The interest rates applied to related-party lending under a limited recourse borrowing arrangement (LRBA) have increased for the next financial year, but at slower rate than in the current year.
The new safe harbour rate that ensures a related-party loan is consistent with arm’s-length dealings has risen by 0.5 per cent to 9.35 per cent for real property and by the same amount for listed shares and units, rising to 11.35 per cent for the 2025 financial year.
The increase is less drastic than the one that took place at the start of the 2024 financial year when real property rates rose from 5.35 per cent to 8.85 per cent and the listed shares and units rate increased from 7.35 per cent to 10.85 per cent.
SMSF Alliance principal David Busoli said where an LRBA was reliant on related-party borrowings, it was very important that arrangement was properly administered to avoid a breach of the non-arm’s-length income rules, which carried harsh penalties for any breaches.
“Essentially, all taxable income and capital gains from the property will be taxed at the top marginal rate,” Busoli said.
“Once triggered, this situation can never be fixed. It’s permanent.
“Note that it isn’t just the interest rate that’s relevant, it’s the loan conditions as well, including principal and interest term and security.
“As the financial year draws to a close, it is prudent to check that any such loan has been treated correctly this year, as well as taking measures to ensure the new interest rate is incorporated for next year.”
He also noted trustees planning to make their SMSF pay off a related-party loan after making planned non-concessional contributions in the future may be restricted by superannuation regulations from doing so.
“An obtuse and totally unjustified rule counts the balance of a related-party loan as an asset for total super balance purposes, potentially creating the absurd situation where the presence of the loan may, of itself, prevent the making of the contribution that would enable it to be paid out,” he said.
“Note that arm’s-length loans are also caught by this provision, but not until the member’s benefits are unrestricted non-preserved.”
