Deductibility of Interests

I just want to confirm whether my understanding is correct.

I have a $200K loan with redraw only against PPOR. I did redraw once for $1000 for personal purpose and that's it. Current balance is $0 and I haven't close the loan account. I don't have other loans or IP yet.

According to Taxation Ruling TR2000/2,"Where a loan facility allows for redraws of extra repayments, we consider those redraws constitute new borrowings of funds that cannot be traced to the extra repayments. In this regard the term 'redraw' is a misnomer. It is in effect a new borrowing of funds." and "Where the original borrowing is for non-income producing purposes and the taxpayer uses the redrawn funds wholly or partly for income producing purposes, that part of the accrued interest attributable to the redrawn funds used for income producing purposes is deductible."

My understanding is I can redraw as many times as I want and with sole purpose of investment, they are considered new borrowings and are deductible. Am I correct so far?

There are two options,
Option 1, redraw and invest.
Option 2, pay off $200K loan, arrange LOC and invest.

Both options should be deductible, but option 1 is cheaper with no refinancing costs. Which option would you choose and what are the advantages?

My last question is about converting PPOR into IP. Is there any formal process or conversion happens automatically as soon as I move out and engage REA to advertise?

Any help is much appreciated.

 

If you currently owe nothing on the loan, either of these is fine.
Depending on the lender, you might be able to switch the loan facility into a LOC without refinancing, but there's probably no point unless you have a specific reason for using a LOC over a term loan?

 

Option one sounds like the winner too me.

If you have non-deductible debt elsewhere - then consider setting up the current loan as interest only.

As always - I'm not an accountant and that.

Cheers

Jamie

 

Option 1 would be easier as long as you can pay directly from the loan to the recipient.

Q2. No formal process. Just start keeping records.

 

Agreed, there's no specific reason, just my habit of starting the ball rolling by listing possible options and evaluate each option.

 

Thanks Terry, I might need to talk to the bank to see how this can be done.