Author: Jason Roccasalvo, Partner, TAG Financial Services
The ATO has recently updated their interest rates for Limited Recourse Borrowing Arrangements for 2020/21.
These interest rates are for related party loans to an SMSF, for either real property or listed shares/units. The rates are relevant as they form part of the “safe harbour” provisions as advised by the ATO via PCG 2016/5.
|New Rate – 2020/21||Old Rate – 2019/20|
What do these updates mean for our clients?
Well, to ensure the loan remains within safe harbour terms, related party loan repayments should now be adjusted to factor the change in interest rate.
The ABC Super Fund has a related party loan with the XYZ Family Trust. On 1 July 2018, the Fund borrowed $700,000, on terms consistent with those outlined in the PCG.
The monthly loan repayments, of principal and interest, would therefore be as follows:
- For the 2018/19 financial year – $5,831.63 per month (based on the 5.8% rate applicable)
- For the 2019/20 financial year – $5,904.03 per month (based on the 5.94% rate that was applicable)
- For the 2020/21 financial year – $5,649.70 per month (based on the new rate of 5.1%)
As the monthly amount has now decreased, clients will not be at risk of failing to meet their obligations by forgetting to make this change. However, for clients who wish to adjust their monthly repayments, we would suggest a loan refinance to ensure it remains compliant with the PCG 2016/5 terms.
Refinance of loans are available, however the amount borrowed and remaining term cannot be altered.
As a reminder, the PCG 2016/5 terms are only for direct property, or listed shares/units. It does not provide safe harbour for unlisted trusts or other investments, irrespective of the underlying assets which exist. In these circumstances, the ATO would expect the SMSF to demonstrate how the loan is commercial (arm’s length) – typically by providing some evidence of a loan offer to the SMSF from an independent body (e.g. bank or lending institution).
For more information, call us on 03 9886 0800 or email us at firstname.lastname@example.org.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2020. Please do not reproduce without the expressed written consent of the author.