loan from relative deductability


just have a question that i need help with.

i got 1 IP that i will be subdividing. My relative from overseas has offered to lend me funds to be able to build on the to be created lot. (have done calculations and it will make the whole IP positive geared)

1. will a simple written agreement (stating amount, interest rate and terms) be enough to make it deductible or do we need to get a solicitor to draft a contract formally.

2. if in the future my serviceability improves and i want to borrow from banks, will that personal loan need to be declared since it is unsecured loan (am not going to default on loan or anything just pointing out fact that its not secured by property)

1. I would advise a solicitor/property lawyer is consulted for guidance. Can refer you to one if required for an initial discussion.

2. Yes, all liabilities should be declared.

You would be wise to seek advise on tax implications as well as talking to an MB inclusive of short, medium and long term goals.

If the lender is non-resident it may not be deductible unless you go to extensive lengths to comply with the interest withholding rules. You would need to address:
- Written loan agreement
- Proof of satisfying the loan...Not just thinking its a loan.
- Not giving any share of profit to that person
- Register for withholding tax
- Deduct withholding tax from each payment and remit to ATO
- Report total interest paid at year end

Of course the non-res would then pay AUS tax on the earnings and be credited with the WHT deducted.

Do you understand that when you subdiv and build then CGT will not apply to that profit AND GST will likely impact. Professional guidance before acting may be sensible.
From a legal perspective you are the borrower so you would want a weak loan agreement. A verbal agreement would be weak.

But from the relative's point of view they would want to make sure they were protected - so a properly drafted loan agreement should be considered by them. They should also consider taking some sort of security so that in the event of your bankruptcy they may take some priority.

Plus consider all the tax aspects as per Paul's post.