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Safe Harbour interest falls but COVID-19 changes the rules!

Jun 22, 2020, 13:23 PM

Phillip La Greca, SuperConcepts SMSF expert

By Philip La Greca

The RBA has recently published the latest standard investor interest rate of 5.10% for standard variable housing loans as of May 2020. This rate is to be used for Limited Recourse Borrowing Arrangements for the 2020/21 financial year under the “Safe Harbour”  guidelines published by the ATO in PCG 2016/5. This represents a fall from 5.94% used for the 2019/20 financial year.

Even though official rates have fallen to 0.25% over the year, it looks likely the Safe Harbour rates for SMSFs will remain higher due to the timing lag as the May standard investor interest rate is used for the subsequent financial year.

Throwing a further spanner into the works is COVID-19 and rent relief arrangements. As the majority of LRBAs are for residential and commercial property, SMSFs as landlords have been obliged to grant rent relief to tenants adversely affected by the pandemic. 

For tenants granted rent relief, the SMSF as the landlord will have reduced rental income for a period and may need to seek deferral of loan repayments themselves.

Related party lenders are permitted to offer loan repayment deferrals like those offered by commercial lenders but the ATO’s Safe Harbour guidelines do not allow related party lenders an option of extending the loan term to give the borrower more time to pay the deferred amounts.

So, related party lenders now know the interest rate to use from 1 July 2020 in calculating repayments due to the lower interest rates. But at the same time will need to take into account the COVID-19 rent relief measures and reduced rental income.