Ask Ban Tacs Question
Like many parents I would like to help my son onto the property ladder by contributing 10%-15% of the value of the purchase price. I am however wary of gifting the funds, If my son and his partner split she will be able to claim half the net proceeds from the sale of the house which will include the gift that I make.
I’ve found a loan called “Smart Families Loan” http://www.bluebayhomeloans.com.au/loan-types/smart-families that seems to say that the contribution towards the purchase of the property is protected in case of a split (i.e. it comes back to me). From reading all of the material it also looks and feels like an investment loan and if so I would like to access borrowed funds to make the contribution. In your opinion would this qualify as tax deductable investment similar to any other property investment?
Thanks
Pat.
Answer
Certainly a loan is the best option, though this is limited by the information provided in your question. I question whether you would need to use the Blue Bay product, no doubt there are costs. A solicitor could draw up a loan agreement for you instead.
Unfortunately I don’t know enough about your circumstances to draw a definitively conclusion but the following should help you see how it would work. You are going to need a professional to draw up the loan agreement anyway, please make sure they are fully aware of all your circumstances and review your decision.
Do you intend to receive a right to some of the capital growth of the land? That is how the Blue Bay loan works and I gather they have done this for tax purposes. It doesn’t say it as such on the web site but reading between the lines I suspect they are working on the basis you can charge your son a market rate of interest for a housing loan and as you are borrowing unsecured from them you are paying a higher rate of interest, negatively gearing the “investment” in your tax return. This would not be acceptable to the ATO unless there was some opportunity of future taxable profit hence the need for you to get a return out of the capital growth of the land.
I have tried ringing them twice over the last two hours and they have not got back to me so I can only assume the above is what they are doing, seems to fit the information on the web site. I have two problems with it:
1) Depending on your tax rate and the actual capital growth I am not sure even as an investment there is any real tax savings for the family as a whole. The capital growth in the land would normally be tax free as it is covered by your son’s main residence exemption. This arrangement, if my assumptions are right, would require that capital growth to be taxable in your hands by some sort of agreement that may not even qualify you for the 50% CGT discount. In the mean-time your negative gearing benefits may not have been that great anyway. It would be interesting to do the numbers
2) My next concern is that the ATO would see this arrangement as primarily for the purpose of providing your son with a home, not for an investment return so you would not be entitled to negatively gear it in the first place reference IT 2167. Yet you could end up with some taxable income at the end of it that would have otherwise been protected from the ATO by your son’s main residence exemption. I would ask them if they have a product ruling from the ATO on whether they will accept the tax consequences of the arrangement. If they don’t or the product ruling is not exactly suited to your situation then you should get your own ruling.
I don’t want all this tax talk to put you off the arrangement. Lending your son the money is a good idea, just get legal advice to make the debt enforceable should the relationship break up. You don’t need Blue Bay to organise that. Remember if you charge your son interest he will not be entitled to a tax deduction for it. It seems to me your only real concern is finding a bank that will accept your loan to your son as a deposit instead of a savings pattern. Obviously some banks must do this because that is still the position your son would be in when utilising their smart families loan. Don Sutherland http://www.affiliates.bantacs.com.au/don-sutherland.php could probably advise you which banks will do this.
If Blue Bay do ring me back and are prepared to tell me more about how the loan arrangement works I will do an article for Newsflash http://www.bantacs.com.au/newsflash.php
