By Phil LaGreca

The RBA has recently published the latest Standard investor interest rate for residential property as at May 2019 as 5.94%.

This rate is used for the Limited Recourse Borrowing Arrangement “Safe Harbour” rate under ATO PCG 2016/5. This represents an increase from 5.80% used for 2018/19.

Meanwhile the RBA recently moved the official cash rate down from 1.5% to 1.25%.

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.

This occurs as the Safe Harbour rate is effectively set retrospectively as it uses RBA indicator investor residential loan rate in May to set next year’s rate.

The question is: Should there be some capacity to set the Safe Harbour rate more frequently (say, quarterly) if the trustee wishes?

Annual setting is there for simplification as it means the monthly repayment does not need to be recalculated during the financial year if the rate only changes at 1 July, but given commercial rates do change in response to other factors like RBA rate movements, could this be incorporated in a related party loan?

In reality, SMSFs with related party LRBAs have a choice to either charge the “Safe Harbour” rate or a proven rate that is commercially available.

Proving a rate is commercially available means more than just showing the rate quoted on a commercial lender’s website. There needs to be proof that an offer could be made by the unrelated finance provider for the terms of the existing loan (duration, LVR, security and interest rate).

For advisers with SMSF clients that have related party loans in place it would mean that the new Safe Harbour rate increase should result in attempts to determine if a commercial lender can provide a better rate. In fact, a case could be made that under an adviser’s Best Interest Duty to a client this option should be pursued.

A similar problem exists with the Centrelink deeming rate where changes are not tied to movement in RBA rate, but requires Ministerial Determination to be issued rather than being automatically linked to movements in the RBA official rate.

The last time a determination was issued was in March 2015 and since then the RBA has cut rates in May 2015, May 2016, August 2016 and June 2019.