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tax deductibility on amount redrawn from home loan?

Discussion in 'Accounting, Tax & Legal' started by drseuss, 11th Apr, 2013.

  1. drseuss

    drseuss New Member

    Joined:
    11th Apr, 2013
    Posts:
    1
    Location:
    sydney
    Hi,

    I'm hoping someone could clarify what % of an amount could be tax deductible if redrawn from a home loan and used for investment purposes:

    as an example

    If I have a $400k debt with $50k in an offset account (therefore net position is $350k). I'd like to know the tax deductibility implications dependant on two scenarios

    I start a debt recycling strategy where i take say $20k pa from the offset account and use to buy shares. Is the 20k tax deductible? i think no, so to get around this if i put 20k into the home loan and then redraw out it would be deductible I believe. However, as I slowly repay the loan does that change the % of deductibility on the 20k? Is there a way to separate it so whatever i draw out for investment purposes it stays at 100% tax deductible? Or are you able to notionally elect that is what is happening?

    Thanks
     
  2. Terryw

    Terryw Well-Known Member

    Joined:
    9th Jun, 2006
    Posts:
    653
    Location:
    Sydney
    The offset account is just a savings account. So if you withdraw $20k there is no interest charged and therefore no deduction. But because this is an offset linked to the home loan the interest on the home loan will increase - about $1200 pa. And this will not be deductible.

    If you put the $20k into the home loan and then redrew it the interest would generally be deductible as it is a new loan for investment purposes.

    But you would end up with a mixed loan. This will create problems as each subsequent repayment into the home loan will come off the investment portion as well as the non deductible portion. ie you cannot chose to pay off the home loan part separately.

    So what you should do is to pay down the loan and then set up a new split which you can use solely for investment purposes. Probably a LOC is easiest. Or redraw loan is fine but do not redraw and park into another savings account even temporarily as the interest will no longer be deductible.