Negative Gearing Question

Is it allowable to adjust your LVR on an investment property/properties within your portfolio to ensure you are getting the best return via negative gearing.

Purchase Property for $250,000 on interest only 6% mortgage $30,000 deposit - $220,000 owing
LVR = 88%

Loan has offset account attached and you pay in $20,000 - $200,000 owing
LVR = 80%

Interest rates change and you move capital out of your offset account which changes the amount owed on the property to the full amount of the mortgage.

$220,000 owing LVR back to 88%

How is this viewed by the ATO for tax purposes from 1 year to an other?
That's why people have offset accounts. :D
You can do that, the offset account is really just a savings account which reduces the amount of interest you pay on your mortgage. You're not reducing the debt with it, so you can put money in/out of it as you please. This however is not the case with redraw. Very important to understand the difference between the two.
However, remember that maximising deductions may not necessarily be best. e.g. if you take out the 20k, pay 6% (deductible) interest on it, but put it into a term deposit paying 5% (taxable), you're actually worse off.
You claim the interest you pay, not the amount of interest you should'a, could'a, would'a paid.

The ATO doesn't care about your LVR.
It's fine if you do it using an offset account to reduce the interest paid.

However, if your loan had a redraw facility instead and you paid it down to $200k DR and then take the 'extra payments' back out, you can never claim more than the interest on $200k. Messy.

Offset > Redraw.
I was more concerned that they would think that you were capitalising on your debt by increasing you debt in the property as if you claimed interest on the $200k last year and this years return shows $220k then you might be asked to explain this to get the deduction.

I was advised that I could do a similar thing with the PPOR if I turn that into a IP at some time in the future. Was advised to refinance loan to Interest only and get an offset. pay extra payments into the offset and can take that away when property changed into an IP and claim the full amount that was owed when the property was refinanced into Interest Only so was applying this principle to properties that I may purchase in future as IP's.

Thanks for the reply's
The ATO might start asking questions if you tick the box that asks something like "have you refinanced or renegotiated your loan...?". In your case this hasn't happened - you've simply drawn down on the offset account - so you've got nothing to worry about.

From what I can recall there's nothing on the rental property schedule which asks what your loan balance is - just the amount of interest you want to claim - and they're hardly likely to challenge a 10% increase in interest outside of interest rate fluctuations.