As far as superannuation rates and thresholds are concerned, high inflation can have both a positive and negative impact. On the positive side we see an increase in the General Transfer Balance cap (‘general cap’) resulting in higher pension commencement values and greater capacity to make non-concessional contributions, but on the negative we will see related party limited recourse borrowing arrangements (LRBA) take a big hit with interest rates jumping more than 3% for those with variable interest rates.
SMSFs that comply with the safe harbour terms outlined in PCG 2016/5 – Income tax arm’s-length terms for limited recourse borrowing arrangements must be aware that 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, to determine the appropriate interest rate.
The following table outlines the interest rate increase from 1 July 2023:
| Year | Real property | Listed shares or units |
| 2023-24 | 8.85% | 10.85% |
| 2022-23 | 5.35% | 7.35% |
| 2021–22 | 5.10% | 7.10% |
| 2020–21 | 5.10% | 7.10% |
| 2019–20 | 5.94% | 7.94% |
Fixed or variable?
One saving grace is for any fund that established their LRBA in accordance with PCG 2016/5 in the past few years and fixed the interest rate at commencement. The safe harbour provisions provide for a fund to fix the interest rate at commencement for a maximum of 5 years for property and 3 years for stock-exchange listed shares or units. For some that will provide temporary relief, but for those that are coming out of their fixed period they need to be aware of the immediate rate hike.
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 cash flow 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
Login or sign-up to order these documents.
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
A hike in interest rates will be a double whammy for many SMSFs who may still be feeling the pinch of extra repayments coming out of the relief measures introduced as a result of COVID-19.
