Hi, I currently have an IP loan with about 10k in redraw available.
I plan to redraw the amount this FY to invest in an ETF which provides distributions, however the next distribution will not happen till July (next FY).
Questions
1. Is the interest in the redraw deductable?
2. Can I deduct interest accrued this FY if there is no distribution in the same FY?
Thanks!
Based on the information provided - yes, you can claim a deduction as you are buying the ETFs with the expectation of receiving income by way of distributions - it doesn't matter that its not immediate.
Having said that - make sure you understand how ETFs work from a tax perspective. They are different to dividends as it is a trust distribution rather than a dividend payment, so generally (there are some exceptions such as VEU from recollection) distributions received in July are actually assessable income in the previous financial year as they are a distribution of the previous year's income.
So you will receive an annual distribution statement around late July that will show you what to include in your tax return for the previous financial year. Don't use the annual statement from your brokerage company for the purpose of disclosing your ETF income in your tax return - you must use these ETF statements. These are generally either emailed or snail mailed to you, but if you don't get it, you can obtain it from the ETF's share registry (not your brokerage company) - firms such as Link or Computershare.
Hey Gd1978,
I just wanted to add a bit of clarification to what’s already been said.
Interest on the amount you redraw can be deductible if you use that money to invest in an income‑producing asset. What matters for tax purposes is how the borrowed money is used, not when the income is actually received.
This treatment is outlined in TR 2000/2. You don’t need to receive a distribution in the same financial year to claim the interest. What matters is that the borrowing is incurred with the purpose or expectation of earning assessable income, not when that income is paid.
Because the redraw changes the use of part of the loan, the interest needs to be apportioned from the time of redraw based on how the funds are used.
where you're still unsure, a registered tax agent that specialises in this area can help.
Consider also how you're gonna claim tax deduction/s for interest.
Part of the interest will be a rental property expense, and part of the interest will be a deduction against trust (ie ETF) income.
It gets more complicated when you make repayments of the loan principal.
Like @KaraATO says, you should consider having a meaningful discussion with an accountant who is fully experienced with investments and tax deductions.
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