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Interest Only - 100% Offset Acc -> 100% Full of Dads Cash?

Discussion in 'Real Estate' started by tc123, 12th Dec, 2011.

  1. tc123

    tc123 Tom

    Joined:
    4th Nov, 2011
    Posts:
    40
    Location:
    Australia
    Wondering if this is a good strategy:

    - Loan of 300k
    - 100% offset account
    - Interest rate around 6.5%

    Dad sold his property and has spare cash which he has put his money into an account that gives him a return of around 6%.. obviously he pays tax on the returns too.

    So.. instead, what if Dad gave me 300k to put into my offset account.
    Obviously the bank would be making no money in interest. But that 300k is now 'tax free'.
    And instead of me paying the bank back.. I can now just give Dad an agreed interest rate return on his money invested in my offset account.

    Is this a good strategy? Would Dad still get taxed on my 'donations' back to him for 'lending' me the money in my offset?
     
  2. zudjian

    zudjian Member

    Joined:
    25th Nov, 2011
    Posts:
    17
    Location:
    Melbourne, VIC
    G'day

    disclaimer: I'm not a tax agent and certainly do not profess to be an expert.

    That said, what you've proposed (ie 'donating' payments back to dad) sounds awfully a lot like some of the provisions that anti-avoidance rules attempts to capture.

    Part IVA: the general anti-avoidance rule for income tax

    The arrangement is effectively a loan from your father to you - he is getting a return on capital. I'd suggest that the 'donations' (otherwise known as interest) would be added 100% to dad's taxable income.

    I'm sure this sort of inter-family loan is quite common, and I'd go so far to say that many family lenders wouldn't pay tax on "interest" received. That said, it's called tax evasion.

    Good luck.
     
  3. tc123

    tc123 Tom

    Joined:
    4th Nov, 2011
    Posts:
    40
    Location:
    Australia
    So if my Dad lends me $50, and I propose to pay him back at $10 per month for 5 months.. He then has to pay tax on the money I paid him back with?

    Clearly I am no tax expert.
     
  4. zudjian

    zudjian Member

    Joined:
    25th Nov, 2011
    Posts:
    17
    Location:
    Melbourne, VIC
    In your first post you stated, "I can now just give Dad an agreed interest rate return on his money." I propose, that the return would be taxable, not the principle repayments.

    In the example you've given above, the rate of return is 0% as you've only repaid principle. Therefore no tax. Great for you, crap for Dad because inflation will eat the value of the money away over time.
     
  5. tc123

    tc123 Tom

    Joined:
    4th Nov, 2011
    Posts:
    40
    Location:
    Australia
    I suppose its a matter of doing the calculations and seeing what works better..
    Dad would be in the highest tax bracket. In the end though, I would feel better about Dad getting my money, and getting taxed on it obviously, rather than giving my money over to the bank..


    By the way, not planning on touching the principal payments, as it is currently my PPOR and I intend to turn it into an IP in the short term (next few years)