Warning: ATO targeting redrawing of investment loans

Increase in ATO activity

The ATO estimates that incorrect reporting of rental property income and expenses is costing around $1 billion each year in forgone tax revenue. A significant portion of the problem is how taxpayers are claiming interest on their investment property loans.

There has been a major uptick in ATO activity focussing on refinanced or redrawn loans. This activity is a result of a major data matching program of residential property loan data from financial institutions. This data is being matched to what taxpayers have claimed on their tax returns. Those with anomalies can expect contact from the ATO to explain the discrepancy.

Redrawing loans for different purposes

Using your investment property loan for anything other than its intended purpose makes it a mixed purpose account.

Interest on mixed purpose accounts must be divided among the different purposes the money was used for. If you use the redrawn funds to produce investment income, then you can deduct the interest on this portion of the loan.

You cannot deduct the interest on the part of the loan used for a vacation or to pay off personal debt. You must divide interest expenses and repayments into deductible and non-deductible portions.

Withdrawals from an offset account are treated as savings rather than a new borrowing.

If you have a loan account and an interest offset account is attached to this account that reduces the interest payable on the loan, withdrawing funds from the offset account will typically increase the amount of interest accruing on the loan, but won’t change the deductible percentage of the interest expenses.

Withdrawing money from the offset account does not impact the deductibility of interest on the loan account. This is because it is simply a withdrawal of savings.

If you have a home loan that was used to acquire your private home and you have funds sitting in an offset account, withdrawing those funds to pay the deposit on a rental property won’t enable you to claim any of the interest accruing on the home loan.

However, if you redraw funds from the home loan to acquire a rental property then interest accruing on this portion of the loan should be deductible. The tax treatment always depends on how the arrangement is structured.

Here to help

If you’re unsure about what you’ve claimed, or what you can claim on your investment property loan, call TaxAssist Accountants. We offer free initial consultations. Call us on 08 6245 7506 or fill out our enquiry form here.

Last updated: 16th November 2023