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Edited version of private advice
Authorisation Number: 1051651618740
Date of advice: 27 March 2020
Ruling
Subject: Deductions - redrawn loan funds used to refinance investment loan
Question
Are you entitled to a deduction for your 50% share of the interest charged on loans A, B and C to the extent that loans A, B and C have been used for income-producing purposes?
Answer
Yes. You are entitled to a deduction for the interest on loans A, B & C as they will be used to repay loan D which will be being used in an assessable income producing activity (paragraph 42 of Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith). Additional information about the deductibility of interest on loans for a rental property can be found by searching ato.gov.au for 'interest on loans'.
Further information about redrawn funds and mixed purpose loans can be found in Taxation Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities which is available by searching for 'TR 2000/2' in the Legal Database on ato.gov.au
This ruling applies for the following periods
Year ending 30June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
The scheme commenced on
1 July 20XX
Relevant facts and circumstances
You own your home jointly with your spouse.
You and your spouse have 3 separate loan accounts (loans A, B and C) that were used to finance your home.
You and your spouse have a loan account (loan D) used to finance the purchase of a rental property that is also jointly owned.
Each of the loan accounts operate separately with regards to repayments and interest charged.
You and your spouse have savings in a loan offset account.
The interest rate charged on loan D is higher than on loans A, B and C.
To reduce the amount of the overall interest expenses being incurred on your borrowings you and your spouse will pay down loan D using funds from loans A, B and C.
To achieve this you will use some of the savings in your offset account to reduce the balance of loans A, B and C.
You will then use the available funds in loans A, B and C to pay down loan D.
The bank will close loans A, B and C if you reduce the balance of those loans to zero so you will leave a small amount outstanding in each loan.
You understand that this means that loans A, B and C will have been used for both income producing and non-income producing purposes and you will need to apportion the interest charged on loans A, B and C accordingly.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1