SMSF LRBA safe harbour interest rate increases for 2017/18

The interest rate has increased for the ATO safe harbour for arm’s-length SMSF Limited Recourse Borrowing Arrangements (LRBAs) for the 2017/18 financial year.

The ATO created a safe harbour for SMSF LRBAs from the non-arm’s length income rules in 2016, with PCG 2016/5.

The safe harbour interest rate for real property was set at 5.75% for the 2015/16 year – the Reserve Bank of Australia ‘Indicator Lending Rates for banks providing standard variable housing loans for investors’. The interest rate for later years was set at the rate published for May – that is, the May before the financial year in question. For 2016/17 the rate was 5.65%. The rate for 2017/18, based on the RBA figures, is 5.80%.

This is the rate for LRBAs with variable interest rates. For fixed interest rates the ATO says “trustees may choose to fix the rate at the commencement of the arrangement for a specified period, up to a maximum of 5 years.”

Slightly different rules apply for LRBAs used to acquire listed shares or units. In PCG 2016/5 the ATO says that the interest rate is the same rate as for property plus 2% – so 7.75% in 2015/16, 7.65% for 2016/17 and 7.8% for 2017/18. Fixed interest rates have a maximum of 3 yeas for listed shares or units, under the safe harbour.

The ATO says, for the safe harbour, that “interest is to be calculated monthly on a compounding basis”.

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