Suppose Jack has a PPOR loan of $500k at principal and interest rate 3% Also has an investment loan of $300k at interest only rate of 3.5% Jack uses the entire rental income of say $20k per annum to pay off the PPOR, then redraws $18k and pays off the investment property interest expenses. Would this convert $18k of the non deductible PPOR loan to a tax deductible loan? Jack would claim that reducing the P&I loan before the paying the IO loan helps improve his cash flow, would this be considered a legitimate reason?
I have a private ruling for something similar. You are just borrowing to pay one loan with another and it would be a refinance. refinancing doens't change the deductibility of interest generally. I have written about this here and called it 'loan shuffling' or 'loan recycling' I think
Potentially yes in some proportion. However that loan is blended and every month the loan must be recalculated for the deductible %. (ie some is PPOR, some Investment). get it wrong and ATO will cancel the full deduction claimed if they disgree on the calculated %. Note however that the payment of the interest isnt actually a thing. You are repaying the loan itself. Interest is incurred (debit) and a loan is repaid (credit).. They are different things. This is why people with P&I loans cant claim what they pay. If the PPOR loan is SPLIT and 100% for the refinance it may allow the new drawn amounts to be fully deductible. As Terry says its shuffling and may merely move a loan from one account / bank to another over time. Otherwise, without that clean split, it seems like you may be refinancing DOWN so you are reducing overall deductibility due to the proportioning on the PPOR v the full deductibility on the IP loan Further....Its a matter for specific tax advice and any reply here is mere general guidance and a number of issues could impact it
@Terry_w and I have discussed the ruling he obtained. Would be worth having a chat with him about it.
Of course private rulings are specific to that taxpayer and ensuring they maintain the arrangement to the approved arrangement the ATO agree to. A BPR isnt of any help to another taxpayer unless they replicate the arrangement and follow the advice. Its often the part many skip. Generally private rulings arent a earth shattering new thing but may be a safety net for a arrangement that could otherwise be disputed due to uncertainty. In some ways a BPR is like a Xray or scan. It will confirm what you suspect and know. But getting a scan without medical advice isnt much help as it doesnt fix anything.
