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With 1 July just around the corner, it’s important for SMSF trustees with a limited recourse borrowing arrangement (LRBA) to start planning for the increased liquidity pressures resulting from the numerous interest rate hikes over the past year.
SMSF trustees relying on the ATO’s safe harbour terms to ensure that the LRBA remains, at all times, at arm’s length (as set out in PCG 2016/5), will face an increase in monthly repayments of interest and principal from 1 July 2023.
The arm’s length annual interest rate for 2023-24, as determined under the ATO’s safe harbour terms is based on the published rate for the month of May 2023 of the Reserve Bank of Australia’s Indicator Lending Rate for banks providing standard variable housing loans for investors.
In accordance with the ATO’s safe harbour, where an LRBA is funding the purchase of real property, the relevant interest rate for 2023-24 will increase to 8.85%. This is an increase of 3.5% from the current rate of 5.35%.
Where the LRBA is funding the purchase of listed shares or listed units in a unit trust, the safe harbour requires an additional margin of 2%, so the relevant interest rate for 2023-24, will increase to 10.85%.
Essentially, SMSF trustees with an LRBA are set to feel the impact of 10 interest rate hikes since May 2022 in one fell swoop, come 1 July 2023. And unfortunately, trustees cannot rely on increased contributions to ease the headache of increased loan repayments as annual contributions caps are not being indexed on 1 July 2023.
Where refinancing an LRBA is a viable option, it is important to get it right if an SMSF trustee wants to continue to rely on the ATO’s safe harbour. The common problems that can arise on refinancing an LRBA will be discussed in detail at the SMSF Association’s Technical Summit being held on the Gold Coast from Wednesday 26 – Thursday 27 July. Register today!
Written by Mary Simmons, Head of Technical