An SMSF technical specialist has suggested related-party limited recourse borrowing arrangements (LRBA) implemented under the safe harbour provisions detailed in Practical Compliance Guideline (PCG) 2016/5 need revision in the current economic environment to prevent fund members from paying unnecessary interest on these loans.
Smarter SMSF technical and education manager Tim Miller made this recommendation in light of the recent rise in official interest rates and the economic forecasts relating to the coming months.
Miller pointed out that in May 2025 the interest rate pertaining to the safe harbour conditions for related-party LRBAs under PCG 2016/5 was 9.35 per cent and that it fell to 8.95 from July 2025.
“We all expected to see that number drop [again] after July last year. [But] circumstances have changed and the rate, which had got down to 8.6 [per cent], then went back up to 8.85 [per cent] in February when we saw the 25 basis point increase in the [official] interest rate,” he told attendees of a technical webinar hosted by SuperGuardian today.
“If we look at the forecast now, there are people saying that we are going to get [another interest rate increase] in March and in May and some of the forecasters are saying [these increases] will be 25 basis points each.
“So we actually might end up in a situation where the [safe harbour related-party] LRBA interest rate for the 2026/27 [financial] year will actually equal the LRBA interest rate for the 2024/25 [income] year, [which is] that worst-case scenario of just under 10 per cent.”
According to Miller, this could mean an SMSF might now be incurring significantly higher interest on a related-party LRBA than necessary.
“If we then reference that to commercial lenders, and of course commercial lenders are always changing [their interest rates] with the markets as well, then we’re talking about in this instance the potential of a 3 per cent difference between the LRBA rate for a related-party loan and what you can get from some of the commercial lenders,” he indicated.
To this end, he pointed out SMSFs can benchmark related-party LRBAs against commercial lenders, but in order to do so the trustees must have a loan offer from the relevant commercial lender.
As such, he identified it as an issue practitioners with clients who have a related-party LRBA in place needed to monitor in the immediate term.
