Lending from non resident family members

[roypropertyinv]

Hi there

Just a quick question regarding tax and logistics of borrowing the equivalent of a deposit amount from family who are resident overseas, and have their money overseas.

I am in a position where I could borrow enough cash to use as a deposit on an IP from overseas family.

If we set up a formal loan agreement with no principal repayment, just a yearly payment of interest on the loan at an agreed percentage, how would this be dealt with by the ATO, and what would we need to do i.e. register it with ATO?

Thanks

 

[Terry_w]

Being overseas this may draw the attention of the ATO more. Some people borrow their own money and claim a deduction! Hope your lender is not living in a tax haven.

 

[roypropertyinv]

Being overseas this may draw the attention of the ATO more. Some people borrow their own money and claim a deduction! Hope your lender is not living in a tax haven.

UK. They are earning something like 0.5%pa in a savings account, so basically nothing.

 

[Terry_w]

UK. They are earning something like 0.5%pa in a savings account, so basically nothing.

Well you will probably have to withhold some tax on the interest sent back as this income. 10% from memory.

 

[roypropertyinv]

I found this link from the ATO website.

Terry you are right, it looks like 10% withholding tax, with some exceptions for countries where there is a tax treaty in place.

I see Australia has a tax treaty with the UK, but cant work out if would need to still do the withholding here.

https://www.ato.gov.au/individuals/international-tax-for-individuals/in-detail/australian-income-of-foreign-residents/payg-withholding-from-interest,-dividends-and-royalties-paid-to-non-residents/

 

[coastymike]

If you want to obtain a tax deduction for the interest you will need to pay withholding tax. Otherwise no interest deduction

. Section 26-25 of the ITAA 1997 provides that interest is not deductible if the taxpayer has not met the withholding tax requirements of theTaxation Administration Act 1953*(TAA).

Section 12-245 of Schedule 1 to the TAA provides that an entity must withhold an amount from interest that it pays to another entity if the recipient has an address outside Australia.

You must be registered for pay as you go (PAYG) withholding before you withhold tax from interest, dividend or royalty payments to non-residents.

This liability to Australian withholding tax is subject to any applicable tax treaty provisions in the Convention contained in the International Tax Agreements Act 1953 (Agreements Act).

The Convention provides that Australia may not tax interest derived by the contracting party or by a political or administrative subdivision or a local authority or by any other body exercising governmental functions, or by a bank performing central banking functions. Unlikely an overseas family would meet any of these definitions.

 

[roypropertyinv]

Thanks for the answer. So if my calcs are correct:

$40000 - Loan @ IR of 5%
$2000 - Interest per year
$200 - Withholding tax per year (10% of interest)
$1800 - Interest received by overseas family

My taxable income reduced by $2000

$750 - My tax rebate (37.5% of overall interest paid)
$1250 - Overall cost to me per year

Simplistic and excluding extra income from property etc.

Or have I got this totally wrong?

 

[Terry_w]

Thanks for the answer. So if my calcs are correct:

$40000 - Loan @ IR of 5%
$2000 - Interest per year
$200 - Withholding tax per year (10% of interest)
$1800 - Interest received by overseas family

My taxable income reduced by $2000

$750 - My tax rebate (37.5% of overall interest paid)
$1250 - Overall cost to me per year

Simplistic and excluding extra income from property etc.

Or have I got this totally wrong?

Do you have a commercial loan agreement in place?

 

[roypropertyinv]

meaning a private loan agreement between the me and the person lending the money?

 

[Terry_w]

meaning a private loan agreement between the me and the person lending the money?

Yes a written loan agreement between lender and borrower on commercial terms.

 

[roypropertyinv]

There isn't any agreement in place yet, but if there were to be a loan in the future, we would do a written agreement setting out terms of the loan.

I'm not sure if this is what you mean by a commercial loan agreement?

 

[roypropertyinv]

just a bump!

 

[maadha]

Hi Roy,

I'm very interested in this as we have some family in the UK and are thinking of approaching them for a loan to get us through some financial problems. This is literally the first thing i've found on the topic so will watch with anticipation. Would welcome any other info you may have via a PM.

Thanks

 

[Paul@PFI]

Ah Mike has delivered. No withholding = no deduction. This key rule can be fatal to deductions and is poorly understood. Mike's Master of Tax shines through.

Tread carefully with borrowing overseas !!! The loan agreement may a futile exercise if withholding rules are not complied with. The penalties are dire.

related overseas parties can also be subject to other rules relating to Australian source income that makes it all waste of time.

 

[maadha]

Tread carefully with borrowing overseas !!! The loan agreement may a futile exercise if withholding rules are not complied with. The penalties are dire.

related overseas parties can also be subject to other rules relating to Australian source income that makes it all waste of time.

Thanks Paul. Is there a better way to go about this then?

Basically the In-Laws are born and bred Poms and still live there. We can potentially borrow a bit from them to help us over a few hurdles and then pay them back over 5 years.

Cheers.

 

[Terry_w]

Thanks Paul. Is there a better way to go about this then?

Basically the In-Laws are born and bred Poms and still live there. We can potentially borrow a bit from them to help us over a few hurdles and then pay them back over 5 years.

Cheers.

Depends on your definition of 'better'. Interest free loans would be better for you and no tax issues.

 

[Paul@PFI]

Private loan no issuse. deductible...XXX

To comply then you need a loan agreement. Account for loan in the agreed currency. Calc interest. Deduct withholding tax. Pay the ATO monthly. report by 14 July each year. They pay tax in UK and claim the witholding tax. No issues.

You may find the $AUD / UK could bite you too !! or them.

Or you borrow from the bank.Or interest free.