Confirmed LRBA related party rates to increase from 1 July

Author: Emma Partenza, Senior SMSF Manager, TAG Financial Services

The Reserve Bank of Australia Indicator Lending Rates were released earlier this week for May 2024. The impact is for SMSFs who have borrowed monies from related parties, under the safe harbour guidelines of Practical Compliance Guideline 2016/5. This PCG ensures the loan terms are set on an arm’s length basis and are commercial (i.e. terms consistent with dealing with third parties in the marketplace). Where its complied with, funds will not fall foul of non-arm’s length income provisions.

From 1 July 2024 the interest rate will again increase to 9.35% for real property, and 11.35% for listed shares/units.

A history of recent interest rates is as follows:

Loan repayments from the SMSF to the related party lender need to be re-calculated as a result. This will impact repayments made from July 2024 onwards.

Let’s take a fund who had an outstanding LRBA loan with the following terms (under safe harbour provisions):

Monthly repayments of principal and interest are calculated to be $6,650 per month during FY2025 (up from $6,510 in FY2024). An additional $1,700 in yearly repayments need to be funded by the SMSF in 2024-25.

Since the significant interest rate increase in May 2023 (for FY2023-24), has meant an increase in repayments of $1,075 per month – or, $12,900 for the year!

It is crucial to ensure the right repayments are going to be made from July 2024, 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 impacts will need to be continually addressed, given the ever increasing costs of property ownership, such as significant increases in land tax.

• • Additional contributions made into the fund for members;
    – Consider TSB impacts to members where the LRBA was entered into after 1 July 2018 (or refinanced after that date).
  • Rolling over monies that may be held in member’s external superannuation funds; or
  • Adding new members into the fund (as we now have up to 6 members).

For those Funds with related party tenants review the lease arrangements for opportunities to increase rent (in line with market yields).

It’s therefore critical trustees considering and reviewing the investment strategy of the fund be taking action to put in place strategies to ensure the fund can continue to meet its increased 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 2024. Please do not reproduce without the expressed written consent of the author.