Parents and children and other family members can lend money to each other. There are many reasons family members would want to lend to each other, the most obvious one is that they keep their finances separate, but still be able to help each other out. There can also be some other benefits such as shifting income from one person and reducing interest of the other person. There can also be asset protection benefits too. Example Mum and Dad have $500,000 cash in a bank account earning 2% pa. They receive $10,000 in interest income p.a. and pay tax on this. Daughter has a $500,000 non-deductible home loan at 4% pa and pays $20,000 in interest each year – which she might have to earn close to $35,000 to make $20,000 after tax needed to pay the loan. It would be great if the parents could help the daughter Options a) Mum and dad gift the $500,000 to the daughter. Probably not a good idea as it will become and asset of the marriage and potentially fall into the hands of her spouse. Daughter might also die and the parents will miss out. Bankruptcy is also an issue b) Mum and dad lend it to daughter at 3% p.a. This benefits both parties because daughter is saving $5,000 and mum and dad are making an extra $5,000 pa. Banks lose out. c) Mum and dad lend it to daughter at 2% pa. Mum and dad are no worse off. Daughter is $10,000 per year better off. d) Mum and dad lend it to the daughter at 0% p.a. Daughter is $20,000 p.a. better off and the parents are $10,000 worse off – but pre-tax. Once tax is taken into account the figures even up a bit. e) Instead of mum and dad lending, the one on the lowest taxable income can lend This will divert the income to the lower taxpayer – where the loan is made at an interest. For example Dad might be earing $30,000 from some work he does when mum might only be earning $10k from investments. If mum lent the daughter money and received $10k in interest she would pay no more tax, but if dad lent the money he might pay $2,000 in tax on the interest income. Whatever they decide to do they should seek legal advice and write up a proper legally enforceable loan agreement and consideration given to the parents taking a mortgage to secure the debt. This could be a first or second mortgage. One strategy is for the daughter to keep their loan with the bank open, and any money borrowed from the parents be deposited into the existing loan, but keeping it open so that the parents can request their money back at any stage and the child using redraw to access this money. Care must be taken though as the borrower could spend the money and not be able to give it back to the lender parents when they want it. This would lead to the parent having to consider whether to sue the child. Seek legal advice before trying this.