SMSF practitioners advising clients with related-party limited recourse borrowing arrangements (LRBA) should consider the impact of any interest rate changes announced by the Reserve Bank of Australia (RBA) to ensure the loan remains cost-effective, according to a technical specialist.
Smarter SMSF technical and education manager Tim Miller noted the current RBA indicator lending rate for standard variable housing loans of 9.35 per cent – which is used for determining LRBA related-party loans – has not changed and was likely to be unfavourable for many SMSF trustees.
“At 9.35 per cent that makes it exceptionally unattractive to be looking to enter into related-party loans unless the trustees can go out and enter into a related-party loan that flies in the face of Practical Compliance Guideline (PCG) 2016/5,” Miller told attendees of a SuperGuardian webinar today.
“To do that, ultimately, the tax office’s position is you must have received an offer from a commercial or non-related lender that is going to provide you with a rate and you have then chosen to match it by undertaking it in related-party terms.
“You can have a related-party loan outside the scope of PCG 2016/5, but you’ve got to be able to benchmark it against something. That something has to be a formal offer for you to be able to borrow from another lender.
“If you’ve got that rate, then you can lower your related-party loan rate. Otherwise you’ve got to stick with that 9.35 per cent rate and, of course, that jumps to 11.35 per cent for listed securities. Realistically [that’s] far too high a rate to be borrowing against.”
He recommended considering options for refinancing the LRBA, citing rates offered by commercial lenders ranging from 6.99 per cent to 8.19 per cent as potential alternatives to the standard rate associated with related-party loans.
“You can see that if we go down a path of reduced interest rates in June or July, then you’d be able to jump on it relatively early in the new year compared to having to lock in 9.35 per cent and be stuck with it right through to the end of the 2024/25 financial year,” he noted.
“It’s one of those situations where we need to be really careful and conscious if our clients have these related-party limited recourse borrowing arrangements. Are they in the best position for themselves right now? And if the answer is no, then can we look at refinancing? Is there a possibility to look at refinancing?
“Be mindful and make sure that your clients are being best served by their existing limited recourse borrowing arrangement because there’s still obviously plenty of them out there in the industry.”