Is the purpose of redraw as important as the initial loan?

Discussion in 'Property Finance' started by wylie, 4th Feb, 2019.

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  1. wylie

    wylie Moderator Staff Member

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    I called my bank yesterday to ask about opening an offset account against a loan to sit some funds in for a few months.

    I said "I know I can deposit funds to the loan and redraw it. This money will be spent on an investment house, but if we decide to buy a car, then drawing funds for a car via redraw from a loan totally used for investment would contaminate that loan and we couldn't continue to claim all the interest."

    He said "I don't think that would matter".

    Am I right in my thinking? I know initial loan purpose is important, but wouldn't redraw use the same "purpose" test?

    And if he was wrong, then how many people are being given this advice over the phone by someone who should know better?
     
  2. Propertunity

    Propertunity Exclusive Real Estate Buyers Agent Business Member

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    Your banker is wrong. What you thought is correct. Banks should not be giving tax advice.
    As Virgin Australia's (Blue at the time) sign at the airport many years ago said: "What a bunch of bankers".

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  3. George Poullos

    George Poullos Finance Strategist Business Member

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    Lenders are largely indifferent about tax related issues when it comes to loans. I have seen it many times where they give advice similar to what you received.

    You are absolutely right. Using the funds for a car from redraw (investment loan) would create a contamination issue. If you wanted to use the funds for another purpose, you will need to split the loan creating a clear distinction between the loans and their uses.
     
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  4. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    The 'purpose test' misleads most people - it is really the 'use test' that matters.

    But in this situation it works out the same almost.
    Borrow and park in an offset - use the money for the car = not deductible
    Redraw and buy a car - use of the funds is for the car = not deductible.