I often encounter enterprising PCers who ask if they can draw down a LOC or tap into equity then use the borrowings to capital expenses. Sometimes the expenses include loan interest payments. On a IP. First lets start by saying that capitalising interest is not prohibited and on simple reading of the tax act such interest may well appear deductible. A basic example is you fall ill and lets say the interest only repayments on the IP and a instalment of rates etc is paid using borrowed funds. I see NO issue with that. The problem is where its a scheme and the intended purpose appears likely to inflate borrowings on the IP, perhaps even using a loan against your PPOR. eg: 1. You apply for a loan facility of a defined amount 2. You then progressively pay many IP expenses from that account attempting to progressively build up to that approved limit 3. The accumulated debt on the IP inflates over time Maybe a few years. 4. The interest deduction against the IP inflates. and the end result is that there is a tax benefit..ie a larger deductible The ATO issued a Tax Ruling back in 2012 on this. TD 2012/1. The ATO indicate they MAY apply Part IVA (The general anti-avoidance rule) to instances where interest is capitalised. What they mean by that is the onus is on the taxpayer to ensure that capitalised interest is not claimed where their is a possibility a scheme is in place where the dominant purpose is to derive a tax benefit. Part IVA allows the Commissioner to cancel the tax benefit - By deny the deduction for the capitalised interest. And penalties etc may apply. TD 2012/1 explored wether the issue of paying down your own home sooner was a acceptable dominant purpose (rather than a inflated deduction). The ATO consider Part IVA applies even where the purpose is to repay your own home faster. But their TD is not confined solely to that view. My tip - Unless the capitalisation is merely incidental or driven by some very clear and dominant purpose then it may pose a concern. An example of a acceptable reason for capitalising could be short term loss of a job, maternity leave, short term cashflow issues etc However that doesn't mean when you take such time off that you can or should go to town and engineer a higher debt. What may be a concern ? ANY instance when you contemplate inflating the debt that is deductible on a IP or more than one IP by paying expenses using a new loan. The process of arriving at that may comprise a scheme even if it means higher debt or some other excuse. A scheme is merely a systemic process. So applying for the loan, considering which expenses to pay and then progressively paying them could well be a scheme. In instances like that personal tax advice is a must. If it looks like a scheme then my suggestion would be that all the facts are given to the Commissioner in a request for a binding private ruling. However I would be concerned the answer will be that Part IVA would apply. After all, asking the Commissioner may be the final step in the scheme !! Remember too that it is always the onus of the taxpayer to self assess their tax position. If they have a tax position that is uncertain the taxpayer may be obliged to seek the Commissioners views to avoid penalties.