Related Party Loans

This week’s technical update will cover: Related Party Loans.

In the past Self-managed super fund trustees had been able to borrow at an interest rate that was less than what a bank would traditionally charge, which meant more money could be kept in the fund.

On the 6th April the Australian Taxation Office issued a guidance paper (PCG 2016/5), which outlined terms for related party loans.  It says related-party loans, such as a family trust or private company, to self-managed super funds need to be at interest rates of 5.75 per cent for property and 7.75 per cent for shares.

Further, the loan-to-value ratio must be 70 per cent for property and 50 per cent for shares.

The loan-to-value ratio is likely to cause the biggest concern for people who have these arrangements. For example if trustees have a property in their super fund at 80 per cent or 90 per cent then they’ve now got to come up with the extra cash to pay that loan down by making contributions (subject to eligibility) or they might need to sell other investments in the fund to pay down the loan.

The new benchmarks have to be met by June 30.  If you are effected by these changes please contact your SMSF Club Adviser to discuss your options.

To review the full guidance paper please click here.