Things to consider when lending money in the family

Hi All,

My friend has a question on lending money in the family:

What are the ramifications of someone lending a large amount of money to someone else, as a deposit for purchasing residential investment.

He would like to know if there issues with Taxation, or anything else it is good to be aware of, beforehand.

If anyone could help out, that would be great.

I think that many people would say that, in addition to any taxation or accounting issues, that it can be very dangerous to lend to family. It can lead to a lot of pain further down the track.

I've only once lent to a friend to buy a property- that turned out OK, because I was working with him, and knew that I would get the money back wiuth good terms. Even then, it could have been dangerous.

That was fifteen years ago.
Hi Henry
If you charge interest then that income is taxable.

If your close to or on centerlink benifits there are some rules to follow.

There is the joy of default to think of as well.

If it is a loan and not a gift some nice legal paperwork will provide some bum cover.

I think the problem lending money to family (or friends) is both parties realising the line between friendship/family and a business-oriented transaction.

Australians are very good bill payers partly because they are afraid of the big stick that banks wield - this is why home ownership is seen as a good "savings" vehicle for many Australians who otherwise would not fritter away their incomes.

But lending to a family member or friend changes the psychology of the lending arrangement. The big stick theory doesn't hold anymore (it may in reality, but not in the borrowers mind), because you are their Uncle/Auntie/Father/Daughter/friend, whatever. You wouldn't possibly wield the big stick on them, would you?

Should they have trouble paying, they will expect their lender (you) to offer them more favorable conditions than a "real" lender (eg. a bank).

I would lend small amounts (eg. perhaps a couple of $K) to friends if asked and there was a definite need for the money, and it was obvious they could pay it back. I would lend and/or give money to immediate family if they were in dire need and I had it, because that I believe is part of your responsibility to your family. But I would also see the transaction as "risky" in the sense that the time period in which I expected to get that money back might become "unknown", etc.

When I was young and just started working I was earning $2500 per month and didn't know what to do with it (going from $20 a week or so pocket money to that sum of money is somewhat overwhelming). I lent lots of money to my brother not because I didn't know about investing but probably because the earnings on that money were small potatoes anyway and he *was* my brother after all. That amounted to nearly $10K over a number of years - it became easy for him to spend, very difficult for him to repay. When our house got built in '96 he finally took out a personal loan to repay us, as we wanted the money to get additional "stuff" for our house. His psychology towards paying the debt changed, because now he was dealing with a formal lending institution, not us, and he diligently paid off his loan every month till the debt was cleared - something he couldn't make happen with me (eg. never had the money, blah blah blah). And his personal situation hadn't changed (eg. more income etc).