Are you entitled to a deduction for the interests on the redrawn amounts from your home loan redraw account where the redrawn amounts were used to purchase your investment property?
Yes. This ruling applies for the following periods : Year ended 30 June 2021 Year ended 30 June 2022 Year ended 30 June 2023 Year ending 30 June 2024 Year ending 30 June 2025 Year ending 30 June 2026 The scheme commenced on: 1 July 2020
You have a home loan with redraw facility. You had substantial amounts available in your home loan redraw account. You decided to purchase an investment property. You planned to use the money from the home loan redraw account to fund 20% of the purchase price and costs associated with the purchase. You were required to pay 10% of the total purchase price on the day of the auction. You decided to use your home loan offset account cheque book to facilitate the transaction. In 20xx, you signed a contract to purchase an investment property. You issued an offset account cheque to the sales agent as 10% deposit. After that you transferred the offset account balance to the redraw account. You then transferred available redraw amount from the redraw account to your joint saving account to cover further 10% of the purchase price and costs associated with the purchase. Your investment property was available for rent the following year. You did not claim interest deductions in your tax returns.
Income Tax Assessment Act 1997 Section 8-1
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. 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 provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put. The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion.
Accordingly, it follows that if a loan is used for investment purposes from which income is to be derived, the interest incurred on the loan will be deductible. However, where a loan relates to private purposes, no deduction is allowed. Taxation Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities considers the deductibility of interest incurred by borrowers on money drawn down under line of credit facilities and loans offering redraw facilities. The ruling establishes drawing any excess or available funds from a loan account is treated as a new loan. As such the purpose or use of the drawing is relevant. That is, the deductible portion of interest when further borrowings are made depends on the use to which the redrawn funds are put. This is independent of the purpose of the original borrowing. The redraw facilities referred to in TR 2000/2 is where a borrower redraws previous repayments of the loan principal in a loan account.
Where a person uses the redrawn funds for different purposes then the loan account becomes a mixed purpose account. In a mixed purpose loan, the interest must be apportioned between the income producing and non-income producing purposes. The part of the accrued interest attributable to the funds used for private purposes is not deductible. Application to your circumstance You have a home loan with redraw facility. You used available funds from the redraw account to purchase an investment property. As you have used the redrawn funds for income producing purposes, this is generally considered a new loan. As per TR 2000/2, you are entitled to a deduction for the interests on the redrawn amounts. However, as the original home loan is now a 'mixed purpose' loan, you will need to apportion the interests for income producing and private purposes. The redrawn funds were transferred into an offset account and joint saving account which were then used to pay the deposits for the investment property. As the funds originally came from the redraw facility, the interest remains deductible.