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amphx(Newbie)Newbie
8 Nov 2023

Hi All,


I'll try to keep this short and concise.

I have a land loan of 650k and construction loan of 250k.

In last month i have made additional repayment of 200k to my loan accounts. Then it was brought to my attention that I had made a mistake as it would reduce my tax deductible interest. So I moved the money out i.e. I redraw the additional repayment amount i made. Principal was not redrawn.

Then while reading a property tax book it was brought to my attention that according to TR 2000/2 because i made additional repayment of 200k, my tax deductible interest would only be calculated on the balance being 650+250-200k=700k

I have read TR2000/2 and it is confusing me. In one section it appears to only refer to redraw of the principal paid and another on any amount redrawn even if it is additional repayments.


Can someone qualified please clarify this for me?

1) Would my tax deductions on loan interest now be calculated on the 700k even though I have withdrawn the 200k additional repayments from my loan account?

Or

Does this ruling only apply to redraw of principal paid on loan and not additional repayments?

2) would my tax deductions on interest be calculated on the 700k for the remainder of the life of the loan?

Or

Would the deductions be calculated on 700k only for duration in which the 200k additional repayments is in the loan account and will be calculated on the 900k once 200k is no longer in the loan account?


Looking for answers from qualified individuals only so that I can be sure how to proceed.


Your help is much appreciated


Regards

A

9,102 views
2 replies
9,102 views
2 replies

Most helpful response

Most helpful replyATO Certified Response

AriATO(Community Support)Community Support
ATO Certified Response16 Nov 2023

Hi @amphx


We're back with an update.


Provided the land and property is used solely to earn assessable income, for example to earn rental income, you'll be entitled to claim interest expenses incurred in respect of the loan used for that purpose.


Where a loan allows for a redraw of extra payments, we consider the redraw of these payments to be a new borrowing between you and your lender. This is outlined in TR 2000/2. If you use the redrawn funds (for example in your case $200,000) for anything other than an income producing purpose, your loan will become a "mixed use" loan and your interest deduction needs to be apportioned. 


For example, provided no additional amounts are redrawn from your loan, you would calculate your income producing portion of the loan as:

Total loan balance - redraw amount (used for purposes other than income producing) = income producing loan portion.


To work out how much interest you can claim, use the following calculation: 

Total interest expenses x (income producing loan portion ÷ loan balance) = deductible interest expenses.


All replies

Most helpful replyATO Certified Response

AriATO(Community Support)Community Support
ATO Certified Response16 Nov 2023

Hi @amphx


We're back with an update.


Provided the land and property is used solely to earn assessable income, for example to earn rental income, you'll be entitled to claim interest expenses incurred in respect of the loan used for that purpose.


Where a loan allows for a redraw of extra payments, we consider the redraw of these payments to be a new borrowing between you and your lender. This is outlined in TR 2000/2. If you use the redrawn funds (for example in your case $200,000) for anything other than an income producing purpose, your loan will become a "mixed use" loan and your interest deduction needs to be apportioned. 


For example, provided no additional amounts are redrawn from your loan, you would calculate your income producing portion of the loan as:

Total loan balance - redraw amount (used for purposes other than income producing) = income producing loan portion.


To work out how much interest you can claim, use the following calculation: 

Total interest expenses x (income producing loan portion ÷ loan balance) = deductible interest expenses.


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