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I don't think that changes things much. The only way to know is to apply for a private ruling. BTW, there are many private rulings where capitalising was allowed.

Yes, i think it would be. from memory I think there was an example of using an offset in that TR saying the ATO could apply Part IVA.

Not sure why you would be doing that, but capitalising interest is ok - interest on interest is deductible as long as the underlying interest is deductible. The problems arise when you are doing this as scheme to pay off non deductible debt faster and artificially creating a tax advantage.

that is good, but I was referring to the manner in which the borrowed money was used - how did you get the money from the bank loan account to the vendor etc?

ATO has said that if the dominant purpose is to capitalise interest so you can pay down the PPOR debt faster then they can apply Part IVA to deny the deduction

I would be raising both my eyerbrows. Borrowing to pay interest? What is the purpose. Borrowing to pay non interest costs should be ok. But any income should be dumped into the offset account on the non deductiblle debt.

Yes sounds like you have done it right. Hope the 20% wasn't drawn out into the offset account so you could right a cheque??