Private ruling: Deductions - redrawn loan funds used to refinance investment loan
Date of advice: 27 March 2020
Published: May 2020
Ruling period: Year ending 30June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a deduction for your 50% share of the interest charged on loans A, B and C to the extent that loans A, B and C have been used for income-producing purposes? | A1: Yes. You are entitled to a deduction for the interest on loans A, B & C as they will be used to repay loan D which will be being used in an assessable income producing activity (paragraph 42 of Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith). Additional information about the deductibility of interest on loans for a rental property can be found by searching ato.gov.au for 'interest on loans'. Further information about redrawn funds and mixed purpose loans can be found in Taxation Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities which is available by searching for 'TR 2000/2' in the Legal Database on ato.gov.au

Relevant facts and circumstances: You own your home jointly with your spouse. You and your spouse have 3 separate loan accounts (loans A, B and C) that were used to finance your home. You and your spouse have a loan account (loan D) used to finance the purchase of a rental property that is also jointly owned. Each of the loan accounts operate separately with regards to repayments and interest charged. You and your spouse have savings in a loan offset account. The interest rate charged on loan D is higher than on loans A, B and C. To reduce the amount of the overall interest expenses being incurred on your borrowings you and your spouse will pay down loan D using funds from loans A, B and C. To achieve this you will use some of the savings in your offset account to reduce the balance of loans A, B and C. You will then use the available funds in loans A, B and C to pay down loan D. The bank will close loans A, B and C if you reduce the balance of those loans to zero so you will leave a small amount outstanding in each loan. You understand that this means that loans A, B and C will have been used for both income producing and non-income producing purposes and you will need to apportion the interest charged on loans A, B and C accordingly.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1