Lending 100% from parents who then rent the property from you

What are the implications of obtaining a 105% (to cover all costs and duties) loan from parents (with a private loan agreement with security over the property), then renting out that same property to the parents?

If it matters - assuming interest rate on the loan is say 4%, and the rent is 5% yield on purchase price.

 

Smells like a scheme

 

Borrowing from parents?

Interest would be deductible under s8-1 as per normal if you are charging them arms length rent.

But you need specific tax advice on Part IVA.

Could be possible.

 

Not looking to avoid anything, would want everything done property. i.e. proper secured loan agreement in place, market rate interest rate charged on the loan, market rate rent charged, all done at arms length, with actual cash transfer taking place for loan and rent repayments.

 

Under Part IVA it may be non-deductible property outgoings (incl interest) or just the interest as it could be argued it is a non-recourse loan attributable to a round robin and private purposes.

I question why.... Non ownership for your own home but there are tax outcomes. Too easy to argue its Part IV unless there is a sound purpose. If parents are non citizens a FIRB problem too. Even OSR in NSW / Vic may see it as duties and land tax avoidance if they are subject to surcharges.

It could also be argued the loan is a sham and property is held on trust - A Janmoor Nominees type case. In Janmoor that taxpayer got the deduction BUT the ATO doesnt like Janmoor and often doesnt allow such a trust property as found in Janmoor.. That opposing view could be their view for this too.

Apparent purchaser issue too ? Lack of an explicit trust a concern ?