tracking deposit tax deductibility

thanks Terry..

Terry,

What if I borrowed the deposit of my friend, placed it in a savings account then paid it to the settlement agent.
When I pay them back can I just draw down money into a savings account, then transfer it to the friends account.
Have I lost the link, or is that what I need the loan agreement for?
The loan is for like 1 week so I’m not to worried about claiming any extra I pay them.

Hope this is clear, I’m just trying to get my head around this whole money trail thing which is very confusing (to me anyway).

Thanks!

Well I emailed my accountant and heres his response for general info.

“When determining the deductibility of interest, the key determinant is the use the funds are put to.
If you borrow funds, and park them in an interest bearing savings account from where you immediately purchase an income producing asset, then deductibility will be preserved.

The purpose and use of the borrowings is clearly to produce income.

In the case of repaying the loan from your friend, the funds move from the loan to your account and then to your friends. the original borrowing from your friend was for an income producing purpose, and the money borrowed from the bank to repay her will retain that character, despite the short trip via your bank account.

The major issue you must bear in mind is where loan funds are used for mixed purposes, or where a repayment of the loan is made, and then subsequently redrawn.

These changed purposes require you to split the interest between deductible and private – this is where the link can be broken.

Tax Ruling 2000/2 deal with some of the concepts in this area, and is attached for your reference.

This quote is one of a number that illustrate the process.

14. Where borrowed money applied to a particular use is recouped and redirected to another use, it is necessary to examine that new application of those borrowed funds in considering the deductibility of interest. Where there are changes in the use of money borrowed under a line of credit facility, or in the amount of borrowed money used for a particular purpose, the deductibility of the interest accrued on that part of the outstanding debt will be determined by considering the advantages sought from that new application of those funds.
Interest will be deductible under section 8-1 to the extent that it is incurred on that part of the outstanding borrowed money used at that time for an income producing purpose.”

So sounds like I should be right (I think..)

Grant