loan contamination and interest apportionment

Current PPOR has a loan of $260k (with $40k available on redraw)
I intend to increase this loan to $400k to release $140k as a deposit on a new PPOR and then rent out the original house.

Loan is now contaminated and only the interest on the original $260k is tax deductible correct?

Does the loan need to be "split" to show the 2 separate amounts or can the accountant simply apportion the correct amount of interest as deductable?

Cheers
 
If the original $260k balance was the portion used to buy the house yes. However if you long ago borrowed $260K and say $20K for a car and its now dropped to a $260k balance then only $241K would be deductible
(ie 260/280 x $260K)

Once you blend you must apportion and its awfully difficult sometimes to calculate. Even impossible.

It should never have been blended. Should always have separate loans for each purpose separate at all times. If its a single issue its easier to calculate. Give loan stmts to accountants and explain.
 
Thanks,
I've made extra payments into the loan over the years and redrawn back some amounts at various times to pay for small expenses, do these withdrawals need to be deducted to arrive at a deductable balance? The redraws were not extra borrowings they we just redrawing some of the extra I had paid into the loan.
 
Thanks,
I've made extra payments into the loan over the years and redrawn back some amounts at various times to pay for small expenses, do these withdrawals need to be deducted to arrive at a deductable balance? The redraws were not extra borrowings they we just redrawing some of the extra I had paid into the loan.
The ATO looks at redraws as new borrowings. You have to subtract every payment you've made from the loan balance to calculate the deductible portion.

Worst case, if you deposited $1K extra from your salary every week, then redrew it for expenses, even though your balance at the end of the year might still be $260K, your deductible portion would now only be $210K. :/
 
Thanks,
I've made extra payments into the loan over the years and redrawn back some amounts at various times to pay for small expenses, do these withdrawals need to be deducted to arrive at a deductable balance? The redraws were not extra borrowings they we just redrawing some of the extra I had paid into the loan.

Redrawing increases the loan. Its a non-deductible borrowing. You have a blended loan like a smoothie. Pick out the strawberry and eat it...You cant. Think of a credit card. Start with $1k of deductible then you use it on 20 other non-ded bits. How much is deductible after 1 month may be easy to work out. They you make a repayment, add interest. After three months of more use = good luck. The repayments, interest etc apply across all the card and so on.

In practice ATO scratch their head and deny the deduction and allow you to go away and appeal or give up.
 
You have a mixed loan. Mixed when one withdrawal was made, further mixed on the second withdrawl....etc Depending on how many withdraws it will be very difficult to work out.

Every repayments will come off all portions too.

It is like starting with 300ml of milk, take out 100ml, put in 30 ml orange juice, take out 20mil, put in 25 ml of lemon juice - how much milk is in there?

Luckily the ATO lets a mixed loan be unmixed based on a reasonabl calculation - you can't do that with milk.
 
It is like starting with 300ml of milk, take out 100ml, put in 30 ml orange juice, take out 20mil, put in 25 ml of lemon juice - how much milk is in there?

The best analogy I have read on the impact of redraw on deductibility of a loan. So good even I understand it now when before I thought I did but this has proven I didn't.

Cheers
 
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