How Much Interest to Charge on a Family Loan in Australia
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.
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.
Zero Interest vs. Commercial Interest: The ATO Perspective
For a loan to be considered legitimate debt rather than a disguised gift, its structure must reflect genuine legal intent.
| Feature | Zero-Interest Loan | Interest-Bearing Loan |
| Tax on Lender (You) | No income, so no tax payable. | Interest income must be declared on your tax return and is taxed at your marginal rate. |
| Deductibility for Borrower | Interest is zero, so no deduction is available. | Interest may be tax-deductible if the funds are used to acquire an income-producing asset (e.g., a rental property). |
| Legal Status (Risk) | 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. | The commercial element strongly supports the loan’s status as a genuine liability, making it more robust against legal challenges. |
| Capital Loss Claim | High risk 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. | The income-producing nature strengthens the ability to claim a capital loss if the debt becomes permanently bad. |
The most significant risk of a zero-interest loan is that it fails the ATO’s 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.
The ATO’s Benchmark: A Guide for Commerciality
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.
This benchmark, derived from the Reserve Bank of Australia’s official variable housing loans indicator rate, signifies what the ATO considers a commercially acceptable rate for related parties. Using this rate—or at least a material interest rate close to it—is the best way to demonstrate the loan’s genuine commercial intent.
| Income Year (Financial Year End) | ATO Benchmark Interest Rate (For Reference) |
| 30 June 2026 (Projected) | 8.37% |
| 30 June 2025 | 8.77% |
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’s ability to claim a capital loss should the loan fail.
Strategies for Setting Your Rate
When deciding how much interest to charge, balance the following:
- The Bank’s Rate (Ceiling): Never charge more than the borrower would pay a commercial bank. Charging too high a rate can be exploitative and damage the relationship.
- The ATO Benchmark (Floor): Use this rate (currently around 8.77%) as a minimum reference point for what is considered commercial.
- The Purpose: If the borrower is using the funds for an income-producing asset (e.g., an investment property), charging interest allows them to claim a tax deduction for the interest paid. If the loan is for a purely personal purpose (e.g., a car), there is no tax benefit for the borrower, making a lower or nominal rate more appropriate.
Documenting Your Choice to Avoid Conflict
Regardless of the rate you choose (including 0%), the answer to how much interest to charge must be documented in a formal loan agreement signed by all parties. This documentation is your defence against a variety of legal and familial issues.
- Fairness: Charging a clear rate prevents sibling squabbles by setting transparent terms. If the loan to one child is interest-free, the others may perceive it as a greater gift.
- Performance: If you state you are charging interest, you must collect it and declare it. If you state the loan is 0%, you must have the written agreement to support that classification. Consistent performance is key to satisfying the ATO.
- Change in Circumstances: The agreement should include a clause allowing the interest rate to be adjusted if the borrower faces genuine financial hardship, preventing the immediate need for a formal default while maintaining the integrity of the debt.
A clear, written agreement that specifies the interest rate provides the framework for a professional transaction, which is the only way to safeguard your capital and your relationship.
🛡️ Formalising Your Loan Rate with Chipkie
The complexity of deciding how much interest to charge should not prevent you from helping a loved one. Chipkie removes the risk by providing legally sound loan agreements that allow you to clearly define your interest rate choice—whether zero, nominal, or commercial. We ensure your decision is protected by law, offering the safety, certainty, and transparency needed to prove the loan’s legitimacy. Our platform provides visual tracking of all interest and principal repayments, creating the professional audit trail required to satisfy the ATO and defend the debt in any future legal dispute.
Disclaimer
Disclaimer: The information provided in this article is for informational purposes only and should not be considered financial advice. We always recommend consulting with a financial professional before making any financial decisions.
