Tax Implications of Borrowing Money from a Family Member

Harrow33 on 27/11/2020 - 13:28

Hello,

I know many forum members are financially knowledgeable and would appreciate some input.

I have a large bill to pay.

I have a family member that can quickly call on a line of credit, secured by their house, and lend me the money.

As a result of my borrowing they will incur an additional interest expense, their interest is not tax deductable.

If I borrow, say, $100000 for one year and then pay them back the $100000 in one year and add the interest would they then have to pay tax on the interest?

I have Googled and read numerous articles on the ATO website but can not find a definitive answer.

The pros and cons of borrowing within the family etc. are noted. It is just easier at the moment due to Covid

Thanks for any thoughts and comments.

Financial

Comments

trex on 27/11/2020 - 13:36

Read this
mskeggs on 27/11/2020 - 13:39

+3

If they receive interest from you, it is classed as their income - this is not something that is doubtful.
They should then record it on their income tax returns.

In my family, we wouldn't charge interest on a family loan like this, but it would be typical for the borrower to give the lender a gift (but in our family it is more likely to be taking them out to dinner, not cash).
Such a gift wouldn't be treated as income.
- JimmyF on 27/11/2020 - 14:00
  
  In my family, we wouldn't charge interest on a family loan like this,
  
  Agreed to a point, it depends on how much and how long they want it for I guess, but I think the issue here is the person lending the money has to 'borrow' it themselves, so will be paying interest on it.
  
  ie has $200k in the offset account, takes out $100k to lend, now ends up paying interest on that $100k they took out.
  
  So this could be 2-3k the person lending is out of pocket. So kinda fair for the borrower to kick something back their way.
  
  If it was $20k for 2 months, then yeah dinner would cut it ;)
  
  If they receive interest from you, it is classed as their income - this is not something that is doubtful.
  
  But then if the person lending the money treats it as a investment instead of a gift and they had to paid interest on the money they lent out, that interest could be classed a deduction, so equals each other out ;)
  - mskeggs on 27/11/2020 - 14:21
    
    They can't treat the cost of the money they borrow as a deduction, as it is against their home loan.
    The "gift" would not have to be a dinner. It could be an envelope with $4000 in it.
    
    The ATO is not really in the business of hassling families' internal finances.
Harrow33 on 27/11/2020 - 13:46

Solved!

Thank you both for the comments.

Last thing I want to do is cause trouble, so off to the bank I go!!

Edit:

Found this one level down from the link posted by @trex

https://community.ato.gov.au/t5/Personal-tax-questions/Famil…

It appears the interest wouldn't be taxable in the circumstances I described.

Still not going there, no risk if I do it myself.
capslock on 27/11/2020 - 13:56

If they declare it as income then they can also declare the interest that the bank charged them as a deduction so net effect is zero.
- Harrow33 on 27/11/2020 - 14:00
  
  Yes, just found that. Need to keeps records and they would have to explain it to their accountant so really not worth the trouble.
  
  I really do like the simple life.
  
  Thanks for your comment.
pharkurnell on 27/11/2020 - 14:09

… and then pay them back the $100000 in one year

Can I come and work with you?
- Harrow33 on 27/11/2020 - 14:15
  
  Not what it seems… I wish!
  
  Let's just say Sale of an asset or Redundency package or something like that.
Donaldhump on 27/11/2020 - 15:07

the interest you give them is taxable,
the interest they incur is a tax deduction, as the loans purpose was to lend to you (which you will document of course)

they negate each other.

they incur $5000 but recieve $5000 = 0

Tax Implications of Borrowing Money from a Family Member

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