What is the interest rate for LRBA?
The ATO provide guidelines for self-managed super funds (SMSFs) to have a “safe harbour” when borrowing money from a related party in relation to a limited recourse borrowing arrangement (LRBA). The safe harbour operates to give SMSF trustees certainty they can avoid potential compliance issues as set out in the ITAA 1997 under the non-arm’s length income (NALI) rules.
As part of the guidelines interest rates are set annually by the Reserve Bank of Australia (RBA). The interest rates for the 2025/26 year are 8.95% for real property and 10.95% for listed shares or units.
| Year | Real Property | Listed shares/units |
| 2025/26 | 8.95% | 10.95% |
| 2024/25 | 9.35% | 11.35% |
| 2023/24 | 8.85% | 10.85% |
| 2022/23 | 5.35% | 7.35% |
The interest is based on the RBA’s Indicator Lending Rate for banks providing standard variable housing loans for investors which are published in May immediately prior to the start of the relevant year. However, the ATO publish what this is every year for easy access.
Update loan agreements with related parties
An SMSF trustee must recalculate and update the loan repayment schedule as interest on a LRBA set up under the safe harbour guidelines must be in line with the current rates.
Fixed interest rates can apply for up to 5 years for real property, and up to 3 years for listed shares or units. The applicable interest rate is determined by the rate in effect during the first year of the loan’s operation. For example, a loan with a fixed interest period of 5 years used to buy property in January 2026 would have an interest rate of 8.95%, remaining unchanged until January 2031.
Why is the Safe Harbour interest rate important?
An SMSF risks breaching NALI provisions (section 295.550 ITAA 1997) if it pays insufficient or no interest on related party loans under an LRBA, which could lead to a tax rate of 45% on net income and capital gains arising from the asset acquired.
To avoid this, SMSFs must provide independent evidence that related party loan terms are commercially reasonable. The ATO notes this is only possible if the SMSF has actually secured a comparable loan from a lending institution for the asset in question, with the related party loan agreement mirroring identical terms and conditions.
The ATO will not prosecute an SMSF incorporating the safe harbour guidelines in the loan agreement in relation to the NALI provisions. The SMSF must ensure related party loan terms not only align with safe harbour guidelines, but the interest benchmark and other terms are actually made in accordance with those terms.
Example 1 – real property – adapted from an example in the ATO’s PCG 2016/5
A complying SMSF borrowed money under an LRBA on terms consistent with section 67A of the SISA. It used the funds to acquire commercial property valued at $500,000 on 1 July 2025.
- The borrower is the SMSF trustee.
- The lender is an SMSF member’s father (a related party).
- A holding trust has been established, and the holding trust trustee is the legal owner of the property until the borrowing is repaid.
The loan has the following features:
- the total amount borrowed is $350,000 with a loan-to-value ratio of 70%
- a registered mortgage over the property was obtained as security by the lender
- the SMSF met all the costs associated with purchasing the property from existing fund assets
- the loan is interest free
- the principal is repayable monthly in arrears on a principal and interest basis
- the term of the loan is 15 years
- the lender’s recourse against the SMSF is limited to the rights relating to the property held in the holding trust
- the loan agreement is in writing
The income earned from the property, which is rented to an unrelated party, may give rise to NALI. Capital gains on disposal of the property may also be subject to NALI.
The LRBA has not been established or maintained on arm’s length terms. The SMSF will pay no interest on the loan. An independent lender would charge interest on the loan, therefore the SMSF has incurred an expense less than expected which will result in earning higher net income as a result of a scheme. A scheme has very broad application and is likely to be met by the arrangement between the member’s father and the SMSF.