Redrawing investment property loans – something to think about
Do you have an investment property loan?
For refinanced or redrawn loans, there has been a significant increase in ATO activity. This has come as a result of an ongoing data matching program from based on residential properly loan data from financial institutions.
The ATO has been majorly cracking down on discrepancies between this data with what taxpayers have claimed on their tax returns.
If you have an investment property loan and then redraw the loan for a different purpose to what was intended when initially borrowed, the loan account is identified as a mixed purpose account. For mixed purpose accounts, interest which accrues will need to be allocated between the each of the various purposes the money was used for.
Alternately, if redrawn funds have been used to produce investment income, deductions on interest for this portion of the loan can be applied.
So, what might this look like exactly? If you have redrawn on the loan in order to make payments towards personal debt or a private holiday, then the interest relating to this portion of the loan balance will not be deductible. Deductible and non-deductible interest expenses will need to be apportioned, as well as the individual repayments.
For offset accounts, any withdrawals should be treated as savings as opposed to a new borrowing. For loan accounts, interest offset accounts which are attached and reduce the interest payable on the loan will mean that withdrawing funds from the offset account will increase the amount of interest accruing on the loan, however won’t change the deductible percentage of the interest expenses. Simply put, withdrawing funds from the offset account is really a withdrawal of savings, and will not impact the extent to which interest accruing on the loan account can be deducted.
For those with a home loan used to acquire a private home, and who have funds sitting in an offset account, withdrawing those funds to pay for the deposit on a rental property will not enable you to claim any of the interest accruing on the home loan. However, funds redrawn from the home loan with the purpose of acquiring a rental property with interest accruing on this portion of the loan, should be classed as deductible.
At the end of the day, determining if something can be classed as tax deductible will depend on how the arrangement has been structured.
In need of help with anything we’ve mentioned here? Reach out to our team and we will be in touch.