Where a fund has entered into a limited recourse borrowing arrangement (LRBA) with a related party that is utilising the safe harbour set out in PCG 2016/5, the interest rate is required to stay in line with the published rate each year by the Australian Taxation Office (ATO).
The rate utlised by the ATO is the Reserve Bank of Australia (RBA) Indicator Lending Rates for banks providing standard variable housing loans for investors (refer to table F5) – this rate is determined for the following financial year (from 1 July) based upon the published rate in May each year.
This rate has now been published by the RBA at 5.1%, reduced from the previous year at 5.94% as you can see within the table below:
Listed shares or units
Loan repayment relief
There are currently a range of SMSFs impacted by COVID-19, with rent relief being offered to tenants due to the Government’s economic response to the pandemic.
The impact of rental relief being provided has then naturally put pressure on a fund’s ability to meet loan repayments where an LRBA is in place. For related party loan arrangements, the ATO has provided temporary LRBA relief to where the repayments that are deferred are consistent with those set out on the Australian Banking Association’s website (as provided by commercial lenders).
What does this change in interest rate mean?
It is important that the capitalised interest during this period is appropriately reduced from 1 July in line with the interest rate adjustment. It will mean that the fund will have to recalculate its repayments after this 6 month period, accounting for the change in interest rates.
Available SMSF documents
As part of the Smarter SMSF document suite, you can create documentation that provides notice of a change to the interest rate applicable to an existing related party LRBA loan facility being provide to an SMSF.
The following documents will be generated as part of the completed order:
- Notice to vary interest rate
- Trustee resolution about variation of interest rate