amount of expenses.”

He added it was possible for SMSF trustees and administrators to make use of variable rates and to change them accordingly, as long as this was documented within the SMSF.

“The ATO guideline only refers to setting the interest rate for each year of the LRBA, however, given that commercial variable rates are not for fixed periods, the idea that the rate could be reviewed when the indicator rate moves should be valid,” he noted.

“The frequency of the review would be specified in the loan agreement and given the need to provide notice to the lender of the new monthly payment to be made, a quarterly review is an appropriate cycle.

“It would be recommended if the client wanted to make the benchmark rate variable, they should check the terms of the loan agreement to see if it is permitted, as well as discuss the arrangement with their auditor.”

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital