I bought an investment property in February 2008. The loan for the prperty does not include the stamp duty cost. I did renovation for that property in September 2008. The cost is from my own pocket. Now I want to top up the loan to include the cost of stamp duty and renovation. Can I do that? Is top-up loan still tax deductable? I spoke to someone at ATO. He said usually the interest for stamp duty is tax deductable if I borrow the stamp duty when I purchase the investment property. Because I’ve already paid the stamp duty myself, he asked me to write to ATO for private ruling.
Whether interest on a loan is deductible or not is determined by whether the funds were borrowed to produce income. The ATO interprets this nexus very strictly. If you reimburse yourself for out of pockets then the money would be borrowed to do whatever you spend the reimbursed funds on, probably private expenses. If you had borrowed the money to pay back a loan that had the original nexus you would be ok. So if you paid for any of the improvements on a credit card then you could borrow to pay that off and the interest would be deductible.
In Roberts and Smith the taxpayer was successful in arguing that the interest on the money the business borrowed to repay the owners their original equity investment was deductible but the ATO in TR95/25 ruled that this did not apply to people in with rental properties because they are not in business.
In Domjan’s (2004 AATA 815)case the ATO was successful in arguing that the interest on money borrowed to pay for repairs was still not deductible because it was taken out of the loan and put into a personal cheque account then a cheque was written to pay for the repairs. The ATO’s point was that the funds had been intermingled with private money so the nexus was lost.