Loan top ups and refinancing

Question

Hi Julia,

I have a question relating to the deductibility of loan interest following a loan top up and potential loan refinance. The detail of my situation relates to the previous question I sent to you last year, but to recap, I have 3 loans with one bank secured against a single rental property. The loans are split as follows:

$98k loan – the original loan for the rental property
$151k loan – a new borrowing used directly to purchase shares
$48k loan – a new borrowing used directly to purchase shares

Recently I topped up the $48k loan by $31k to buy further shares. I had instructed the bank to leave the funds as available balance so that I could transfer them directly to my share trading account (keeping a clear nexus- which you have taught me from your book!). Unfortunately, the bank withdrew the top up funds to a mixed purpose savings account, and claim they are not able to reverse the transaction in any way. They have given me some mixed advice about what options I have. In summary though my preferred action now is to pay out this loan (of $48k + $31k). This will close the loan. I will then top up the other $151k share loan by $79k- and redraw these new top up funds (as a new borrowing) directly to a share purchase account. This will leave me with 2 loans in total-

$98k- for house
$230k – for shares (which is 151 topped up by 48+31)

A bit of cost for me regarding brokerage (and maybe extra loan stamp duty? Capital gains effect from selling 48k shares will be relatively neutral). This will simplify loans into 2 for me.

My question for you is 2 fold:

a) Is this a legitimate/ advisable strategy that I can take and is there anything else I need to be aware about this .

b) If I take my loans to another credit provider (which I was considering anyway)- how do I make sure that loan interest remains deductible through a loan refinance (especially when the refinance amount is split into 2 or more loans)?

Kind regards

Answer

Would it be too cheeky to guess that you bank with the ANZ bank?

I would be giving them a roasting about this and referring them to TR 2000/2 to prove what they have done to you. You are right now 31/79ths of the loan interest is no longer tax deductible because that portion of the loan is considered to be used for private purposes because it was mixed in with private funds (Domjan’s case). You now have a mixed purpose loan.

If you don’t want to sell shares and go to a lot of trouble refinancing you could follow, very carefully, the steps in paragraph 18 of TR 2000/2 https://www.ato.gov.au/law/view/document?docid=TXR/TR20002/NAT/ATO/00001 to pay out the mixed purpose loan. Tax $48,000 from the $151,000 loan and $31,000 from your savings account and completely pay down this mixed loan. Once this is done you can then borrow from it afresh for further investments without being effected by its previous use. It is important that you pay down both these amounts on the same day and reduce the balance completely to zero. Though you could get away with $1 if you need that to keep the loan open.

BTW your original plan will work to if that is what you prefer. In this case just make sure you don’t borrow any of the money used to pay down your $79k loan

TR 2000/2 also talks about refinancing which is fine as long as it is clean ie there is no detour. The funds from the new loan go directly into paying down the old loan. Then the new loan has the same status as the old loan.

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