refianance loan

Hi Pranay,

You may find the following link useful:
Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities
http://law.ato.gov.au/atolaw/view.htm?locid='TXR/TR20002/NAT/ATO'&PiT=99991231235958

Essentially, you have a mixed purpose redraw facility (private portion and investment portion). You can still claim the tax deduction for the interest paid on portion of loan you took out (the whole $74K) to acquire the investment in line with s8-1 as it is. This is stated in the above Tax Ruling:

“15. Where a taxpayer has a mixed purpose sub-account, the interest needs to be apportioned between the income producing and non-income producing purposes. Apportionment must be made on a fair and reasonable basis. One approach that we accept as fair and reasonable in relation to the apportionment of interest that has accrued on a daily basis on a mixed purpose account is set out in the following paragraphs. We accept that this approach to apportionment is not the only approach that is fair and reasonable.”

However the down side of not refinancing your loan to split the private and investment portion is:

“21. Where a taxpayer makes repayments over and above the required minimum payment and the line of credit facility comprises one mixed purpose sub-account only, the taxpayer cannot choose to notionally allocate the repayments to a particular portion of the total debt, e.g., the non-income producing portion.”

What this means, is when you pay P&I on the loan, you cannot choose to pay down the private/non income producing portion first. However, the good news is that the ATO has made an allowance for investors to refinance their mixed purpose account to separate income producing portion and private portion as you have mentioned before:

“Second Exception – Refinancing mixed purpose debt
18. A taxpayer may choose to refinance a debt outstanding on a mixed purpose sub-account by borrowing an equivalent amount under two separate accounts or sub-accounts. If the sums borrowed under those two separate accounts are equivalent to the respective income producing and non-income producing parts of the existing outstanding debt, we accept that interest accrued on the debt incurred in refinancing the income producing portion of the mixed purpose debt will be deductible.”

I would recommend that you consult with a tax professional before proceeding. It is always advisable to obtain your own private ruling from the ATO before relying heavily on random research, to avoid unnecessary pain further down the track. There is no value in risking misinterpretation.

Best of luck
Kenny

Note that comments made on this forum are of general nature and does not constitute personal advice. You should consult with professionals before taking action.

No prob S/C! I am glad it worked out for you!

To be honest, I just copied and pasted our old post

Pranay,

If you choose to split the loan into two, the investment portion can include any purchasing cost incurred to acquire the income-generating IP. Typical purchasing cost includes borrowing costs (LMI, loan application fee, establishment fee, stamp duty on mortgage etc), conveyancing costs, stamp duty on the property transfer, etc. In this case, assuming the $74,000 contains no private or domestic component, you can set up a sub-account for this amount and be able to claim the interest as tax deduction, so long as the property is rented or available for rent. Keeping this account at interest only may maximise your tax benefit.

I don’t have enough information to comment on the $125K portion. But if this amount is used to finance the PPOR, then it is of private nature and will not be tax deductible. You may choose to go with P&I to reduce the debt.

Just as a side note, for any interest expenses to be deductible when it comes to investment properties, there needs to be nexus (or relevant connection) to the revenue generated (ie rent). If you start taking additional loans out to pay for mortgage interest incurred to finance the IP, you will start to lose the nexus between the additional loan interest expense and the revenue generated.

Hope it helps,
Kenny

Note that comments made on this forum are of general nature. You should consult with professionals before taking action.