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Family loan to parents overseas

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Hi, 

I have a similar situation to the Loan from Parents query here, but with a couple of differences. 

My parents are selling a property while building another one, both overseas - they reside overseas. To help them with the cost of the new build, I would like to make them a loan of AUD$100K, which will be repaid in a few months.  My father has also offered to repay the interest on the loan, as I will be using my home equity to fund it in Australia.   The interest charged would be what my Australian bank will charge me on the funds, no more.

 

How do I ensure that I am not taxed on the repayment as foreign income, when he transfers the money and interest due back to me?  I am providing him with a letter stating it is a gifted loan, for his home country tax authorities.  Is something similar needed from him when he repays the loan to me?

 

JAN

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Hi @JAN,

 

Thanks for your patience whilst we checked information with a specialist area regarding your query!

 

Generally, private financial arrangements between family members don't result in tax outcomes. However, it may depend on the nature of the transaction, as family members can choose to enter into commercial or business-related transactions. Where a standard commercial loan arrangement is entered into it can be that the interest component of the repayments would need to be declared as assessable income.

 

In your case a relevant factor would include whether the arrangement was legally enforceable as a loan and on commercial terms. For example, dealings connected with real estate have to be officially recorded or registered. Where such an arrangement was not legally registered and enforceable then this would be an element pointing towards a private arrangement.

 

Interest offered on an unsecured basis would ordinarily be significantly higher than that obtainable from a lender on a secured basis. Therefore, borrowing at a rate where your home has been provided as security and lending at the same rate without similar security would be a factor pointing to a private arrangement.

 

Finally, if the interest was actually assessable, then it would be likely that your interest incurred in providing the loan would be deductible to you. There is likely no ‘net’ tax impact for you in loaning this money whether it is a private transaction or not. 

 

It's important to keep records of the agreement and transaction that can prevent any unnecessary concerns by us if the cash flows are identified and you are contacted to explain and identify relevant transactions.

 

Thanks, JodieH.

1 REPLY 1

Most helpful response

ATO Certified Response

Community Support

Replies 0

Hi @JAN,

 

Thanks for your patience whilst we checked information with a specialist area regarding your query!

 

Generally, private financial arrangements between family members don't result in tax outcomes. However, it may depend on the nature of the transaction, as family members can choose to enter into commercial or business-related transactions. Where a standard commercial loan arrangement is entered into it can be that the interest component of the repayments would need to be declared as assessable income.

 

In your case a relevant factor would include whether the arrangement was legally enforceable as a loan and on commercial terms. For example, dealings connected with real estate have to be officially recorded or registered. Where such an arrangement was not legally registered and enforceable then this would be an element pointing towards a private arrangement.

 

Interest offered on an unsecured basis would ordinarily be significantly higher than that obtainable from a lender on a secured basis. Therefore, borrowing at a rate where your home has been provided as security and lending at the same rate without similar security would be a factor pointing to a private arrangement.

 

Finally, if the interest was actually assessable, then it would be likely that your interest incurred in providing the loan would be deductible to you. There is likely no ‘net’ tax impact for you in loaning this money whether it is a private transaction or not. 

 

It's important to keep records of the agreement and transaction that can prevent any unnecessary concerns by us if the cash flows are identified and you are contacted to explain and identify relevant transactions.

 

Thanks, JodieH.