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Mez, if I were you I would be double checking your circumstance with your accountant. My opinion is that the interest is not dedctible because you redirected the use of the borrowed funds. http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001 From the ruling: Otherwise, when...

But you said that the shares were sold. And a PPOR was bought with the proceeds. Your PPOR is non-income generating, yes?

Right. So Mez, looks like you will have investment income after all as you cannot deduct that interest anymore.

Mez - if you are sure you will have no investment income for 2010, you can ask you accountant to vary the statement to nil. Otherwise just pay it and you'll receive a credit in your 2010 return for the amount paid.

Probably best to ask your accountant Mez. Like the letter says, you've been put on the PAYG system. You can apply to have the instalments varied down to nil. However, if in fact you should be paying instalments and you vary to nil, there may be penalties.