You've got a PPOR worth $800k, you originally borrowed $500k to purchase the property, you've thrown all your spare cash into an offset account against this loan (there's $200k in there now).
Then you set up a second loan to access equity for an IP and leveraged to 80% of the property value. The loans now look like this:
* $500k original non deductible PPOR loan with an offset account with $200k in it.
* $140k equity loan for purchasing IP 1.
You now want to purchase a new home and the original house becomes IP 2. The original loan of $500k will become tax deductible as it's now for investment purposes.
Ideally you'd use the $200k in your offset account for the deposit and purchase costs of the new PPOR and borrow the balance against that property. Any remaining cash in the offset account would be moved to an offset account over the new PPOR loan. You're not actually borrowing the $200k back, you're simply taking it out of a savings account.
Nothing really changes with the $140k equity loan, it's still deductible because its original purpose of purchasing IP 1 remains deductible.
This is the ideal scenario, it requires a bit of preplanning.
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What most people do is they don't plan ahead. They put the $200k savings into the $500k loan redraw facility rather than an offset account, so the original structure looks like:
* $500k limit with $300k owing and $200k in redraw.
* $140k equity loan for IP 1.
When they purchase the new PPOR they want to redraw the $200k which contaminates the purpose of the $500k loan because they've now borrowed that $200k back for purchasing a non deductible PPOR. Essentially the loan structure on the original property looks like:
* $300k loan tax deductible.
* $200k loan non deductible (because it has been borrowed for a non-deductible purchase).
* $140k equity loan for IP 1 (remains tax deductible).
The difference between using redraw and an offset account in this scenario is by using the offset account you get tax deductions on an extra $200k of loans. The key difference is that in the first scenario you take the money out of a savings account (offset account), the second scenario you're borrowing the money back by redrawing it.