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Ruling
Subject: Deduction of interest on redrawn loan
Question
Are you entitled to a deduction for the interest on redrawn funds that are used to finance your new main residence?
Answer
No
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts and circumstances
a) You are the owner of a rental property.
b) There was an outstanding mortgage owing on the property until you reduced the amount owing to by using funds which were inherited.
c) You wish to redraw an amount equal to that of your inheritance to use toward the purchase of a new primary place of residence.
d) This would return the mortgage balance back to the amount it was prior to applying the inheritance monies to the loan.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
Interest expenses incurred on borrowed funds that are used for income producing purposes fall for consideration under section 8-1 of the ITAA 1997.
Taxation Ruling TR 2000/2 deals with the deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities. The deductibility of interest on a further borrowing of money under a redraw facility depends upon the use to which the redrawn funds are put.
In your case, the redrawn funds will be used to purchase a property in which you will reside. The redrawn funds will be used for a non-income producing purpose. Therefore the interest attributable to this redrawn amount will not be deductible.
We acknowledge that the monies which you used to reduce your mortgage on the rental property were not borrowed.
However, those monies were deposited with the lending authority to partly discharge the mortgage on your rental property.
If an amount is redrawn from the mortgage account at a future time, it is then a new borrowing and the original source of the monies is not relevant.
Even though it may allow a depositor to redraw funds to use as they wish, the lending authority does not differentiate between funds which were originally borrowed and monies which were sourced elsewhere, and they all must be repaid to the authority.
If the funds withdrawn are used in gaining or producing assessable income, for instance, to purchase a rental property, then the interest expenses incurred will be allowed as a deduction.
The redrawn funds take on the character of the purpose to which they are put; similarly if you took out a separate loan to purchase a private place of residence, the interest expenses would not be deductible.
Because of this, the interest attributable to an amount redrawn to be used to assist in the purchase of a new primary place of residence will not be deductible.
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