Tax deductibility on Loan from family member

Discussion in 'Accounting & Tax' started by Sweetbob, 28th Sep, 2020.

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  1. Sweetbob

    Sweetbob Member

    Joined:
    4th May, 2020
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    Location:
    Melbourne
    Hi All,

    I am aware that a loan from a family member to buy an investment is tax deductible. My situation is slightly different.

    The Investment Property has already been purchased.

    We would like to borrow $500K from a family member, and pay them a rate lower than our current rate but better than they’d get in a savings account.

    We plan on doing some renovations in about 5 years but have no firm date. In the interim, the cash would sit in our offset account, help us reduce our rate and give us some financial flexibility.

    Family member will declare income. Contract will be on arms-length terms including second mortgage (allowable by bank).

    My question is whether I can deduct the interest on the new loan from the family member?
     
  2. Trainee

    Trainee Well-Known Member

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    Do you have assessable income from use of the loan?
     
  3. Sweetbob

    Sweetbob Member

    Joined:
    4th May, 2020
    Posts:
    6
    Location:
    Melbourne
    Hi Trainee,

    That's a good question.

    Is the loan associated with assessable income (rent)? yes and at some point in the future it will be used to fund renovations (not sure if that is relevant though)

    Was the loan purely created to buy an asset to generate assessable income? Not sure, given the existence of the current loan.

    From the ATO's perspective, there is no double dectuction or tax avoidance. The $500k I borrow from family member would reduce the amount of interest I pay the bank. It actually means a smaller interest deduction.
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Not if you put the money into the offset. could be if you put into the loan = refinance
     
    craigc likes this.

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