Loan Consolidation with new lender and maximising debt against rental properties

Question

Hi Julia,
I’m in the process of refinancing my loans, which look like this:
Principle – $1.5m ($2.25m value)
Investment 1 – $620k ($600k value) – jointly held with partner
Investment 2 – $220K ($275k value) – jointly held with partner
Investment 3 – $728k ($840k value)
Is it possible whilst refinancing to move the debt up to the valuation levels on each investment property and (1) put it against principle property or, failing that (2) create an additional investment loan for shares etc with the excess funds?
There may be another way of explaining this that you may be aware, with the aim being to maximise deductible debt against non-deductible debt.
I look forward to your views.
Many Thanks

Answer

The key rule here is what the borrowed money is used to buy determines whether the interest on the loan is tax deductible. And the ATO are very strict about the nexus. There must be a direct line between the borrowing and the purchase. It does not matter at all where the borrowing is secured.

So as you can see this means if you borrow more money to pay off the loan that was used to buy your principle residence then that borrowing would not be tax deductible because it just replaces a borrowing that was not tax deductible.

Looking at the figures it seems to me that some of those loans for the investment properties would be secured also by your home. I hope you have separate loans so you can concentrate on paying off the borrowing that was actually to purchase your home and keep the others interest only. If that $1.5mil loan is just one loan and some of it was used to pay the deposits on the investment properties you should refinance it and split it up but make sure you follow exactly paragraph 18 of TR 2000/2 http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001 you may also find this ruling interesting in general.

Here is a link to a page on our web site about capitalise interest http://www.bantacs.com.au/capitalising-interest.php The idea is you borrow to pay the interest on the loans that are tax deductible so that borrowing is also tax deductible, increasing tax deductible debt and using all your spare cash to pay off non deductible debt.
The interest on the interest is technically tax deductible but if you do it in regard to rental properties the ATO will apply Part IVA to deny the deduction. Yet they quiet accept it is ok if you do it on a margin loan for shares or a business overdraft. It would be great if someone took them all the way to the courts on the issue but considering the ATO’s unlimited taxpayer funded resources that they will just use to continue to appeal until the taxpayer runs out of money I doubt anyone ever will. They are particularly vicious on this one because they know darn well they will lose in court so I have seen them be pretty nasty to try and scare people off but then when all else fails I have seen them give in and allow the taxpayer to claim the deduction rather than go to court providing the taxpayer signs a confidentiality agreement.

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