refinancing a contaminated loan

Hi could anyone please clarify if refinancing a contaminated investment loan (ie money has been withdrawn from loan and used for non investment purposes) to a new lender "purifies" the loan for tax purposes as the contaminated loan is paid out by the new lender

 

Not really. The money was still spent and used for a non deductible purpose.

You can't solve the problem outright, but you can repair it and prevent it from getting worse. If you figure out how much of the loan is still deductible and how much isn't deductible, you can split the loan into two accounts via a refinance. One for each type of debt. From there, make sure you don't contaminate the deductible portion any further.

 

Peter's "not really" was diplomatic; I'd go for a flat-out "no".

 

Lender is not relevant, nor is security. It is the use that is important.

Why not just split the loan into the relevant portions and pay off the non deductible part.

 

So if I have withdrawn$6000 for personal use from a $415000 loan would I just do a two loans - one for $6000 (to pay out asap) and one for $409000?

 

Assuming you haven't made any deposits, yes.

 

Oh... Thanks for the reply Terry. So if I withdrew the money 6 months ago and I've been making fortnightly repayments (p&I) how much more would I need to include with the contaminated $6000?

 

you would need to set up a spreadsheet and work out the percentages and then every deposit would come off both portions. complex. You might just have to make a reasonable estimate.

 

Thanks Terry. I really appreciate your generosity with your knowledge.

 

Hypothetically, if one did this without realising the consequences, or in fact that this was the wrong thing to do, whats likely and/or the worst to happen?

Lets say the sums are very similar to the OPs.

 

Likely - you would get away with it.
But if caught the ATO would penalise you, the penalty would depend on the severity, whether you did it intentionally etc.

 

I'll tell my friend, I asked for them. Thanks.