Tax Tip 455: Shuffling Loans to a Lower Rate Without Losing Tax Deductions

It is possible to move borrowed money around without losing deductibility of interest. A taxpayer might want to redraw from a loan with a low rate of interest and pay that borrowed money into a loan with a high rate of interest. This can save interest yet maintain deductibility.


Example

Homer has an owner occ loan at 3% and an investment loan at 4%. $400,000 for each loan and to make this example easier assume they are IO but it wouldn’t matter if they are PI.

Homer splits his $400,000 owner occ loan into

Loan A $380,000

Loan B $20,000

He uses cash to pay into Loan B down to $1.

He redraws and pays the redrawn funds into the $400,000 IP loan. The balance of this becomes $380,000

Homer can now claim the interest on Loan B because this was used to refinance an investment debt. The IP loan was used to buy the IP so the interest on Loan B would now be deductible.

Homer is saving 1% interest on $20,000 which is $200 per year – without losing or reducing the amount of the deductible debt – which is still $400,000.


A few months later Homer does the same thing again.

He splits Loan A into 2 portions

Loan A $360,000

Loan B $20,000

He pays down Loan B to $1. Redraws and pays into the IP loan of $380,000 reducing it to $360,000


He would keep doing this every few months, as he saves up, and at the end of the process he will have fully shuffled the loan for the investment property over to be secured against his main residence. At owner occupied rates.

He would be saving 1% interest on $400,000 which is $4,000 per year.

He would also have access to $400,000 to redraw from the original investment loan.


I have obtained a private binding ruling for a client who did something similar, and was successful

Authorisation number: 1051526355187

 

Sounds too good to be true! Any downsides of doing this over keeping money in owner occ offset?

 

Because you are paying down debt it has tax consequences if you wanted to use the cash for something else in the future - you might have to borrow it and the interest wouldn't be deductible.

 

Can you use this method with repayments and holding costs on IP?

 

Yes but whether interest will be deductible or not is a different question