Deductibility of redraw from PPOR to fund deposit on IP

Hi,

I currently have a PPOR which I have paid off (the balance of the loan is $0), with 200k available in redraw in that loan. I have never used the redraw facility during the life of that loan (there is no mixed purpose).

I intend to buy my 1st investment property. My plan is to redraw the 200k (the whole amount) to use as the deposit on an investment property.

Obviously I currently pay no interest on the PPOR as the balance is $0. My question is, if I redraw the 200k and use it to buy an IP will the interest I start to owe on the 200k for the PPOR loan become deductible? (I do not plan on using that redraw for any other purposes).

I believe the answer is yes, as outlined in this tax ruling: TR 2000/2 - Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities (Published on 1 March 2000) .

I asked my accountant and she basically dismissed it, saying the ruling is too old but couldn't explain to me any subsequent rulings overriding it or what has changed.

My plan is to get a 2nd opinion from an accountant specialized in IPs, but before I do that I am wondering if I am wasting my time. Can anyone hear give a more definitive answer?

 

1. I'm not an accountant so don't take this as advise.
2. yes deductible as the purpose of funds are for investment
3. get a new accountant - seek professional personal advise.

 

The tax ruling should be set aside and practical advice obtained. I would argue the accountant doesnt know what they are talking about if that was their advice. The ruling is NOT too old. Its still current. What it needs is interpretation. And thats not that complex.

LOCs can be a dangerous form of credit if you blend the use. If the ONLY use of the LOC now and in the future remains the $200k of deposit etc then there could well be full interest deductibility providing :

1. You dont ever use the LOC for another purpose so its blended; and
2. You carefully ensure that the funds are ONLY drawn on the LOC and directly pay the costs of acquisition. By this I mean dont transfer through a savings account with other $$ in it etc. Otherwise it then means your USE of the borrowed funds is to save and not earn interest. If the LOC doest have abiloity to pay third parties make sure you have a sterile savings account or offset account with NO OTHER FUNDS in it.
3. Dont move more than actual acquisition costs. eg balance of deposit, duty, legals, inspections, BA etc
4. If you do have a clean offset if you do move all $200K over and find surplus funds then just repay the loan for the balance.

 

Yes the interest can be deductible under s8-1 as you will be borrowing to invest.
Just make sure the funds don't take a detour.

See
Tax Tip 6: Using Redraw to invest Tax Tip 6: Using Redraw to invest

Tax Tip 67: Using Redraw Facilities on loans and Tax Issues Tax Tip 67: Using Redraw Facilities on loans and Tax Issues

Tax Tip 63: Don’t cause borrowed funds to take a detour Tax Tip 63: Don’t cause borrowed funds to take a detour

Tax Tip 1: Parking borrowed money in an offset account Tax Tip 1: Parking borrowed money in an offset account


and get a new accountant.

 

If the ruling is not relevant it will be withdrawn. There are tax rulings issued in 1982 that are still current.

What you are doing is possible. The future blending issue is a risk.