Answers to your questions:

1. Can the rental price be set at an agreed price or it has to be market value?
– Slightly below market may be OK (say 5% ish) assuming they will be good quality tenants and look after the place, however any excessive discounts on the rent may lead to your deductions being reduced proportionately.
– Even though they are family it doesn't do anyone (especially you) any favours by reducing it too much
– If you think you will be able to have the 'official' rent low and then get cash directly from your relatives in addition to compensate – think again, you are simply increasing the chance of an audit.  I believe the ATOs new fangled computer system will enable them to pick up these types of anomalies easier.
– Further information below:

Property let to relatives for low rental

Leasing a home to a relative for a low rental has often been seen as a way of conferring a benefit on the relative while still retaining the tax advantages of being a landlord. The Commissioner generally treats the rent as assessable, except where the arrangement is similar to Groser's case. However, he does not concede that losses and outgoings incurred in relation to the property are necessarily deductible in full. The ultimate resolution of the matter depends on the purposes of the taxpayer in acquiring the property and letting it out to relatives. For example, in Kowal's case (.50) the Court found that the taxpayer had two purposes in mind in acquiring the relevant property. One was to provide his mother with a good home at moderate cost; the other was to earn assessable income. The second purpose was held to be the predominant one and the taxpayer was allowed deductions for 80% of his expenses on the property. Similarly, in Madigan v FC of T 96 ATC 4640, where a trustee of a family trust rented a property to the father of the trust's beneficiaries at 25% of the market value, the Court considered it appropriate to allow 25% of the outgoings claimed or the amount of assessable income, whichever was the greater.

As a working rule, the Commissioner will allow deductions up to the amount of rent received. Whether any additional deduction is to be allowed will depend on the nature of any further information provided by the taxpayer in his return.

Where a property is let to relatives on a normal commercial basis, the owner will be treated for tax purposes in the same way as any other owner in a comparable arm's length situation.

Where family members living with the taxpayer simply pay board, the whole arrangement is treated as a domestic one having no tax consequences; the board is not assessable and the losses and outgoings are not deductible.

2. Should a bond be lodged?
– I would.  Doesn't have to be 4 x weeks rent though. Maybe enough to cover insurance excess if that place burns down!

3. What documents are required by the end of financial year to support negative gearing benefit/claim?
– Lease agreement
– Quantity surveyors report / depreciation schedule
– Loan statements
– Bank statements (for rental income)
– Rates notices
– Body corp / strata levies
– Insurance premiums
– Any other expenses related to the property

I am sure there will be a more detailed check list somewhere around in previous forum posts that will cover what you need in more detail.

I hope this answers your questions
E