converting non-deductable loan to deductable?

I thought that interest on a non-earning investment (block of land), was only allowed to be added to the cost base of a property upon sale. My intention with this block has always been to build for investment, but how does one prove that. In my case it may be a few years before I can afford to actually build out there.

Ok, so I've now redrawn 6k and bought shares with them. When push comes to shove how does one prove that any extra repayments going into the homeloan are not paying off the redrawn funds for the shares?

I'm hesitant to claim the interest that the 6k is incurring (though I feel that I would be entitled to) on the basis that I don't know how to prove that if I were to pay a further 6k extra into my loan, that I weren't paying off the "shares" money.

I hope that makes sense.

Thanks so much for your wisdom Terry,

I assume you would you calculate it the same way if only the portion used for shares were going to be claimed, and the remainder not.

My entire buying amount incl brokerage was 5831.90… my entire loan amount is 91k, but I had 22k redraw (69k owing). Now that I've redrawn the 5831.90, obviously my owing amount is now ~ 75k, I assume with your calculations that I should calculate the % of interest towards shares as ~7.7% (5831.90 as a % of 75k)

I'd still like to know how one would prove that if I pay an extra 5831.90 into my home loan, that it won't be considered as paying off the "shares" portion of the loan… I suppose this is why people generally take out a new loan to invest in shares (via margin lending?)

Thank you again

Awesome, thanks so much again Terry.

***ANSWERED*** (however un-verified by an accountant figure)
Disclaimer/Warning: Errr, yeah… so while thismakes sense to me, I'm no accountant and Terry's stated the same. Anyone with a background in accounting is more than welcome to either verify or add to the reasoning in fact, I encourage someone to

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To close off this thread in case anyone else does read it,

Using Redrawn money to buy shares from a non-deductible loan will convert that portion of the loan into a tax-deductible interest portion. The redrawn amount should be calculated as a % and that % used when calculating how much interest is deductible.

Example.

DEDUCTIBILITY
100,000 loan on a block of land with 20,000 redraw (extra repayments on top of interest): total amount owing 80,000. Interest rate of 10% (to make things simple, however we may be heading that way)

10,000 is redrawn to buy shares, bringing the total amount owing to 90,000.

10,000 as a % of 90,000 is 11.11%

90,000 @ 10% pa = $9,000 interest, of which 11.11% is tax deductible

9,000 x 11.11% = $999.9 deductible interest

EXTRA REPAYMENTS
Any extra repayments are treated the same way as above. 11.11% will always be deductible, as you can't choose which portion of the loan is to be repaid.

10,000 payed back into the account will actually be treated as 11.11% payed back into the tax deducible portion of the loan, and the remaining 88.89% into the non deductible.

So back to 100,000 loan with 90,000 owing, 10,000 paid back into the account bringing us back to a total of 80,000 owing. As we're playing with percentages here, in the end 11.11% of the interest is still going to be tax deductible as the 10,000 payed back into the account is split as such

10,000 x 11.11% = $1111 payed back to the "shares" portion of the loan
10,000 x 88.88% = $8888 payed back into the "land" portion of the loan

Therefore, 80,000 @ 10% = $8,000 interest of which 11.11% is tax deductible, = $888.88