With an increase in interest rates in Australia by the Reserve Bank, this also has an impact on rates that are required to be charged under a limited recourse borrowing arrangements (LRBA). The impact of these rate changes is significantly important for SMSFs that comply with the safe harbour terms outlined in PCG 2016/5 – Income tax arm’s-length terms for limited recourse borrowing arrangements.
The Australian Taxation Office (ATO) uses the May published rate each year from the RBA’s Indicator Lending Rates for banks providing standard variable housing loans for investors.
The following table outlines the interest rate increase from 1 July 2022:
| Year | Real property | Listed shares or units |
| 2022-23 | 5.35% | 7.35% |
| 2021–22 | 5.10% | 7.10% |
| 2020–21 | 5.10% | 7.10% |
| 2019–20 | 5.94% | 7.94% |
What needs to be evidenced?
Any change in respect to repayments by the fund should be documented, including consideration to the fund’s investment strategy regarding the ongoing cashflow considerations of the fund.
Smarter SMSF provides a range of documents through its platform to order including:
- Notice to vary LRBA interest rate
- LRBA refinance
- LRBA Loan Facility Agreement
- Bare (Holding) Trusts
Non-compliance
Failure to stay within the safe harbour terms set out within PCG 2016/5 may result in the income generated from the asset to be taxed as non-arm’s length income (NALI). The ATO has provided guidance in respect to this topic through the release of:
- TD 2016/16 – Income tax: will the ordinary or statutory income of a self-managed superannuation fund be non-arm’s length income under subsection 295-550(1) of the Income Tax Assessment Act 1997 (ITAA 1997) when the parties to a scheme have entered into a limited recourse borrowing arrangement on terms which are not at arm’s length? and
- LCR 2021/2 – Non-arm’s length income – expenditure incurred under a non-arm’s length arrangement
