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Interest on Interest---with a twist

Discussion in 'Accounting, Tax & Legal' started by cassma1, 24th Jun, 2006.

  1. cassma1

    cassma1 New Member

    14th Feb, 2006
    First post from an occasional lurker!

    I have a “personal” LOC ($30k) account. The idea behind the personal LOC is to have a buffer source of funds for emergency personal expenses. My salary and also rental income from some of my IPs is paid into this personal LOC (those IPs in my own name, before I discovered trusts). Because of the regular salary and rental deposits, the personal LOC has remained in the black over the last several years. I’ve therefore used the available funds in this LOC account to pay interest on several other investment loans (loans used to purchase IPs, units in HDTs etc). Over the years I have used over $300k from the personal LOC to finance interest payments on the other investment loans i.e. to help service interest on loans used to purchase income-producing assets.

    I now want to demolish my old PPOR and build a new one (this wasn’t in my original plans!). Interest on funds borrowed to finance the new PPOR will not be deductible. After a recent refinancing exercise, I have over $300k available in another LOC which I use for investment (income producing) purposes. My question is: Can I “repay” the $300k interest from my investment LOC into my personal LOC (where it is to be used for construction of the new PPOR), and claim the subsequent interest incurred on the investment LOC as deductible?

    The logic I’m using is that the original $300k from the personal LOC was used for “income-producing” purposes, and therefore the $300k from the investment LOC to repay these funds to the personal LOC are also used for “income-producing” purposes—hence interest incurred is deductible. However it is not with great clarity of thought that I am applying this logic.

    Am I way off the mark here?
  2. D&K

    D&K Well-Known Member

    14th Nov, 2005
    Hi, and welcome to Invested.

    I'm having a little difficulty understanding the situation, but I think you want to take $300k LOC from an investment and use it to pay for your PPOR being rebuilt. I think the answer that yes, you could use the money, but the interest on the $300k will no longer be tax deductible because its purpose now changes to a private, non-income producing one. This is regardless of the invesment being born out of funding from the PPOR. Presumably you claimed the interest on the LOC on the PPOR that was used for investment in the first place.

    If I've missed the point, I apologise, but I think you'll need a) professional tax advice, and perhaps b) a tax ruling.

    Best of luck. Dave