{"id":891,"date":"2023-10-20T16:07:45","date_gmt":"2023-10-20T05:07:45","guid":{"rendered":"https:\/\/chipkie.com\/?p=891"},"modified":"2025-11-16T11:14:28","modified_gmt":"2025-11-16T00:14:28","slug":"interest-to-charge-when-lending-money","status":"publish","type":"post","link":"https:\/\/chipkie.com\/au\/blog\/2023\/10\/20\/interest-to-charge-when-lending-money\/","title":{"rendered":"How much interest to charge when lending money to friends and family?"},"content":{"rendered":"\n

How Much Interest to Charge on a Family Loan in Australia<\/p>\n\n\n\n

Deciding how much interest to charge on a private loan to a friend or family member is one of the most critical and complex decisions a lender faces. While lending money interest-free seems like the most generous option, it can create immense legal and tax vulnerability for both parties, particularly under Australian tax law.<\/p>\n\n\n\n

The optimal interest rate is a balance between generosity and commercial realism. The rate you choose dictates the tax treatment of the loan, its status in the event of a divorce or bankruptcy, and ultimately, its enforceability. We explain the risks of zero interest, the benefits of commercial rates, and provide the official ATO benchmark to answer the question of how much interest to charge.<\/p>\n\n\n\n

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Zero Interest vs. Commercial Interest: The ATO Perspective<\/h3>\n\n\n\n

For a loan to be considered legitimate debt rather than a disguised gift, its structure must reflect genuine legal intent.<\/p>\n\n\n\n

Feature<\/td>Zero-Interest Loan<\/td>Interest-Bearing Loan<\/td><\/tr><\/thead>
Tax on Lender (You)<\/strong><\/td>No income, so no tax payable.<\/td>Interest income must be declared on your tax return and is taxed at your marginal rate.<\/td><\/tr>
Deductibility for Borrower<\/strong><\/td>Interest is zero, so no deduction is available.<\/td>Interest may be tax-deductible if the funds are used to acquire an income-producing asset (e.g., a rental property).<\/td><\/tr>
Legal Status (Risk)<\/strong><\/td>High risk of being deemed a “gift” in Family Court or by the ATO, risking loss of capital in a divorce or through tax audit.<\/td>The commercial element strongly supports the loan’s status as a genuine liability, making it more robust against legal challenges.<\/td><\/tr>
Capital Loss Claim<\/strong><\/td>High risk<\/strong> of the ATO classifying the loan as a “personal use asset,” meaning the capital cannot be claimed as a tax loss if the borrower defaults.<\/td>The income-producing nature strengthens the ability to claim a capital loss if the debt becomes permanently bad.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

The most significant risk of a zero-interest loan is that it fails the ATO\u2019s test for “commerciality,” making it easier for tax authorities or Family Courts to disregard the loan’s status. This relates directly to the Gift vs. Loan Tax Trap discussed here<\/a>.<\/strong><\/p>\n\n\n\n

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The ATO’s Benchmark: A Guide for Commerciality<\/h3>\n\n\n\n

While private loans between individuals are generally exempt from the strict rules of Division 7A (which applies to loans from private companies), the Division 7A Benchmark Interest Rate is the most objective and defensible standard available when determining how much interest to charge.<\/p>\n\n\n\n

This benchmark, derived from the Reserve Bank of Australia\u2019s official variable housing loans indicator rate, signifies what the ATO considers a commercially acceptable rate for related parties. Using this rate\u2014or at least a material interest rate close to it\u2014is the best way to demonstrate the loan’s genuine commercial intent.<\/p>\n\n\n\n

Income Year (Financial Year End)<\/td>ATO Benchmark Interest Rate (For Reference)<\/td><\/tr><\/thead>
30 June 2026 (Projected)<\/td>8.37%<\/td><\/tr>
30 June 2025<\/td>8.77%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Even if you choose to charge a nominal interest rate (e.g., 1%) out of generosity, it is better than 0%. A nominal rate establishes the “income-producing purpose” required to protect the lender\u2019s ability to claim a capital loss should the loan fail.<\/p>\n\n\n\n

Strategies for Setting Your Rate<\/h3>\n\n\n\n

When deciding how much interest to charge<\/strong>, balance the following:<\/p>\n\n\n\n