I am seeking your advice about using a loan from my parents to refinance an investment loan.
The background is that I have a $200,000 loan with a bank that was used to purchase dividend paying shares. The loan was a new split facility (secured against a property), and the funds from this split loan were used for the sole purpose of purchasing shares. The loan is interest only, and I have been claiming this interest as a deduction each year. The property (to which the loan was secured) will soon be sold, and the loans with the bank will need to be closed or re-financed in some way. I intend to keep the share portfolio though that was purchased with the $200,000 loan.
What I intend to do is use a new loan to refinance this $200,000 loan, keeping the interest on this amount tax deductible. My parents who are retired and keeping most of their assets in cash and bank accounts are willing to provide this loan (getting both them and myself a better deal on the interest rate). We have looked at using a “friends and family loan agreement” as provided by many legal firms to formalise the terms of the loan. This loan would be interest only and I would pay interest every 4 weeks to them at an agreed interest rate from a separate account. To initiate the loan after signing the agreement they would transfer funds directly into the current 200,000 share loan. From this background and proposal I have a few questions:
– Will a private loan set up in this manner enable loan interest to remain tax deductible?
– If needed, does refinancing from another loan source (such as a margin loan facility) also enable loan interest to remain tax deductible?
– If some shares purchased from the $200,000 facility are sold and the sale proceeds used to purchase the same value of new shares (that are also income producing) does this still enable loan interest to remain tax deductible?
The answers to your questions are in TR 2000/2 http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001 and TR 95/25 http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9525/nat/ato/00001
Certainly make sure you draw up a loan agreement with your parents and make sure you make the payments, you don’t want the ATO trying to argue it was a gift. Also keep the banks statements showing the money from your parents paying out the loan.
Refinancing through your parents or a margin loan is fine TR 95/25 says at paragraph 42:
42. Interest on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income producing activity or used in a business activity which is directed to the production of assessable income ( Roberts and Smith ATC at 4388; ATR at 504).
Selling and buying shares – It would be great if you could take the original purchase price and pay it off the loan then redraw to buy the new shares but that is really being conservative so if it is a pain you can instead rely on paragraph 14 of TR 2000/2
14. Where borrowed money applied to a particular use is recouped and redirected to another use, it is necessary to examine that new application of those borrowed funds in considering the deductibility of interest. Where there are changes in the use of money borrowed under a line of credit facility, or in the amount of borrowed money used for a particular purpose, the deductibility of the interest accrued on that part of the outstanding debt will be determined by considering the advantages sought from that new application of those funds. Interest will be deductible under section 8-1 to the extent that it is incurred on that part of the outstanding borrowed money used at that time for an income producing purpose.