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FlyingTaxFish(Newbie)Newbie
29 July 2024

Hi,


We are looking into starting a debt recycling strategy.


We currently have an owner-occupied home loan of 640k, and the home is valued at 940k leaving an equity of 300k.


If we were to take out a home equity loan of say 100k and use this to invest in shares, would the interest on this second loan be tax deductible?


Can we continue to pay down our first owner occupied non tax deductible loan, and then redraw the equity via our second loan to continue investing in shares and have the interest be tax deductible?


Is there anything we might be missing?


Thanks

4,135 views
1 replies
4,135 views
1 replies

Most helpful response

Most helpful replyATO Certified Response

AshleyATO(Tax Time Tech Expert)Tax Time Tech Expert
ATO Certified Response1 Aug 2024

Hi @FlyingTaxFish


Similar to this question we’ve answered previously, for interest expenses to be a tax deduction the funds from the loan must be used to produce income.


If you borrow money to buy shares or related investments from which you earn dividends or other assessable income you can claim a deduction for the interest you pay. See Interest, dividend and other investment income deductions.


As you’re planning to stay in your current home and use the new loan to buy shares, which will be used to produce income, then the interest expense on that new loan would be a tax deduction.


if you redraw from that loan, then the redraw is treated as a separate loan to you. If you spend the redraw money in a different way to the original investment related borrowed money then you will have to apportion the interest charged on the loan into deductible and non-deductible parts.

 

The details in this approach are explained at TR 2000/2. You can find an example from the ruling which explains how the ATO treats redraw situations.

All replies

Most helpful replyATO Certified Response

AshleyATO(Tax Time Tech Expert)Tax Time Tech Expert
ATO Certified Response1 Aug 2024

Hi @FlyingTaxFish


Similar to this question we’ve answered previously, for interest expenses to be a tax deduction the funds from the loan must be used to produce income.


If you borrow money to buy shares or related investments from which you earn dividends or other assessable income you can claim a deduction for the interest you pay. See Interest, dividend and other investment income deductions.


As you’re planning to stay in your current home and use the new loan to buy shares, which will be used to produce income, then the interest expense on that new loan would be a tax deduction.


if you redraw from that loan, then the redraw is treated as a separate loan to you. If you spend the redraw money in a different way to the original investment related borrowed money then you will have to apportion the interest charged on the loan into deductible and non-deductible parts.

 

The details in this approach are explained at TR 2000/2. You can find an example from the ruling which explains how the ATO treats redraw situations.

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