Tax Tip 262: Related Party Loan and Use of Offset Accounts: Major Tax Issues

I have stumbled across a new situation concerning deductibility of interest.


Son borrowed money from mum and dad who basically let the son use their loan redraw to buy a property. No written loan agreement not good – but that is a separate issue.

Son is using the parents offset account linked to their loan. It is fully offset.

Say he wants to rent this property out and move his offset cash to a new loan, in his name, or even the parents name. Will the interest be deductible? If there was a loan agreement in place,


I would say no.


This is because

a) He borrowed money from the parents

b) He repaid the parents when he put his cash into their loan.

And this means there is no loan anymore. The debt has been repaid.


This shows the risks of not getting advice.


A way around it?

No, I don’t think so now.

But potentially the son’s wife could have separately lent the parents an amount of money. The son would still owe the parents. Another option might have been for mum to lend the son the money and dad to have borrowed it back from the son.

But the Part IVA anti-avoidance measures would need to be considered, especially in situations like this.


You might ask why didn’t the son borrow from a bank originally? It was because he was unable to get a loan due to his self-employment situation. Now he could probably get one, but the problem has already happened, and he has paid off the loan.

 

This sort of situation also applies where trusts and companies are borrowing from an individual - such as when onlending borrowed funds