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Re: Servicing monthly loan principal payments using another loan

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Hi,

Assume I have an $100k investment loan (loan A) for a property.
Assume I also have a linked offset account with a $100k balance, so all my monthly repayments are pure principal.
I also have a second loan (loan B) which is not drawn (starting balance $0), I then use a monthly redraw on loan B to pay the principal of loan A.
Over time Loan A reduces, and Loan B accrues. Both loan purposes are for financing an income producing asset.
Is the interest in loan B tax deductible?

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ATO Certified

TaxTime Support

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Hi @Mike741,

 

Thanks for your question!

 

The ATO can only provide you with general guidance on tax law and how it may apply to your circumstances as described.

 

TR 2000/2 may be of use to you, as it does detail deductibility of interest on a line of credit or redraw facility. You may find that, since the purpose of Loan B was not to purchase the income producing asset, but only to make repayments on Loan A, this may mean that the interest on Loan B is not at all deductible.

 

However, if you would like more specialised guidance, you may wish to speak to a tax professional, or seek other options.

 

Hope this helps,

 

Rachael B.

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Newbie

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In light of my question above, I have looked up relevant Tax Rulings & Determinations.

I can merely draw conclusions by inference as none of the documents I sighted cover this case in particular. It may even be too trivial to warrant documentation.

Nevertheless, how do I go about getting formal sanction to avoid issues later on?

Is there a tax expert that can provide proper guidance to make sure I’m doing the right thing?

Who shouldn I turn to? Any help is appreciated

Highlighted

Best answer

ATO Certified

TaxTime Support

Replies 1

Hi @Mike741,

 

Thanks for your question!

 

The ATO can only provide you with general guidance on tax law and how it may apply to your circumstances as described.

 

TR 2000/2 may be of use to you, as it does detail deductibility of interest on a line of credit or redraw facility. You may find that, since the purpose of Loan B was not to purchase the income producing asset, but only to make repayments on Loan A, this may mean that the interest on Loan B is not at all deductible.

 

However, if you would like more specialised guidance, you may wish to speak to a tax professional, or seek other options.

 

Hope this helps,

 

Rachael B.

Newbie

Replies 0

Hi Rachael and thanks so much for your reply.

Let me just emphasise again that the loan repayments on Loan A are principal only, no interest.

In that light let me ask you these questions:

 

a) I assume that I can re-finance Loan A with a new loan from another bank or even the same bank. This new loan will not have been used to originally purchase the income producing asset, yet it's interest charges are tax deductible. Please correct me if I'm wrong.

 

b) Assume now that it is my Loan B that pays out Loan A. Are the interest charges of loan B still tax deductible?

What happens if I pay back only 50% of Loan A with Loan B. Are the interest charges of loan B tax deductible?

 

c) Assume now that I pay back loan A with Loan B, but do it in several installments. Is the interest of loan B tax deductible?

Again the assumption is that loan A incurs no interest, so non of the amounts refinanced through loan B include any interest, irrespective if they are called "refinance", "installments" or "repayments".

 

At what stage (a-c) would you say that that interest from Loan B is no longer tax deductible?

 

I understand that I cannot collect Loan A interest charges & other outgoings from the rental property in loan B and then expect the resultant interest to be tax deductible.

 

Best Regards

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