Interest received on unsecured loans

Hi all,

A friend of mine did an unsecured loans to a property developer and getting paid an interest component.

Questions that she have :

1. How is the interest she earned be declared to ATO ? ie. does she just declare this interest on the section of Interest- Income (same with other interest income from the banks)

2. If the unsecured loans goes wrong or didn't get returned at all , how is that loss being accounted during the tax lodgement ?

3. What is the best way / structure to protect her asset in providing such loan ?

4. What is the best structure to minimize the tax ? She's married and not earning anything from employment.

Thank you. Feel free to let me know if I am not clear

 

It is interest income

capital loss once it is unrecoverable

She needs legal advice on choice of lender, funding the lender and securing the debt

see above.

 

The interest is taxable when it is paid to her. It is declared in the interest section of the tax return.

It sounds like the loan was on capital account so if the loan goes bad it will become a capital loss.

The best way to protect a loss of capital will be for your friend to seek more security from the developer and get paid interest more regularly.

If your friend is not generating income other than the interest income investment - depending on the amount of the interest income - earning it in her name should be great.

If the interest income was massive you could look at a superannuation structure.

 

thanks Terry and Ross for your prompt response

 

One of my first cases as a new lawyer was trying to recover $1mil loaned to a developer. Only 'Secured' by a personal guarantee.

The developer went bust and the director who gave the guarantee went bankrupt and the client lost $1mil, plus.

It turned out the guarantor and family were serial bankrupts and had done this many times.

 

Whether is a CGT loss is open to conjecture and tax advice. Interest must have been charged and the personal use test (s 108-20 ITAA97) can impact as well. This test can hold a loan to a discretionary test for example to NOT be a CGT loss since there is no expectation of assessable income

The loan documentation and also that of the interest charged would be important. Self prepared agreements a concern.

Tax advice concerning loans where the interest compounds or is paid after a long term should be obtained too.