SMSF trustees with an interest rate applied to a related-party limited recourse borrowing arrangement (LRBA) may look at undoing that arrangement or refinancing it with a commercial lender given the significant gap between the safe harbour rates and those on offer from the latter, a technical specialist has observed.
Smarter SMSF education and technical manager Tim Miller said the LRBA safe harbour rates contained in Practical Compliance Guideline (PCG) 2016/5 were unlikely to change until late May or early June, but based on current rates they may still exceed commercially available loans.
“We know in May 2024 the standard variable housing loan rate for investors went from 8.85 per cent to 9.35 per cent and that is the rate used in the PCG for LRBAs with related-party loans, and that is the current rate of interest they have to pay,” Miller said today during a webinar hosted by SuperGuardian.
“The current rate released in February is 9.2 per cent so if we see nothing between now and May from the Reserve Bank of Australia (RBA) in regards to more reductions in that interest rate, then the LRBA related-party loan conditions based on the PCG will also be 9.2 per cent.
“For commercial lenders, however, the rate a few weeks ago was 6.99 per cent and some are already starting from 6.74 per cent.
“What we’re seeing here is there is already a 2 to 2.5 per cent differential between the RBA rate for related-party loans based on the ATO safe harbour rules versus what you can get commercially.
“For SMSFs with related-party LRBAs, if we’re not going to get a significant decrease, they seriously need to look at either getting an offer from a commercial lender to match with the related-party loan or changing lenders and move outside of the existing framework of the PCG related-party loan.
“There are key elements with regards to LRBAs we won’t have finalised until just before the end of the financial year, but they will have significant impact on any clients who are still paying down an arrangement based on these variable rates.
“We don’t have the indexation number for the PCG rate yet, but it’s not that far away, and based on what we’re seeing, getting a lower number from the ATO is going to be slightly problematic.”
