Author: Emma Partenza, Manager, TAG Financial Services
The Reserve Bank of Australia Indicator Lending Rates were updated last week and will impact SMSFs who have borrowed monies from related parties, under the safe harbour guidelines of PCG 2016/5. This practical compliance guideline ensures the loan terms are set at arm’s length, commercial terms, and funds will not fall foul of non-arm’s length income provisions.
From 1 July 2023 the interest rate has increased from 5.35% to 8.85% for real property; and up to 10.85% for listed shares/units.
A history of recent interest rates is as follows:
Loan repayments from the SMSF to a related party lender now need to be re-calculated as a result of this significant increase. This will impact repayments from July 2023 onwards.
An Example
Let’s take a fund who had an outstanding Limited Recourse Borrowing Arranagement (LRBA) loan with the following terms (under safe harbour provisions):
Monthly repayments of principal and interest are calculated as:
Based on the PCG 2016/5 safe harbour guidelines, the required monthly loan repayment to be made from July 2023 has increased from $5,277 to $6,162, equating to an additional $10,620 annually onto repayments for FY2023-24 that the SMSF is required to make under the loan agreement – an increase of 16.8%.
Repayments, Liquidity & Cash Flow
It is crucial to ensure the right repayments are going to be made next financial year in compliance with the fund’s loan agreement. The interest rate increase may also have a significant impact on the fund’s ability to meet required repayments. Liquidity and cash flow will need to be addressed as it is likely, given the current climate, interest rates may continue to rise.
Some strategies to consider that address liquidity issues could entail:
- Additional contributions made into the fund for members;
– Consider Total Superannuation Balance (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 (but still in line with market yields).
- Additional contributions made into the fund for members;
Review Investment Strategy
It is critical trustees consider and review the investment strategy of their fund and take action to put in place strategies to ensure the fund can continue to meet its increased obligations under the LRBA loan.
Any questions?
If you have any questions about LRBA loans, please contact us on 03 9886 0800 or via email.
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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 2023. Please do not reproduce without the expressed written consent of the author.