Interest Tax Deductible - Scenario

Hi Somersoft Forums

Can you please help me understand if the following scenario allows the interest to be claimed on the loan.

We had a PPoR that was split into two loans as follows.
PPoR loan 1: ($82k)
PPoR loan 2: ($200k)

PPoR loan 1 had a redraw account, that we were unknowingly using it for person use for years until recently we got an offset account and started to use that for all income and expenses.

This year we did a revaluation on the property and the bank agreed to release $133k from the PPoR for an IP we were going to purchase.

The way that the bank gave us access to the equity was by depositing $82k into loan 1, which brought the balance to $0. Then taking out the ($131k) from the same loan, and depositing the difference into our Streamline account to be used for deposit. I ended up using money from my Offset account for the deposit, so I transferred the $49k back to the redraw. (see attachment of the screen shot of loan 1).

So essentially this brought the loan balance back to what it was before.
My question is the following, because the purpose of the new loan is for an IP, does this allow me to claim all the interest expenses on this loan now?
Is this what is called recycling debt?
 

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The loan is NOT 100% deductible and I gather thats why you asked. In the event the ATO reviewed the loan financing they would likley find that it is not 100% deductible and on that basis disallow the whole of the deductions unless you can provide a reasonable basis to apportion You have tainted the loan by blending personal use, the offset etc.

Of the $131k from PPOR1 I gather none was actually used for the deposit. Oh it may have eventually done some round robin but was the loan proceeds directly linked to the deposit ?? The deposit came from an offset account. Not the streamline where the loan proceeds went. The loan proceeds that went to streamline werent used for a deposit. That could be fatal.

Terry's right it sounds messy - Did I get it right ?

Can it be fixed. No. Its a simple process. You need to use the loan proceeds in a traceable chain without tainting it (ie a personal account or offset with other money) so that it can be demonstrated that the loan is where the deposit came from.
 
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