Tax deductability on a formal loan agreement

I am considering borrowing money from a family member to make up a portion of the purchase of a new property and I am wondering if I make a formal loan agreement and deposit the money into a fresh bank account in preparation for purchase, will this loan be tax deductable?

E.g.
Borrow $150k on 01/04/2017 @ 5%
Sign contract 15/04/2017 and use $20k from this account as deposit
Use $130k towards settlement on 15/05/2017

My concern is proving the purpose of the loan was to purchase a property. I would assume that I can only claim the interest from the time that the money is paid out of my account and I'm fine with that.

Would I need the family member to disperse the funds on my behalf or am I able to deposit the money into my own brand new account and disperse the funds myself?

 

Properly documented you should be fine. An accountant can tell you exactly how to go about drawing the money.

The person you borrow from will have to declare the interest as income to ATO and Centrelink if applicable.
Marg

 

You should read tax tip 1 of mine.

I would instruct the lender to pay on your behalf rather than borrow and put into an investment account.

Written loan agreemént too

 

I recently had a technical discussion with a technical staffer at the ATO about this issue.

1. Yes a formal investment/loan agreement helps but it may not actually always be a essential element. Personally without legal advice I would ensure a formal agreement is drawn by a solicitor.
2. The settlement and the maintenance of the loan is VERY important and probably as important as any written evidence of a loan.

The ATO views on related party loan agreements is mirrored in rulings on trusts which discusses loans to / from related entities and amounts unpaid which may or not be loaned. The general view is that to evidence a loan there should be a explicit agreement that says it is a loan and sets out the agreed terms and other matters that the parties agree. While this isnt a definitive view there is no actual ATO view on what a loan agreement is and when it must be available. The taxpayer incurs risks if that ambiguity is allowed.

1. A written loan agreement may be required in some circumstances (eg Div 7A) and must take on minimum requirements contain in tax law, otherwise other terms may be acceptable where there is not an apparent breach of laws (eg Part IVA, credit laws and unenforceable time expiry)
2. Where there is a settled loan a legally drawn up and enforceable agreement prevails over verbal terms or other evidence of terms (eg company resolution v's a actual agreement)
3. Any loan must be settled correctly (ie drawn and paid for the intended purpose). Care should be taken and Terry has posted about this previously. Simple matters can taint this process incl advancing amounts prior to an agreement etc The loan agreement may contitute a deed and may require stamping or other formalities. (Security Registration etc)
4. Any loan must be continually maintained on arms length terms. This means that interest is charged and accounted for and regular payments are made in a manner consistent with arms length terms. An accounting for the balance due must be maintained.
5. Security terms may be a issue and may be held for or against taxpayers. Where there is no recourse or limited recourse and this is contradictory to the intended agreement it may evidence non-commerciality and lack of the parties to maintain a loan consistent with any agreement.

Accountants cannot draw up a loan agreement. There are online document sellers and serious risks exist with reliance on these tools without advice. eg : What events may trigger default ? What are default terms ? What happens if a party dies or suffers a financial issue ? For example if Dad is unable to maintain loan repayments a perfectly sound loan may become a problem loan. How is this resolved ? Legal advice is the best course to address all such concerns prior to making the advance. Tax advice should only follow legal advice.