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:
David Nelson
Daniel,
Thanks for firstly helping you parents when they obviously needed you. At “The Money Matrix Advice”, we believe that family is our foundation and understand that you originally entered this arrangement with good intentions.
Under Australian tax law, the situation you describe may have several tax implications. It's important to note that I am Qualified Financial Adviser, and while I can provide some level of tax advice when it relates to financial planning, the following should not be considered professional tax advice. You should consult with a tax expert or the Australian Taxation Office (ATO) directly for advice tailored to your specific circumstances.
Under Australian tax law, when it comes to debt forgiveness, the Australian tax system can get a bit complicated. Generally, if the debt is genuinely forgiven and not merely written off, it can result in a capital gain for the debtor. This happens because the debtor essentially gets an asset (freedom from the debt) for nothing. This might apply if the property is not your parents’ main residence.
Daniel, in your case you didn’t forgive the debt. Instead, you acquired the property in satisfaction of the debt. This usually means a CGT (Capital Gains Tax) event has happened. According to the ATO, CGT event happens when a borrower disposes of a property to the original lender to satisfy a debt (the loan). The time of the CGT event is when the lender (you) acquired the property.
Typically, the capital gain is the difference between the market value of the property at the time you acquire it and the amount of the debt (plus any incidental costs). So, if you acquired the property when it was worth $860,000 and they owed you $800,000, the capital gain for them would be $60,000, not $160,000. They would be assessed on this gain if the property was not their main residence.
The 'interest' portion of the loan may be considered as ordinary income and could be subject to income tax. If you charged interest but did not receive it, it may be seen as a 'bad debt'. There are specific rules about when you can claim a deduction for a bad debt, and this is another area where it would be beneficial to consult with a tax professional.
Daniel, like so many investment activities the devil is in the detail and as you can see from my review of your question, both you and your parents may be impacted by the change of ownership.
This scenario is quite complex, and other factors could come into play that might affect the tax treatment, such as whether the property was your parents' main residence and whether any exemptions or concessions apply. Therefore, consulting with a tax professional or the ATO directly is crucial.
Best of luck, and again, good on you for making Family our Foundation.
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Comments1
"a great article David well done"
EIleen 14:55 on 22 Sep 23