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Selling investment assets to pay down personal debt

Discussion in 'Accounting, Tax & Legal' started by Simon Hampel, 17th Nov, 2009.

  1. Simon Hampel

    Simon Hampel Co-founder Staff Member

    9th Jun, 2005
    Sydney, Australia
    Here's a question which was posed to me elsewhere - I thought some of our resident accountants might be able to shed some light onto the ATO's approach on the topic.

    Scenario: PPOR with equity available, you set up a separate loan facility against the PPOR to access the equity and use that to fund an income producing investment. The interest on the new loan facility is deductible because it is used for investment purposes.

    However, you now sell the asset and use the proceeds to pay down your personal debt on your PPOR (or for some other private use). I think it is clear that the purpose of the borrowed funds is no longer investment related and thus the interest is no longer deductible.

    However, what about if you sell part of the asset (eg some shares or units in a fund) and use the proceeds to pay down private debt?

    What about if the fund you've invested in grows by 20% and you sell part of that gain and use that gain to pay down private debt?

    I did find this ruling about LOCs and redraw facilities, which I think covers some of these issues:

    TR 2000/2 - Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities (As at 1 March 2000)

    I take this to imply that you would need to either:

    A) pay down the investment loan by the amount of the cost base of your shares/units ... ie. you sold 1000 units @ $1.20 originally purchased @ $1.00, you would pay $1000 into the investment loan and keep the remaining $200 for private use


    B) pay it all into the PPOR loan, but reduce the value of the borrowed funds when calculating the interest you claim by $1000 (eg your $100,000 loan @ 8% is now $99,000 so you only claim $7,920 in interest rather than the full $8,000)

    Have I interpreted this correctly?
  2. Rob G.

    Rob G. Well-Known Member

    6th Jun, 2007
    Melbourne, VIC

    I believe the the formula works on percentage of balance, and not historical cost of the initial investment.

    Therefore do not focus on cost base, for example you could be deducting interest, but capitalising the amount to the loan.


    Initial borrowing to purchase shares: $100k

    Capitalised interest amount: $100k

    Balance owing: $200k

    Now sell all shares for $200k and only pay back the original $100k and spend the rest.

    This leaves a balance $100k no longer relating to any investment activity.

    The ATO would deem a full recoupment of your investment and so interest deduction is now lost.