An SMSF specialist has suggested the current economic environment is providing a good opportunity to refinance related-party limited recourse borrowing arrangements (LRBA) that are potentially detrimental to a fund due to the safe harbour provisions outlined in the ATO’s Practical Compliance Guideline (PCG) 2016/5.
The interest rates recommended to be charged on related-party LRBAs by the safe harbour guidelines have jumped from 5.35 per cent to 8.85 per cent for real property and from 7.35 per cent to 10.85 per cent for the 2024 income year as a result of the recent monetary policy actions of the Reserve Bank of Australia.
As such, Smarter SMSF technical and education manager Tim Miller said it was a good time to revisit whether trustees should be structuring a related-party LRBA under PCG 2016/5.
“Is this the appropriate time to look at what commercial lenders are out there and whether there is the capacity to refinance an LRBA using those commercial lenders,” Miller told attendees of a SuperGuardian webinar held today.
“One of the things to be mindful of is the ATO has never said that [when employing] a related-party loan you have to follow the safe harbour rules. The requirement is if you want to make sure you and the fund are not targeted from an audit point of view, then you should follow the safe harbour provisions.”
According to Miller, loans from commercial lenders are currently available where the interest charge can be anywhere between 6.5 per cent and 8.5 per cent, but warned their mere existence does not mean SMSF trustees can refinance a related-party LRBA without ensuring they adhere to strict compliance process.
“[Even though lower interest rates are on offer in the market], you can’t just refinance a related-party loan on those terms. You actually have to have supporting evidence to show that the banks, or lender, is willing to let you borrow at that rate. Then you can use that as supporting documentation if you refinance a loan [using those market rates],” he noted.
“So it really is a major case of dotting your i’s and crossing your t’s when it comes to refinancing to ensure you’re not putting yourself into some form of compliance grey spot.”
Miller alerted practitioners to the effect of the interest rate rises on related-party LRBAs earlier this year.
