Safe harbour interest rate rises for related-party loans

The interest rate for SMSFs relying on the safe harbour terms set out by the ATO in PCG 2016/5 for their related-party limited recourse borrowing arrangements has increased by 25 basis points to 5.35 per cent for the 2022-23 financial year.

This follows the recent increase in the cash rate target by 25 basis points to 35 basis points.

The interest rate set out under the ATO’s safe harbour terms is based on the Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors.

The annual rate is based on the rate published for the month of May that is immediately before the start of that financial year.

The RBA Indicator Lending Rate for standard variable housing loans for investors jumped from 5.10 per cent in April to 5.35 per cent for the month of May.

Up until this latest change, Smarter SMSF chief executive Aaron Dunn said the rate had remained at 5.10 per cent for the past two financial years.

“This [incremental change] means that all those related party loans that operate within the SMSF industry are going to have to ensure they move in line with that interest rate,” said Mr Dunn.

Alternatively, SMSF trustees can demonstrate that their loan is on arm’s length by providing evidence that it is on terms consistent with a commercial arrangement that they have been offered, he noted.

Mr Dunn said it is important that funds document their decisions and ensure they adjust their repayments accordingly.
 

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