Spousal Loans as a Tax Strategy In the legal section I have mentioned ‘spousal loans’ briefly a few times. e.g. Legal Tip 38 Spousal and Related Party Loanshttps://propertychat.com.au/community/threads/legal-tip-38-spousal-and-related-party-loans.1872/ Now I want to point out some tax benefits of lending your spouse money or borrowing money from your spouse. The deductibility of interest depends largely on what the borrowed funds are used for. If B borrows $100,000 to buy an investment property the interest on that $100,000 is generally deductible (s8-1 ITAA97). The same tax laws apply no matter who the lender is. So spouse B could lend to spouse C even though they are married. Spouse C could potentially claim the interest on this loan if the borrowed funds were used for business or investment purposes. Why bother you may ask? Well, what if Spouse B was a stay at home parent with no income and Spouse C was a public servant earning $200,000. Spouse B would be paying 0% tax and Souse C would paying 47% tax and each additional dollar earn. Spouse B will also be wasting their tax free threshold. If spouse B lent $100,000 to spouse C to buy a property and if she charged him 10% interest then the income to spouse B would be $10,000. spouse B has no other income so her income for the year would be $10,000. If spouse C borrowed $100,000 and paid $10,000 in interest this would be a deduction to him assuming he uses it to invest. That means his taxable income would reduce by $10,000 and he saves 47% of this or $4,700. So the family is $4,700 better off per year. How does the ATO feel about this? I don’t imagine they are excited, but they have allowed it for at least one person: PBR Authorisation Number: 1011723892356 https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/1011723892356.htm However, see PBR Authorisation Number: 1012781169944 https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/1012781169944.htm A related party loan was deemed not to be deductible because of uncommercial terms. The loan needs to be properly documented, on commercial terms, and the funds need to belong to the lender. i.e. C shouldn't be gifting to B so that B could lend back to C. This could work well where properties are owned in single names and a property with a capital gain is sold. It could potentially speed up wealth creation. As usual this is a complex area and you will need both legal and taxation advice and ideally a PBR.