Borrowing from parents deductible?

Discussion in 'Accounting & Tax' started by NovoR, 2nd Aug, 2017.

Join Australia's most dynamic and respected property investment community
Tags:
?

Using parents Line of credit, is it still tax deductible for me?

  1. Yes

    3 vote(s)
    37.5%

  2. No

    1 vote(s)
    12.5%

  3. Maybe

    4 vote(s)
    50.0%
  1. NovoR

    NovoR New Member

    Joined:
    19th Aug, 2015
    Posts:
    3
    Location:
    Perth
    Hi.
    My parents have a LOC loan in their name that I could use to fund part of my development. I can repay them after the build has finished and sell one of the units off. Would this loan still be tax deductible for me? I'll treat it like a loan in my own name.
     
    NovoR, 2nd Aug, 2017
    #1
  2. D.T.

    D.T. Specialist Property Manager Business Member

    Joined:
    3rd Jun, 2015
    Posts:
    9,190
    Location:
    Adelaide and Gold Coast
    If parents loan you money , at x% interest rate (no one really cares where they got the money from, be it LOC or elsewhere at this point), and its documented, then yes:

    1) You can claim the x% interest payable on the loan
    2) They have to declare the income from x% interest
     
    D.T., 2nd Aug, 2017
    #2
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,555
    Location:
    Sydney
    It depends on if the loan is documented and that you clearly incur and pay interest to them and pay expenses for the dev from the proceeds they lend you. Only the interest on the portion you borrow is deductible.

    The parents likely will receive an assessable sum which may equal their costs meaning no tax issue for them. Depends how the rate is determined and calculated.

    You should have a lawyer draft a complying loan agreement and advise on how to settle the loan.
     
    Paul@PAS, 2nd Aug, 2017
    #3
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    42,007
    Location:
    Australia wide
    We set these up for clients all the time. If you borrow to invest the interest will generally be deductible, but to claim the interest you will need a proper written loan agreement.

    Bigger issue for the parents as they would want to claim the interest they are charged by their bank to offset the income you are paying them so their loan to you would have to be on commercial terms at an interest rate at or higher than they are paying.

    Consider also the other legal issues that can arise - estate planning, asset protection, security for the loan, limitations act etc.

    See
    Legal Tip 38: Spousal and Related Party Loans Legal Tip 38: Spousal and Related Party Loans

    Legal Tip 40: Forgiving Loans on death - A recent case https://propertychat.com.au/community/threads/legal-tip-40-forgiving-loans-on-death-a-recent-case.2128/


    Legal Tip 86: Loans and limitations of enforcement legal Tip 86: Loans and limitations of enforcement
     
    Terry_w, 2nd Aug, 2017
    #4
  5. Hamish Blair

    Hamish Blair Well-Known Member

    Joined:
    29th Sep, 2015
    Posts:
    489
    Location:
    Melbourne
    Deductible on a cash basis only? Or accrual basis?
     
    Hamish Blair, 2nd Aug, 2017
    #5
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    42,007
    Location:
    Australia wide
    cash
     
    Terry_w, 2nd Aug, 2017
    #6
  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,555
    Location:
    Sydney
    Related party loans MUST be diligently maintained or the whole interest can be denied to you as a scheme. There is no such thing as accruals !
     
    Paul@PAS, 2nd Aug, 2017
    #7
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    42,007
    Location:
    Australia wide
    But the loan could interest could be capitalised - with the usual consequences.
     
    Terry_w, 2nd Aug, 2017
    #8
Developer Tax Services

Price Accounting provide tax services and advice to developers on issues incl GST, Tax + Structure. Our free developer toolkit covers many of the key elements and is critical to a new development tax plan. Email for your copy and our new client pack.