I loaned my parents $700,000. Due to the amount of money, I had a written loan agreement with them. I only charged 3% interest rate to cover inflation. I am not in the business of providing loans and did not consider this to be a commercial agreement.
They could not pay the debt over time so instead agreed to transfer their property into my name. It was independently valued. The property value was roughly equal to the principle ($700k) and interest of the loan ($100k), and I paid them $60,000 to cover the difference. Is the $100k interest received assessable on my income tax?
- Daniel, Gold Coast, QLD
Top answer provided by:
Jacky Ng
Hi Daniel
Thanks very much for your question. What starts out with the best intentions can often result in family disharmony. You have certainly done the right thing by drafting a loan agreement with your parents.
What do you need to include in your tax returns?
If you’re receiving interest on your loan, even if money is lent to a family member in a non-commercial arrangement, the Australian Taxation Office would need to know about it. It is just like interest earnt from a bank account; the interest charged on the loan will be included in your assessable income for the year. Tax ruling 98/1 indicates that interest is generally considered to be derived when it is received. Of course, you don’t need to charge interest, but it also means that you are forgoing these interest payments.
Other things to consider.
A property can generally be transferred as a gift or as a sale, and either way, stamp duty is still required to be paid by the person receiving the property. There are only certain circumstances where someone may be exempt from paying stamp duty. More information on this can be found on the Revenue NSW website.
It’s also important to consider that if you were to sell your property to a family member at a rate below market value (for example from a parent to a child), the stamp duty will be calculated on what the market value of the property is at the time of transfer, not the price in which the property was sold for. As you have used an independent source to value the property, the value will likely to be considered as the market value.
There may also be tax implications, such as capital gains tax, that may arise from the transaction. If the property is not your parent’s main residence (for example, it’s an investment property), then capital gains tax will be applied and calculated based on the market value of the property at the time of disposal.
Tax taw is a complex area to navigate in, it is important to seek advice from an experienced accountant or tax specialist to discuss the tax implications of the transfer and a qualified property lawyer or expert to assist with the legal aspects of the transfer.
Kind Regards,
Jacky
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