LRBA, Property, SMSF

LRBA interest rate pain coming

LRBA interest rate

SMSF trustees using a related-party LRBA and adhering to the PCG 2016/5 safe harbour rules will be facing a significant interest rate hike in 2023/24.

A technical manager has reminded advisers to ensure SMSF trustees who have a related-party limited recourse borrowing arrangement (LRBA) in place regarding a property purchase are aware of the interest rate changes to the associated safe harbour provisions that will come into effect on 1 July.

“Each year if you apply the requirements of PCG (Practical Compliance Guideline) 2016/5 [detailing the LRBA safe harbour rules], it’s not compulsory but is recommended that funds undertake this, the interest is ultimately fixed each year based on the May standard variable housing loan rate for investors as published by the RBA (Reserve Bank of Australia),” SMSF technical and education manager at Smarter SMSF Tim Miller told attendees of the latest SuperGuardian practitioner webinar.

“This rate was published [during the week commencing 5 June] and the [2024 income year] rate for real property is jumping to 8.85 per cent.

“Now that’s pretty significant because it’s always hovered between 5 and 6 per cent; it got up to roughly 5.9 [per cent] at its peak.

“So the jump to 8.85 [per cent] means that from a principal and interest repayment requirement on monthly terms, which is what the provisions of PCG 2016/5 [dictate], means that [SMSF trustees with this type of gearing in place] really need to make sure they have the cash-flow capacity to meet their LRBA repayment requirements.”

Miller pointed out this is not the only related-party LRBA issue trustees are going to have to potentially manage from a cash-flow perspective in the coming financial year.

To this end, he reiterated PCG 2016/5 specifies the maximum term for a related-party LRBA is 15 years and any financial relief provided to an SMSF during the height of the COVID-19 pandemic would have only applied to the interest rate charged and not the loan term.

As such, he warned trustees with related-party LRBAs in place may have to manage a larger interest rate liability as determined by the May standard variable housing loan rate for investors and the catch-up payments to compensate for any financial relief granted stemming from the coronavirus.

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