Related Party LRBA interest rates 2015-2020
Funds which have Limited Recourse Loan Arrangements (“LRBA”) where the loan has been provided by a related party (typically members of the fund) are required to pay interest based on an “arms length rate”. In the event a fund does not pay an arms length rate the fund income may be treated as NALI (“Non arms length income”) and subject to the top personal tax rate.
In order to provide certainty as to what rates would be deemed as “arm length” the ATO requires that funds with variable rate loans for property investments apply the Reserve Bank of Australia ‘Indicator Lending Rates for banks providing standard variable housing loans for investors’. Interest on such loans is to be calculated monthly on a compounding basis. The interest rate published in May prior to the commencement of the relevant financial year is applied for the whole year
The applicable rates are therefore:
If the related party loan is on a fixed rate basis then the ATO says “trustees may choose to fix the rate at the commencement of the arrangement for a specified period, up to a maximum of 5 years.”
Different rates apply for non property investments. There are a list of other rules which the fund must comply with for the loan to consistent with an “arms length” arrangement including maximum loan to value ratios, registration of mortgage and loan length. You should consult with an appropriately qualified advisor prior to undertaking any LRBA transactions to ensure all conditions are fulfilled