LRBA safe harbour interest rates for 2019/20 up slightly

What is the SMSF Limited Recourse Borrowing Arrangement (LRBA) safe harbour interest rate for 2019/20? What is the SMSF LRBA safe harbour? How is the safe harbour interest rate set?

The 2019/20 LRBA safe harbour interest rates are up slightly compared to recent years.

The LRBA safe harbour interest rate for 2019/20 for real property is 5.94%, up somewhat from the 5.80% for 2018/19. The rate for listed shares or units is 7.94%.

LRBA safe harbour interest rates

Financial yearFor real propertyFor listed shares or units

Source: ATO

The interest rates, published by the ATO, are rates consistent with the safe harbour terms from the Practical Compliance Guidelines (PCG) 2016/5 – Income tax arm’s-length terms for limited recourse borrowing arrangements.

New safe harbour rates leading to SMSFs shopping around

SMSF company SuperConcepts says the new LRBA safe harbour rates could trigger SMSFs to shop around.

“We’re seeing a lot of enquiries from trustees and administrators wanting to know their options around lowering the rates and expenses incurred by funds given the rates elsewhere in the market,” said Phil LaGreca, SuperConcepts Executive Manager of SMSF Technical and Strategic Services, prior to the RBA cut to 1.0%.

“So even though official rates are falling, and could possibly fall further, it looks likely that rates for SMSFS with related party loans will be charged higher interest if they follow the guidelines.”

“We recommend trustees look around for the best deal possible in light of this new revision to ensure their funds are getting a bigger retirement benefit by paying lower expenses.”

“A lot of the banks have pulled out of LRBAs but the gap is being filled by smaller providers who are trying to establish themselves with competitive offers.”

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 sets out what the ATO regards as a LRBA consistent with an arm’s length dealing, and so the Non-Arm’s Length Income (NALI) provisions wont apply just because of the borrowing. The NALI provisions can dramatically increase the amount of tax a super fund pays on income.

The criteria set out by the ATO – including interest rate (fixed or variable), term of the loan, Loan to Value Ratio (LVR), security, guarantees, repayments and documentation – are for the 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?

The safe harbour rates are published by the ATO, but set by reference to a rate published by the Reserve Bank of Australia (RBA). The ATO uses the RBA ‘Indicator Lending Rates for banks providing standard variable housing loans for investor’ for the month of May in the prior year as the rate for real property loans. For loans used to acquire listed stocks or units it uses the same rate plus 2% (for 2019/20: 5.94% + 2.00% = 7.94%).

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