LRBA safe harbour interest rate for 2018/2019 financial year

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The LRBA (Limited Recourse Borrowing Arrangement) interest rate for SMSFs under the ATO’s safe harbour rules for the 2018/2019 financial year, for real property, is 5.80%. For listed shares or units the interest rate is 7.80%.

For the 2019/20 rates see this article: LRBA safe harbour interest rates for 2019/20 up slightly

These interest rates did not increase from the 2017/2018 rates. Though the rates have increased slightly compared to earlier years, since the safe harbour was first announced.

Financial yearFor real propertyFor listed shares or units

Source: ATO

What is the SMSF LRBA safe harbour?

The SMSF LRBA safe harbour was created by the ATO’s PCG [Practical Compliance Guideline] 2016/5: Income tax – arm’s length terms for Limited Recourse Borrowing Arrangements established by self managed superannuation funds. It provides a degree of confidence that the Non-Arm’s Length Income (NALI) provisions wont apply to an SMSF because of an LRBA. The NALI provisions can dramatically increase the amount of tax a super fund pays on income.

“This Guideline sets out the ‘Safe Harbour’ terms on which SMSF trustees may structure their LRBAs consistent with an arm’s length dealing. That is, for income tax compliance purposes, the Commissioner accepts that an LRBA structured in accordance with this Guideline is consistent with an arm’s length dealing and that the NALI provisions do not apply purely because of the terms of the borrowing arrangement,” says the ATO in the PCG.

The criteria set out by the ATO – including interest rate (including fixed or variable), term of the loan, Loan to Value Ratio (LVR), security, guarantees, repayments and documentation – are for a safe harbour to apply. As the tax office notes not meeting the safe harbour criteria “does not mean that the arrangement is deemed not to be on arm’s length terms”.

Does the safe harbour include fixed interest rates?

Under the safe harbour SMSFs can have, limited, fixed interest rate LRBAs.

The ATO says: “A new LRBA commencing after publication of these guidelines may involve a loan with a fixed interest rate set at the beginning of the arrangement. The rate may be fixed for a maximum period of 5 years and must convert to a variable interest rate loan at the end of the nominated period.”

How is the safe harbour interest rate set?

In terms of interest rate, the ATO uses the Reserve Bank of Australia (RBA) ‘Indicator Lending Rates for banks providing standard variable housing loans for investor’ as the rate for real property loans. For loans used to acquire listed stocks or units it uses the same rate plus 2% (for 2018/19: 5.80% + 2.00% = 7.80%).

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