SMSFs with limited recourse borrowing arrangements (LRBAs) have been cautioned about the potential impact of past and continued interest rate rises on their repayments for related-party loans.
Smarter SMSF chief executive Aaron Dunn highlighted the anticipated rate hikes could have ramifications for trustees and practitioners due to the obligation, under the safe harbor provisions defined in Practical Compliance Guideline PCG 2016/5, to maintain a fixed interest rate for the remainder of the financial year.
“We have had with related party loans, the luxury of what previously was only a 0.25 per cent increase. We’ve now seen a huge jump, obviously in interest rates throughout this financial year,” Dunn told attendees at a Smarter SMSF planning webinar today.
“And we know that the May 2023 rate for standard variable housing loans for investors is going to be the determining factor for the interest rate for the next financial year,” he added.
“That is yet to be published, but we expect [to see the announcement] on about the 4 or 5 June, but the rate in April is already at 8.6 per cent. So we’re going from 5.35 per cent to somewhere north of 8.6 per cent. That is going to have a huge impact on cash flow.”
“So looking at the investment strategy, the cash flows of the fund are going to be critical as part of this planning process in getting your clients understanding [this] and [being prepared] as soon as we hit 1 July.”
Further Dunn suggested practitioners should be proactive in preparing their clients to manage this situation.
“Spend a lot of time reassessing these arrangements put in place, [ensure] the right documentation [is squared] away [and] that they’re notifying the relevant parties [about] the fact interest rates are moving up and what the [subsequent] repayments are going to look like,” he said.
Smarter SMSF technical and education manager Tim Miller also took the opportunity to remind advisers of the continuing impact of the COVID-19 relief measures from a practical and tax perspective.
“We can’t forget that from a tax point of view those measures live on until we’ve paid off the loan because we had to increase the repayments,” Miller pointed out.