Declaring loan payment for tax

If I take out a private mortgage from my parents, when I repay them principle and interest, I know they must declare the interest as income, but do they need to declare the principle as well?

 

No. It is just a return of funds. It is not income according to ordinary concepts - just the interest is income.

 

Thank you Ross. Is it possible to do a interest only loan (as opposed to a interest/principle) in when borrowing from my parents. How do i work out what the interest rate is. Do i just find out what a bank would charge and use that rate?

 

Yes can be interest only and doesnt need to be bank rates

 

Thanks, how do i determine the rate to set it? Are there any guidelines as to what is too low and what is too high?

 

Isn't that up to your parents?

If they currently have the money invested, do they want to maintain the return they are already getting?

Do they want the same interest as a bank would charge?

Do they want any interest at all?

 

Probably fairest interest is to average the rate they are already getting and the rate you would have to pay commercially.

I.e., they receive 2%, you will have to pay 4%, so you both agree on a rate of 3%. That way you both win.

But your parents may have to take into account any tax or Centrelink implications if their income increases.
Marg

 

Make sure the loan with your parents is documented and they take a clear security position.

If your mum and dad pass away you want to make sure there is a clear position as to what exists to stop potential arguments.

 

Are they borrowing the money and on lending or is it their cash? Where is the cash now?

 

Thanks all

Interesting point. What is the default position? They already have a will but nothing specifically on this loan as it hasnt eventuated yet. Do they have to revise the will in this case or does it fall under their assets direction for distribution?

 

Not borrowing, it's from savings

 

Without written evidence it could be disputed. The executor has a legal duty to maximise the estate. So best to leave evidence.

Also consider you may die before the parents so they may need to deal with your executor to get their money back.

 

Great point. Thank you, will need to think about this.

 

The issue is usually whether the money was a gift or a loan. A documented loan is an asset of the estate and will be dealt with under the terms of the will.

Difficulties arise when the recipient believes or claims the money was a gift so not part of assets under the will. Other beneficiaries of the will dispute this and problems can arise.

A properly documented loan can avoid later possible problems.

This protects your parents as well. A very recent court case in Qld involved elderly parents who loaned $280K to their son. Despite acknowledging the loan, he refused to pay it back. As there was no legal documentation the judge was unable to order him to pay, saying that legally it was a moral obligation, not a legal one.
Marg

 

If parents have or may have a centrelink pension in the future then specific advice needs to be considered so that a gifting situation is avoided and to address deeming

 

If it was a gift, I would also have to declare that in my tax return wouldn't I? Also if it was a gift, there would be no interest payment into my parents account.

But yes you are right, to avoid dispute in the future, probably best to document it.

Noted about the centrelink payments. Thank you for raising this.

 

No tax on gifts in Australia

And loans can be converted into gifts too

 

So hypothetically if my parents were to give me $X, no matter how large the sum is i don't need to declare it in my tax return?

 

Yep.

Unless it is income disguised as a gift.

I have a tax tip written on this.

 

Cool thanks Terry

Where can i find your tax tip?

Terry, can you please check your inbox, I sent you a message. Thanks