From time to time some property investors use a related party loan to finance some or all of their property. Examples include: - Spouse loans - Spouse to spouse refinancing for a change of ownership interest - Parent loans etc The general view given by posts on PC is that the loan must be documented (legal agreement) and other matters which place the loan on arms length terms. This is the concern...What are those terms ?? There really hasn't been any ATO guidance on what is acceptable. We know that a written agreement is required and that the loan must be maintained eg paid, accounted for etc A recent "determination" (Google PCG 2016/5) by the ATO in respect of SMSF loans provides a lot more guidance but is also not a definitive approach. Admittedly it is in respect of a SMSF arrangement but it should stand as a guide to best practice to avoid a dispute with the ATO later. The determination is guidance on what arms length loan terms "may" be. Its not a ruling or prescribed practice. Consider it a warning though. Here is what the ATO consider terms that are arms length for a SMSF that borrows from a non-bank lender : Interest Rate : Variable rate : Is to be based on published RBA Indicator Rate Fixed Rate : Chosen at commencement of loan based on indicator lending rate (Max 5 year term) Term : Maximum 15 years. Where a refinance occurs the original loan term is not to be extended. LVR : Max 70% for commercial and residential Security : A registered mortgage Guarantee : Not required Repayments : Minimum monthly as Principal and Interest. No interest Only loans. Agreement : A written and executed loan agreement is required Now remember this is guidance for a SMSF but from that it may be reasonable to apply similar guidance to a related party loan for any property. Matters specific to a SMSF that may vary for a non-SMSF loan may include: Loan term...20-25 and even 30 years may be relevant Repayments : Interest only. A term that exceeds normal bank lending rules (ie 5 years) may be a concern. Absence of loan security. (? Is a second mortgage acceptable, A guarantee in the absence of this ? How is a related party guarantee considered ?) Undocumented loans (A serious risk IMO) Overseas lending - Concerns about exchange rate risks, enforcement and withholding tax Interesting that the ATO appears to adopt the view that arms length terms should mirror those of a bank lender. So that offers a degree of guidance that where you depart from this then a concern might arise. eg : Interest rate higher or lower than a lender may charge, lack of security, loan terms which dont repay the loan v's a bank which would expect the loan to be repaid etc The reference rate used for a related party loan probably should be based on a benchmark that is public. In that respect even a "mirrored loan" where the benchmark is the rate on the funds borrowed by the lender may well be sensible. What happens if my loan doesn't seem to comply with the above ? Nothing really, other than there is a higher risk that the ATO could find that the related loan is being maintained on non-arms length terms or that the loan is not on a arms length basis. Interest deductions could be denied or reduced. Part IVA anti-avoidance could even factor. Lesson in this ? Related party loans where interest deductions occur need to be soundly based and maintained.