• Option 4 – a rate agreed between the parties from time to time
• Option 5 – Westpac’s variable home loan rate
• Option 6 – RBA cash target rate + x percent
Best practice is often to use the option 6 (that is, RBA cash target rate + x per cent). Because the RBA cash target rate moves, the SMSF loan’s interest rate will automatically follow and should roughly approximate an arm’s length rate over time (unlike option 1).
Assume that the “x per cent” in option 6 is calculated so that the total of option 6 is the same as what a bank is offering. In this case, it is very easy to show that the interest rate was indeed benchmarked, which of course helps to prove that it is at arm’s length (unlike options 2, 3 and 5).
It is certain and easily observed by a third party (for example, the SMSF’s auditor), years after the relevant time period (unlike option 3, 4 and 5).
Borrowing from a related party can significantly increase clients’ wealth. However, it is important that the key elements in a related party loan – such as being at arm’s length – are properly handled. With proper planning and due care, this is a straightforward process.
Bryce Figot is a senior associate at leading SMSF law firm DBA Lawyers – www.dbalawyers.com.au
