Author: Emma Partenza, Manager, TAG Financial Services
In June each financial year, the ATO release updated interest rates for superannuation funds who have borrowed monies from related parties, to ensure the loan terms remain at arm’s length, commercial terms under the safe harbour guidelines of PCG 2016/5.
For 2022-23 the interest rate has increased to 5.35% for real property; and 7.35% for listed shares/units. This is unsurprising considering the Reserve Bank of Australia having increased interest rates over recent times.
A history of recent interest rates is as follows:
| Year | Interest rate: Real Property | Interest rate: Listed Shares/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% |
Loan repayments from the SMSF to the related party lender need to be re-calculated now due to this increase in interest rate to ensure any increases are applied to the July 2022 repayment.
Let’s take a fund who had an outstanding LRBA loan at 30 June 2022 of approximately $700,000. Based on the PCG 2016/5 safe harbour guidelines, the required monthly loan repayment to be made from July 2022 has increased from $7,435 to $7,525, an additional $90 per month. This is based on an interest rate of 5.35% and the remaining loan term of 10 years.
It is crucial our clients are engaged with now to ensure the right repayments are going to be made this financial year in compliance with the fund’s loan agreement. The interest rate increase may also have an impact on the fund’s ability to meet required repayments. Liquidity and cash flow need to be addressed as it is likely, given the current climate, interest rates may continue to rise and higher loan repayments may be required in the following financial year.
Some strategies to consider could entail:
- Additional contributions made into the fund for members;
- Rolling over monies that may be held in member’s external superannuation funds; or
- Adding new members into the SMSF (we now have up to 6 members).
There may be instances where loan repayments continued to be made at higher levels (for example, under higher interest rates in 2020) and the trustee decided to continue making these repayments during 2021 and 2022 (where interest rates were reduced), to essentially accelerate additional repayments of the loan back to the lender.
Where trustees have decided to do this, their 2023 loan repayment will be reduced also, giving trustees the following options:
- Reduce ongoing direct debits for 2022-23 financial year in line with the current interest rate under safe harbour;
- Continue repaying the higher amount back to the lender (this will ensure the loan is repaid quicker);
- Refinance the terms of the related party loan.
It is best to be discussing and putting in place strategies now to ensure the fund can continue to meet its obligations under the LRBA loan.
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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 2022. Please do not reproduce without the expressed written consent of the author.