Tax deductible or not?

Hi Boys and Girls,

I have a  situation looming which I would like opinions on.

We bought a block of land for a future PPoR not long before we left Aus to come over to the USA. We have an 18 month settlement; it happens in Aug this year. Our plan is to keep the PPoR as an I.P and build a new house on the block of land.

Have paid a 20% cash deposit, so only require 80% plus costs to settle. We have most of the finance available in usable equity already, but will need to borrow some more either using the same existing loan with the same lender, or a new loan with them or someone else.

We decided the direction we will go with the finance is a new Lo Doc loan using my ABN, and keep our existing equity in our portfolio for future investments.

At this stage the interest on the PPoR land loan would not be tax deductible. Our existing PPoR, which is being used as an I.P is debt free (we have used some equity for investment).

It was suggested to me that we can change the structure to one whereby the new PPoR Land would be debt free, while the PPoR that is an I.P would be the security for the new loan, not the block of land, thus the loan for the land would be attached to the existing PPoR.

Here's how it would work;

Our PPoR is in both my wife's and my name. She transfers the Title over to my name only using the "for love and affection" clause allowed in Victoria. There is no stamp duty paid in this transaction; perfectly legal.

I then have to pay my wife for her half of the house now that the Title is my name only, so I raise a loan (using the ABN) to pay her for her half using the existing PPoR as the security. There is enough equity in the PPoR to do this.

The result is She then pays out the loan on the Land using the funds I pay to her, leaving the Land debt free, while there is a loan on the existing PPoR, which is supposedly tax deductible.

My question is; because I have paid out my wife for her half of the existing PPoR and there is now a loan attached to it for this purpose, is the interest on this loan tax deductible? My concern is that the ATO may look at the "purpose" of the loan and decide it is not able to be classed as an investment loan, thus the interest would not be tax deductible.

I realise that no-one is an accountant, so I won't hold anyone to their answers; just interested to know what you think, have you heard of this scenario before, and is there another angle we may try?

Cheers,
Marc.

"we get sent lemons; it's up to us to make lemonade"