Putting Family Money into Offset Account

Stahh on 12/02/2018 - 14:36
Last edited 12/02/2018 - 14:37

I have a scenario and would like to know of any tax implications/legalities/problems that may arise from this situation.

Say I have a family member that has 400k in a savings account and they put it into my offset account that I am paying 4% Variable interest and in turn I pay them 2% interest each month would I have any issue's from my bank in regards to "parking" there funds in my offset account to lower my interest payments with all intentions to pay that money back say in 6 months time. In effect saving me 2% interest on 400k.

  • A contract would be drawn up for both parties.
  • The money is legit.
  • All interest would be declared to the ATO on there side.

Thanks in advanced.

:)

Financial

Comments

  • John Kimble on 12/02/2018 - 14:42

    You probably want to ask the ATO or an accountant.

  • SnoozeAndLose on 12/02/2018 - 14:46
    +5

    Why you need to declared to ATO, you just gift your family as pocket money or cash?

    • abb on 12/02/2018 - 15:09
      +1

      Because to not declare it would be tax fraud. Some people are law abiding.

      Or, OP is lying and just doesn't want to admit to breaking the law on a post that can be trivially associated with them by the government.

    • Stahh on 12/02/2018 - 15:53

      No only declare the interest earned that I pay the family member that gifted or "lent" the money.

      • SnoozeAndLose on 12/02/2018 - 16:34
        -1

        There is no interest earned for the money sitting in the offset account, the repayment wont reduce because the reduced interest charge will goes into the principle.

      • kingmw on 12/02/2018 - 18:48
        +1

        I think you mean "Your family member will declare the interest they earned from the money they lent". You don't have to declare anything.

        My only advice to your family member is that the interest rate should reflect the risks of the borrower i.e. how reliable and how secure is it. That's the reason that people park their money in a bank because ~100% they are guaranteed to get it back, while lending to family is a completely different ballgame and caution is advised. Also the loan is unsecured so if you declare bankruptcy or fail to repay, the only recourse is through the courts. Also 400K is a lot to lend without security….

  • Archi on 12/02/2018 - 14:52
    +5

    why would you declare it to ATO,

    I did the same thing for my sister,

    deposited her $400K for 12 months to reduce her interest charged on her loan from the sale of my unit whilst I looked for a house to buy, then she gave it back to me when I bought my house.

    • Stahh on 12/02/2018 - 15:55
      +1

      yeah exact same scenario where as I save 4% and pay the person 2%.

      • SnoozeAndLose on 12/02/2018 - 16:35

        You cant claim as interest pay/out going for investment property

  • Seraphin7 on 12/02/2018 - 14:59

    Speak to an accountant AND lawyer to get it all done. The bank won't care beyond reporting of large transactions.

  • chumlee on 12/02/2018 - 15:07

    Your bank will not care as they now have an increase in deposits. Behind the scenes things like AUSTRAC checking etc will always occur

  • [Deactivated] on 12/02/2018 - 15:13
    -2

    Put all on bitcoin or gamble on black on blackjack

    • Oz8argain on 12/02/2018 - 15:42
      +5

      gamble on black on blackjack

      haha I don't think you choose colors in Blackjack..

    • Stahh on 12/02/2018 - 15:54

      haha more like ripple ;)

    • T1 on 14/02/2018 - 17:44

      And the rest of the domino's will fall like a house of cards…checkmate..

  • BadGiraffe on 12/02/2018 - 15:16

    Sounds fine to me. Not an expert in the field or anything, but that seems fine. You're not going to be earning any interest on it, so no need to talk to the ATO. No need to talk to a lawyer either, unless you want to draw up a contract. If it's family and you trust them, just go ahead.

    • Typical16-bitEnjoyer on 12/02/2018 - 16:04
      +1

      Lol

      OP, please speak with your Accountant and Lawyer. When the ATO hunts you down, family member breaks the agreement or the bank won't reliquish your family member's cash and everything blows up, I doubt screaming "flaminglemon told me it sounded fine" will help you then.

  • tomleonhart on 12/02/2018 - 15:19
    -1

    you pay them 2% interest each month? that is roughly 24% a year whattttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttttt

    joke aside: they probably wont have to declare it on tax and no one woud care

    • Qkumber on 13/02/2018 - 09:25

      The annual rate will be 2% not 2% per month. Create a spread sheet to track all payments and calculate interest due.

  • tsunamisurfer on 12/02/2018 - 15:55
    +4

    No one has done anything wrong so this arrangement does not need to be declared to the authorities.

    You are the winner in this transaction.

    a) 2% is a very low interest to pay your family member, the only benefit I can see here is that they won't be declaring that income to tax which makes 2% not too bad.

    b) They are taking a very big risk to just give $400k to someone else, even family. If I give $400k to the bank I have a receipt, I have protections in place. Your family member gives you $400k, it is all at your mercy, they can't even make you withdraw it when they need it.

    Whilst it seems win win for both parties where the lender doesn't declare income for tax, what is the benefit to them?

    They can get 2.7% elsewhere…$400k at 2.7% = $10,800 less 40% tax = $6,480.
    They put $400k with you @ 2% with no tax = $8,000.

    Your family member is only gaining $1,520 out of this deal whilst risking all of his $400k.

    • Stahh on 12/02/2018 - 16:02

      Yes they will be getting same as if it was in a short term account I just used that 2% as an example.

      Regarding the tax the person doesn't work so will not be going over the 18k yearly income but they will be declaring the money anyways, it isn't to get around tax so the only benefit for them really is to help me out and earn the same interest as if it was in a savings account.

      With the risk with there money I was hoping maybe a signed contract by both parties would negate that risk stating the money had to be given as it's a loan ect.

  • barbarella on 12/02/2018 - 17:47

    While that money is sitting in your offset account (in your name) it could be seen as a 'gift' (and taxable) no matter what you label it :/

    • kingmw on 12/02/2018 - 18:56
      +1

      No, not taxable to the OP as tax has already been paid on it by the family member. But can affect Centrelink/Pension tests for the gifter.

      http://www.adviserratings.com.au/news/how-much-tax-do-you-pa…

    • sparkles on 12/02/2018 - 19:12
      +1

      Centerlink would be VERY interested in this transaction should the person loaning the money be of pension age. It may be perceived as a gift. You'd probably need to draw up some proper legal documents for it to be considered a loan and thus remaining their asset.

  • barbarella on 12/02/2018 - 17:53

    please say 'their' not there!

  • Gandalf the Thrifty on 12/02/2018 - 18:14

    to pay that money back say in 6 months time

    As in give it back to them? Or do you earn $400k in 6months :)

    I wouldn't be surprised if there were some gift tax implications giving to you AND from you back

  • peterpeterpumpkin on 12/02/2018 - 19:11
    +2

    In the scenario given, I'm not too concerned about you.

    As you've indicated, the person giving you the money has nothing to gain (compared to investing it themselves) and everything to lose.

    The first rule is that this is a loan, not a gift (as you've indicated). Why? To protect the giver. No offense, but people are scum. A contract that hasn't been reviewed by a solicitor is not in the giver's interests, even if it's close family. Do you have a spare house lying around to secure the loan (should you decide to put all the money in an "up-and-coming" cryptocurrency that flops…)?

    Secondly, I know of many victims that thought they were smarter than the system and screwed someone over. Is the person lending the money on or about to get a pension? Well they would probably appreciate a pep-talk on how Centrelink and deprived assets work and learn how they're shooting themselves in the foot until the money is repaid (I know you said 6 months but things do f… up. Trust me. People are scum).

    The irony is that solicitors are expensive and the 1.x% p.a. advantage of your scheme over savings accounts, considering it's only for 6 months, may be eaten up.

    So if I didn't mention it already, people are scum :) The people I know anyway…

  • RockyRaccoon on 12/02/2018 - 19:25
    +3

    Really people

    Its family. They can give you money and there is no gift tax, especially family to family.

    They gift you $400K, in 6 months time you gift them back the $400K

    later you gift them $4K in appreciation.

    However if the family member is in receipt of a Centrelink pension (or will be within 5 years) then gifting rules can affect their pension.

    But all I am doing is alerting you to an opportunity, that needs professional advice. There are different circumstances that could affect what you plan to do. Eg Centrelink pensions, plus if you draw up legal documents, then its a loan not a gift.

    If you and the family member have a strong trusting relationship then documents may not be necessary. Keep in mind if there are partners on either side then things get complicated.

    Again by example. Should you have a partner, and in that 6 months you split, then the $400K if gifted to you, could be subject to a 50% claim by your partner. Now there are arguments against this, but you may have to go to court (at a cost) etc and many a scheme falls apart when going to court.

    Talk with a financial planner after getting some idea here. BTW is it worth all the hassles for a 6 month "loan"

    Some more info can also be found here (inc Centrelink stuff)

    http://www.adviserratings.com.au/news/how-much-tax-do-you-pa…

    EDIT - this was written at the same time as PPPumpkin above wrote their response, read that as well, especially for the lender

    • kazoomyn on 13/02/2018 - 08:03
      +1

      If it's a loan the gifting rules don't apply, just Centrelink normal deeming rules. Gifting is if you've deprived yourself of an asset by either outright giving asset/s away for nothing or giving asset/s away for less than the market value (eg car sold to family member for $20000 when it's market value is $50000). In that case yeah the 5yr rule mentioned would apply. Gifting means the giver is not getting the asset back though. Loaning for a set period of time is completely different to gifting. If the family member lending the money is on/about to be on a Centrelink pension or benefit they would be deemed as making more interest from the loan than what they're getting (as deeming is more than 2%), but if they would have just had the money sitting in a saving account making 2% already anyway - then deeming would already be affecting that way. In this scenario the lender needs to remember that the $400k they've loaned out is still considered their asset for the Centrelink asset test too.

  • abobo on 12/02/2018 - 20:55
    +1

    There is nothing wrong with the arrangement. You should do a statutory declaration that the money is given to you for safe keeping and you are holding it in trust for them and to be returned on demand.

    A monthly gift of money from a children to a parent is not an income to the parent. However as the 400K is held in trust for safe keeping, the money is still theirs, so IF they are on any form of payment benefits the deeming rule applies.

  • CheapskateQueen on 12/02/2018 - 22:43
    +1

    Firstly, to a few people who mentioned gift tax… there is no such thing as gift tax. If my grandmother gives me $50000 gift, i don't pay tax on it.

    Someone did correctly mention that gifts are considered an asset for centerlink purposes. So if my grandma gives me $50k this year, next year when Centerlink calculates how much assets she has, they include the $50k she gave me. I think gifts within 5 years? Not sure about that part though.

    Now to the arrangement.

    Your strategy is good and correct and I'm actually a proponent of this between people who utterly trust each other with their lives.

    I usually recommend offering a better savings interest rate to the lender to give them a benefit in doing it. So the person with the mortgage gets a better interest rate, and the lender gets a better interest rate. Win win.

    As for tax, if your property is an investment property you want to be able to claim the interest as a deduction. If you claim it as a deduction, the other person must declare it as income.

    If it's your home and you can't claim interest expense, i wouldn't get the other party to declare it as income. It's just a family arrangement. That's not to say they're not meant to, just that there's no tax revenue leakage if she/he doesn't. But if they're earning under 18k anyway, can't hurt tax wise to declare it.

    • Gandalf the Thrifty on 13/02/2018 - 09:29

      ATO site says different…
      Generally, you do not have to declare:

      rewards or small gifts such as cash birthday presents (however, gifts may be taxable if they are large amounts

      400k could be classed as large to most people including ATO

      • CheapskateQueen on 13/02/2018 - 10:38
        +1

        sigh… i know that quote.. but it's just a poorly written line.

        it says "however, gifts may be taxable if they are large amounts or you receive them as part of a business-like activity or in relation to your income-earning activities as an employee or contractor)"

        the idea is that if the so-called "gift" is actually received in connection with employment/business then is it really a gift or a disguised payment. or in general, the question is whether it is a genuine gift or whether it was actually paid and received for something/goods/services so that it is actually income.

        so today i do a job for my friend. next week that same friend 'gifts' me $1000. was it really a gift or was it a payment for my job that i did. that's the real question.

        again, no such thing as gift tax. the question is always, was it really a gift, or was it a payment in lieu of something else so that it is actually income.

  • jhmtaylor on 13/02/2018 - 08:48

    I think people here are over thinking this.
    You are borrowing money (which you are obligated to repay) and paying interest on the loan. You are documenting the loan 😀 and the other party is declaring the income. The fact that the other party is a relative is not relevant under than to explain to low interest rate. Charging a low interest rate is perfectly legal. The banks do it for their staff every day of the week.

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