Using Redraw for Principal & Interest payments?

[Dean2012ad]

Is interest tax deductible on the portion redrawn from an Investment

property loan, when redrawing a sum of money e.g. $70,000; placing it in a

separate account solely for storage of that money; and using said $70,000 to

make the mandatory principal and interest payments over the course of the

loan?

- I have an investment property loan with $70,000 in redraw
- I want to redraw said $70,000 in increments over the course of the loan
to pay for principal and interest required
- Plan: Redraw increments, placing redrawn amounts into seperate account
used solely for storage of that money (not mixing investment/personal)
- Have payments debited from that account (normally just Principle)

*Purpose is to use up redraw as a redraw facility with IP is restrictive, and in doing so free up that weekly expenditure from the IP P&I payments to save for deposit on PPOR.*
Basically re-capitalising.

Expected Comments:
Why not use offset account? Hind-sight is a *****

 

[marg4000]

You would have to check with the ATO, but my understanding is that it would NOT be tax deductible.

The purpose of the loan is to repay debt, not to invest, which means there is no tax deduction. Even worse, it would contaminate the loan and lead to further complications.
Marg

 

[Terryw]

Essentially you are borrowing to pay interest. If the initial loan is investment then the interest on the interest would generally be deductible too TD 2008/27.

Buth the ATO could always apply Part IVA and deem this a scheme to reduce tax and deny deductibility so seek professional advice.

 

[Dean2012ad]

Essentially you are borrowing to pay interest. If the initial loan is investment then the interest on the interest would generally be deductible too TD 2008/27.

But the ATO could always apply Part IVA and deem this a scheme to reduce tax and deny deductibility so seek professional advice.

Thanks Terry, spot on.

ANSWER:
I received a private ruling stating:
Yes, aportioned to exclude any non-deductible purpose

Compound interest, as with ordinary interest, derives its character from the use of the original borrowings: TD 2008/27.
Where you allow interest incurred on your rental loan to simply charge to the loan without repayment, the interest is compounding. Accordingly you are entitled to a deduction for the interest you incur on this portion of the borrowing as its character following that of the original borrowing, which is in respect of earning assessable income.

That is, to cover interest payments using redraw is feasible, though for principle repayments it is NOT.

They further state: We have not fully considered the application of Part IVA to the arrangement.

However, to be safe I will talk to a Tax Accountant before proceeding.

 

[Terryw]

Gee I am good aren't I?