Rate rise requires repayment review

LRBA repayments

SMSF trustees with LRBAs should be reviewing their repayments and investment strategy as borrowing rates increase from 1 July.

SMSF trustees with limited recourse borrowing arrangements (LRBA) will need to review their repayments after the benchmark rate rises on 1 July, while also ensuring their investment strategy allows for sufficient cash flow to make payments.

Smarter SMSF chief executive Aaron Dunn said the increase in the safe harbour interest rate, as defined in ATO Practical Compliance Guideline (PCG) 2016/5, was announced by the Reserve Bank of Australia in May, but its application from 1 July would require action from trustees.

“From 1 July 2022, where we have a related-party loan using a LRBA that is complying with the safe harbour set out within PCG 2016/5, we will see an interest rate increase of 25 basis points from 5.1 per cent, which has been the rate for the last couple of years around real property, to 5.35 per cent,” Dunn said.

Speaking during a recent webinar, he added the same increase would apply to the rate for borrowing arrangements for listed shares or units, rising from 7.1 per cent to 7.35 per cent.

“This is going to mean that trustees need to be looking at the repayments of those arrangements based upon the terms and conditions of the specific loans that are in place, so it is critical that we are reviewing existing repayments because the likelihood is that they will increase where we have variable rates in place,” he said.

He said the rate rise would also have an impact on capitalised interest from loan repayments that were deferred due to COVID-19 and those deferrals as well as the increase in the interest rate and repayments needed to be documented by the fund and the related-party lender.

These changes could also have a flow-on effect into considerations related to the SMSF’s investment strategy, he noted.

“This rate rise may mean there needs to be a review or consideration of the cash-flow and liquidity requirements inside the fund, which means giving effect to the investment strategy,” he said.

“This would be a prudent step just to ensure the fund is sufficiently cashed up to be able to meet this increased obligation around repayments of that loan amount where they have a LRBA.”

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