Loan from relatives

[Brett IP]

Good Afternoon

Just wondering if any of you have ever obtained a loan from a relative, mum & dad, brother/sister etc for an investment property AND if you have been able to claim that loan.

E.g If I borrowed $100,000 from a rel to avoid LMI on a property, can you legitimately claim that loan on tax or must it be from a bank/financial institution? Are there ways to make a loan official or will the ATO accept a track record, or definitely not???

The interest rate would be whatever rate they paid

Cant seem to find anything on this

Thanks,
Brett

 

[Rolf Latham]

Hi Brett

have a proper loan agreement in place and make sure you pay them a littelmore than the rate they are paying, and I feel youd be ok.

Caveat is Im not an accountant !

ta
rolf

 

[The Y-man]

From memory I think there is no issue on your side. As per Rolf's post above, a formal agrrement signed by both parties, and interest payments being done.

It may cause issue on the relative/friend's side as they will need to declare your interest payments as taxable income.


The Y-man

 

[Mick C]

Yes a formal agreement signed off by a accountant or a professional in that field etc....

But i remember one time a client was in the same situation as you and after 3 years of claiming for the tax deduction; the tax man wasn't too happy and was asking plenty of questions

1. Due to the parties being related
2. Due to the amount claimed
3. No "formal" agreement-just a written agreement

Just with your accountant as he will be the one making the tax deduction.

Regards
Michael

 

[tom32]

Yes a formal agreement signed off by a accountant or a professional in that field etc....

But i remember one time a client was in the same situation as you and after 3 years of claiming for the tax deduction; the tax man wasn't too happy and was asking plenty of questions

1. Due to the parties being related
2. Due to the amount claimed
3. No "formal" agreement-just a written agreement

Just with your accountant as he will be the one making the tax deduction.

Regards
Michael

The other option would be to do a cash trade and the funder pays no tax on his interest. Illegal yes but if the tax man makes it too hard to be honest, what are you going to do?

Likely this would put the two parties ahead if they shared the spoils. Funding someone to buy a PPOR on a handshake deal (i.e. relative only you have to trust them!) is even better because the interest would otherwise be non deductable and the interest the funder gets from a bank is taxed at there marginal tax rate not the cash they recieve from the relative.

The ATO would have to choose one or the other I assume, they could not have a bet each way and say no he must pay tax but you must not claim it as a deductable? I hope?

 

[Bradsdad]

Just on top of what has already been posted, the lender will most likely want to see a copy of the loan agreement and will take into account the debt when it comes to servicing.

Regards
Steve

 

[Perp]

The other option would be to do a cash trade and the funder pays no tax on his interest. Illegal yes but if the tax man makes it too hard to be honest, what are you going to do?

You can claim the interest as a deductible, provided a formal loan agreement is drawn up. But your relative then has to claim that interest as income.

What's so hard about that?

 

[Brett IP]

I think tom32 is relating this to a PPOR so if you know someone with the cash, they can loan it to you at a lower interest rate than normal (as a PPOR you couldnt claim it anyways) , so you save, and they then make more interest as they wouldnt declare it, so they avoid the tax.

He does also admit the illegality

 

[tom32]

I think tom32 is relating this to a PPOR so if you know someone with the cash, they can loan it to you at a lower interest rate than normal (as a PPOR you couldnt claim it anyways) , so you save, and they then make more interest as they wouldnt declare it, so they avoid the tax.

He does also admit the illegality

Thanks, I thought I was going to get lynched for a minute there.

I guess where I was going to if you had no formal deal and they made it impossible for you to claim the deduction you would argue then why does the counterparty have to pay tax on theirs. They cannot have their cake and eat it too. Actually it is the ATO I suppose they can?

 

[Perp]

I guess where I was going to if you had no formal deal and they made it impossible for you to claim the deduction you would argue then why does the counterparty have to pay tax on theirs. They cannot have their cake and eat it too. Actually it is the ATO I suppose they can?

Of course they can!

The banks have to declare all the interest on PPOR loans, even though it's not tax deductible to the borrower; the two issues bear no relationship to each other.

 

[tom32]

Of course they can!

The banks have to declare all the interest on PPOR loans, even though it's not tax deductible to the borrower; the two issues bear no relationship to each other.

But the borrower can always declare it, the banks have declared it at their end? Imagine if you were on your next bank loan told you cannot declare the loss but the bank must declare it at there end. On the PPOR v the investment loan; I am aware of the difference and thought I had made this clear in the post? I am often quite clumsy with the construction of my posts however and people have missed the meaning behind them before but I can assure you, it is there if you read it again.

I am saying that for BrettIP if for some reason they (the ATO) tell him; 'no that expense is not deductable' then it would follow it does not have to be declared by the other party. How can you have declared income without a declared loss to the other party? I went on to say with a PPOR loan it is an advantage but illegal to do so. Really in the case on an IP it is a near 0 sum game unless the two parties have different marginal tax rates.

Indeed if it was audited even a back to back audit would not pick it up because niether party declared, if one does say the benificiary of a tax deduction then the other party is stuffed.

Also I guess I was warning Brett in my own clumsy way that if he declares to bear in mind the other party has to declare also if he tries to take it as deductable they want to be declaring it. I know when I loan money to friends I do not declare it but nor do I charge interest, but by the same token it usually involves some payment in kind like a few rounds at the pub when the deal comes off or they get paid an outstanding amount etc etc.

Also I am never in the habit of loaning 100k to anyone. This would certainly be putting all my eggs in one basket.

This is all a bit like in the other thread with the person being paid cash she was lynched for not declaring it and was told that she should just declare it as income before she gets caught out by our all seeing tax department.

My first move in the same situation would have been to speak to the individual paying me in cash and resolve it there first so I ensure they are not going to get into trouble with respect to super, payroll tax, workers comp etc etc which if you must declare they need to fix their end first!

It is a bit of a dog act when someone does you a favour and then you unilaterally decide to take the moral high ground and get them into trouble. True you might say you are acting with integrity, but certainly no loyalty whatsoever. I prefer to strike a balance between the two in my personal dealings with people.

I should add I am not even suggestinng the other party in BrettIP's situation is doing this I am just explaining that there are two parties to every transaction and make sure you are both on the same wavelength before doing anything rash but not in such condescending terms. Apologies BrettIP if you take offence as I am sure your friend is an upstanding member of the community.

 

[Perp]

But the borrower can always declare it, the banks have declared it at their end?

But you can't say to the bank "can I just pay you 4% instead of 6%, and you don't declare the income?"

Imagine if you were on your next bank loan told you cannot declare the loss but the bank must declare it at there end.

Isn't this exactly what happens with every PPOR loan?

I am saying that for BrettIP if for some reason they (the ATO) tell him; 'no that expense is not deductable' then it would follow it does not have to be declared by the other party.

No, it doesn't. Whether it's deductible to one party and whether it's declarable by another are two entirely separate issues. Whenever I buy my groceries, they're not deductible, but Coles still has to declare what I pay them as income.

How can you have declared income without a declared loss to the other party?

As stated, happens all the time.

Indeed if it was audited even a back to back audit would not pick it up because niether party declared, if one does say the benificiary of a tax deduction then the other party is stuffed.

Yes, if both parties conspire, it's possible you'd get away with tax fraud. If one party does the right thing, you're correct that it may lead to the other party being detected. Same as any collusion to commit a crime.

Also I guess I was warning Brett in my own clumsy way that if he declares to bear in mind the other party has to declare also if he tries to take it as deductable they want to be declaring it.

I agree that you have to make absolutely sure that the lender is aware of their obligation to declare the interest, because you'll be claiming a deduction, and give them the opportunity to withdraw their offer to lend to you.

I know when I loan money to friends I do not declare it but nor do I charge interest

If there's no interest involved, there's nothing to declare. That's fine; it's only when interest gets involved that the ATO is interested.

It is a bit of a dog act when someone does you a favour and then you unilaterally decide to take the moral high ground and get them into trouble. True you might say you are acting with integrity, but certainly no loyalty whatsoever. I prefer to strike a balance between the two in my personal dealings with people.

I'd suggest that anybody who assumes that you'll agree to conspire in a crime, has a low opinion of your integrity, and isn't acting in your best interests. If they tell you at the outset that that's how they want to structure it, and you're happy and agree to it, then you should stick with it and wear the consequences (if any).

I think the most ethical position would be to say "Thanks for your offer, but be aware that I intend to declare my interest expense on my tax returns, so if you don't plan on declaring your interest as income, then perhaps we need to reconsider the rate of interest, or whether you want to make me a loan at all."

 

[tom32]

But you can't say to the bank "can I just pay you 4% instead of 6%, and you don't declare the income?"

Isn't this exactly what happens with every PPOR loan?

No, it doesn't. Whether it's deductible to one party and whether it's declarable by another are two entirely separate issues. Whenever I buy my groceries, they're not deductible, but Coles still has to declare what I pay them as income.

As stated, happens all the time.

Yes, if both parties conspire, it's possible you'd get away with tax fraud. If one party does the right thing, you're correct that it may lead to the other party being detected. Same as any collusion to commit a crime.

I agree that you have to make absolutely sure that the lender is aware of their obligation to declare the interest, because you'll be claiming a deduction, and give them the opportunity to withdraw their offer to lend to you.

If there's no interest involved, there's nothing to declare. That's fine; it's only when interest gets involved that the ATO is interested.

I'd suggest that anybody who assumes that you'll agree to conspire in a crime, has a low opinion of your integrity, and isn't acting in your best interests. If they tell you at the outset that that's how they want to structure it, and you're happy and agree to it, then you should stick with it and wear the consequences (if any).

I think the most ethical position would be to say "Thanks for your offer, but be aware that I intend to declare my interest expense on my tax returns, so if you don't plan on declaring your interest as income, then perhaps we need to reconsider the rate of interest, or whether you want to make me a loan at all."

Fair enough, apologies as well I did some editing while you typed your response. Hopefully did not change the meaning?

Anyway on the deductable v non deductable, the difference is an IP is deducatable. For the bank to say you cannot declare that loss but you must declare the income when it is a deductable expense woul dbe my issue with it.

The tax department usually makes it easy for people to declare income. If their is another side to that same coin, I would have thought it be a given it could be declared a loss. Clearly as you point out this is only if such expense is in the realm of trying to make an income.

I agree with you on your general premise that people should pay what is due and indeed while my posts may make me come across as dodgy I am not in my personal dealings, that said if it was a choice between declaring a loss and getting some one else in trouble or not I would not declare the loss. I am commiting no crime by not declaring the loss.

I am a PAYG tax earner who usually owes money each tax year so I have no opportunity to scrimp on tax. Indeed the only reason I am buying a PPOR later this year (probably) is that I am sick of paying tax on the measley interest I get each year! It is hard enough to save money but to then have what little interest you earn taken away is pretty ordinary stuff.

 

[Perp]

I agree with you on your general premise that people should pay what is due and indeed while my posts may make me come across as dodgy I am not in my personal dealings, that said if it was a choice between declaring a loss and getting some one else in trouble or not I would not declare the loss. I am commiting no crime by not declaring the loss.

I didn't think you were dodgy; you said you don't charge interest, in which case there's no issue.

What if the ATO came and asked you if you'd paid interest on a loan from that friend, though; would you be willing to commit a crime by lying about it? Just highlighting that you may be forced to commit a crime to cover your friend's illegal activity.

 

[tom32]

I didn't think you were dodgy; you said you don't charge interest, in which case there's no issue.

What if the ATO came and asked you if you'd paid interest on a loan from that friend, though; would you be willing to commit a crime by lying about it? Just highlighting that you may be forced to commit a crime to cover your friend's illegal activity.

I would not hessitate I am afraid, I would be willing to lie in that situation every time.

I would love to say I hold myself to account more strictly than I do others but I don't think it is even that.

Maybe if I have a good hard look at myself I am tad dodgy...

 

[Perp]

I would not hessitate I am afraid, I would be willing to lie in that situation every time.

I would love to say I hold myself to account more strictly than I do others but I don't think it is even that.

Maybe if I have a good hard look at myself I am tad dodgy...

I honestly don't know what I'd do, and I'm not judging you. I think I'd take the risk that I wasn't asked, because if they came and asked me, I'm afraid that I don't know I'd be able to lie; I find it incredibly difficult.

I'd tell my mate up-front, though, that I'd have to tell the ATO the truth if directly asked, and then it'd be up to them if they wanted to take that chance or not.

I have plenty of vices, don't get me wrong, I'm not on my high horse! My challenges just lie more in the areas of laziness and procrastination than deception.