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

Discussion in 'Accounting & Tax' started by Terry_w, 25th Oct, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    18th Jun, 2015
    Southern Highlands NSW
    Taking money, or redrawing, from a loan means you are borrowing money. It is considered new borrowings - a new loan even though it may be from the same loan account. This gets a lot of people in trouble.

    Say you had a $100,000 loan and had paid it down to $90,000. You used the $100k to purchase the property originally. Now with $10k available you withdraw that money to buy a car. It is now one loan with 2 purposes - $90k for the purchase of the property and $10k for the car. The loan is now a mixed purpose loan. This doesn’t really matter while you are living in the property, but will later if you want to start claiming the interest (e.g. if property is income producing).

    But redraw can be used in a way which doesn’t create tax issues.

    Where the loan is paid off in full. There is no need to discharge the loan and apply for a new one. The person can simply use redraw.

    Say you had a $100,000 loan and had enough money to pay it off in full. You could simply pay down the $100,000 and then redraw the $100,000 and use this to buy the property. Since you have borrowed to invest the interest on the loan will be deductible - if there are no detours.

    But be careful because if you pay down loans with some banks the loan will be closed. Check carefully before doing this. If your loan will be closed you may leave just $100 or so outstanding. Technically the loan will be a mixed purpose loan, but $100 in $100,000 is just 0.1%.

    Also avoid redrawing the money to a savings or cheque account. Pay directly from the loan using redraw or go in and get a bank cheque. Otherwise, you could ruin deductibility.

    See my other tips on redraw
    Tax Tip 6: Using Redraw to invest

    Tax Tip 19: Avoid Using Redraw on an Owner Occupied Loan