Loan as 'investment'

[Davidr]

There was a thread the other day about helping your kids into property investment, giving them money etc. It got me thinking to one of the methods used quite a lot, and the tax implications....

If a parent was to loan their kids money (eg $100K from a LOC) to help out with the purchase of a property, would the interest payments (parent to bank) be deductible, if the kid paid IO.

ie:

Bank to parent LOC 100k @ 6% = 6Kpa
kid to parent IO 100K @ 7% = 7K pa

Parent declare 7K income and claim 6K expenses.

Does this work or does there need to be some arms-length to the deal? Are there formal documents or other proforma to make it OK? Assume everything is done in natural person. Would it make a different to use a trust as the lending entity?

Thanks,
David.

 

[Rolf Latham]

Hiya

if there is an agreement in place, and its commercially reasonable then the ATO would have no problem with tit I suspect, but seek personalised Professional (not rolf mug) advice :O)

Ta

rolf

 

[Davidr]

Ta rolf. Post is more hypothetical, rather than intention.

Cheers,
David.

 

[Kris Sheather]

I believe it would need to be subject to interest at a market rate, otherwise it could be deemed a distribution of income.

Dont trust me though I'm not an accountant..

 

[DaleGG]

Hi

Both the tax office and Centrelink are likely to look at the payments from the children to the parent as income.

As has been suggested though keep the deal on commercial grounds and DO ask a solicitor to draw up a proper contract to protect you both. It should not be necessary, but, it so very often is . . .

Dale