income tax for deferred interest payment

[soyabean]

Suppose I lend 300K to my nephew to buy a house (to live in) however the loan interest won't be paid to me for the first 2 years, just gets accummulated as more debt, and then he can start paying me after 2 years. Would the interest incurred, though not actually paid to me during these first 2 years, be considered as part of my income of these 2 years, or as my income from the 3rd year onward when he actually starts paying me ?

(My accountant is on holidays at the moment)
Thanks,
Soy

 

[vaughan]

Another way of thinking about it is this:

your brother is borrowing 300K + 2 years interest
you get no income until the 3rd year.

 

[Rob G.]

If this is a commercial loan for which the interest is income to you (not enough facts for any opinion) ...

Deferring interest beyond 12 months would normally put you on statutory accruals.

You will usually be required to calculate your interest income even though you don't receive it yet.

This calculation is a bit messy, even if you think you are making an interest-only loan !!

Why is your accountant having such a quiet time ?

Cheers,

Rob

 

[soyabean]

Another way of thinking about it is this:

your brother is borrowing 300K + 2 years interest
you get no income until the 3rd year.

thanks, this makes sense to me, any good accountant here could comment please ?

 

[soyabean]

If this is a commercial loan for which the interest is income to you (not enough facts for any opinion) ... I don't know if it is a commercial loan or not. I lend money to a reli to buy house and he pays me interests rate equal to standard home loan rate , is it a comm loan ?
Deferring interest beyond 12 months would normally put you on statutory accruals. And .... so what does this mean/relate to my tax calculation ?

You will usually be required to calculate your interest income even though you don't receive it yet. So there are cases when I am not required to calculate it as income ?
This calculation is a bit messy, even if you think you are making an interest-only loan !! It is an IO loan, at least for a number of years (5,10). How is it messy ? Any other less messy way to do it ?

Why is your accountant having such a quiet time ?

Cheers,

Rob

Thanks for your comments Rob though I am not sure I totally understand them please see my questions in red above.

I will explain a bit more hopefully you will have more facts to be able to comment.
1./We have cash at the moment placed in offset accs against investment loans. Works fine so far but as the $$ accummulated all investments have become quite positive now. We work and earn salaries as well so will pay a lot of tax. Meanwhile my nephew needs a home loan, he would appreciate to be given a few years debt delaying to set things up. We plan to retire in 2 years will need the income then not now. These are reasons for thinking of the strategy above.
2./What do you think about vaughan's suggestion ?
3./My accountant is truly on holidays at the moment can't see him. I suddently had this idea a day ago , I am in the middle of refinancing and whether I apply this "brilliant idea " of mine or not will alter the way I arrange my loans.....
4./Also if nephew decides to rent the house out can he claim the "deferred interest" as tax deductable ? My thinking is yes as it it no differerent to capitalising interest . Yes/no ?

Any good accountants seeing this post please comment, and also everyone else of course....

Thanks very much.

 

[soyabean]

Hello ! anyone has any (even remotely ) relevant experience please share .

 

[THEGREAT888]

Hello ! anyone has any (even remotely ) relevant experience please share .

Hi Soyabean, it may be a good idea o ring ATO anonymously. They can give you an answer that is more likely to be accurate but non binding. though u may choose to get private ruling which is binding

cheers

t

 

[Rob G.]

I really do not like responding to posts with so few & vague facts. The chances of a wrong or incomplete response are very high.

You must decide if you are actually making a commercial loan based on the facts and legal advice.

You must decide whether it is a deferred interest loan or else a capitalised (compounded) loan based on the contract.

The contract terms may contradict whether it is fully commercial, or which type and will need to be drafted carefully because you are having trouble distinguishing the difference.

If it is a commercial deferred interest loan, you will be declaring interest income each year, your nephew will be claiming interest expense each year if used for earning his assessable income. This is regardless of the fact that no interest is paid until the end.

If it is a deferred interest loan, your nephew would not be capitalising interest because no new borrowing has been made to notionally pay you the original interest expense incurred.

If it is a regular loan (or coumpounded) then there is hundreds of threads to read on this site.

If interest is to be capitalised by your nephew, then Part IVA needs to be discussed with his accountant.

I wouldn't mind betting 90% of accountants will not understand and will just pick up the phone to ask the ATO what to do and then charge you for their time.

However, that is still better than the ones who don't understand and also don't ask the ATO. But they will still appear cheaper and possibly knowledgeable to you. You won't find out which until an audit occurs.

Please pay for some competent legal and tax advice before acting. Don't for goodness sake rely on a loan broker or bank employee.

Cheers,

Rob

 

[soyabean]

I really do not like responding to posts with so few & vague facts. The chances of a wrong or incomplete response are very high.

You must decide if you are actually making a commercial loan based on the facts and legal advice.

You must decide whether it is a deferred interest loan or else a capitalised (compounded) loan based on the contract.

The contract terms may contradict whether it is fully commercial, or which type and will need to be drafted carefully because you are having trouble distinguishing the difference.

If it is a commercial deferred interest loan, you will be declaring interest income each year, your nephew will be claiming interest expense each year if used for earning his assessable income. This is regardless of the fact that no interest is paid until the end.

If it is a deferred interest loan, your nephew would not be capitalising interest because no new borrowing has been made to notionally pay you the original interest expense incurred.

If it is a regular loan (or coumpounded) then there is hundreds of threads to read on this site.

If interest is to be capitalised by your nephew, then Part IVA needs to be discussed with his accountant.I wouldn't mind betting 90% of accountants will not understand and will just pick up the phone to ask the ATO what to do and then charge you for their time.

However, that is still better than the ones who don't understand and also don't ask the ATO. But they will still appear cheaper and possibly knowledgeable to you. You won't find out which until an audit occurs.

Please pay for some competent legal and tax advice before acting. Don't for goodness sake rely on a loan broker or bank employee.

Cheers,

Rob

Thanks very much Rob I think you have answered my query very well/ clear.
True I don't understand what a "fully commercial loan" means , and that there are different types of them... I will go find out.

As for the red text above re part IVA , I understand it is only a concern if the house is rented out not used as PPOR (which is a very low probability in this case )?

Thanks again for your time answeing my query Rob.
Soy.