Redrawing Your Investment Loan? You Need to Be Careful

The Australian Taxation Office is continuing to crack down on taxpayers who incorrectly apportion loan interest costs where the loan has been refinanced or redrawn for other purposes.

The ATO estimates that incorrect use of refinancing and redraw facilities on investment loans is costing more than $1 billion in lost tax revenue each year, with some taxpayers claiming tax deductions on interest that has been apportioned elsewhere.

Earlier this year, the ATO announced it would match data from residential property loans to financial details from banks and other lenders to ensure there are no discrepancies on tax returns.

Of particular concern are taxpayers who redraw on an investment loan and use the funds for a different purpose—such as to pay off a personal debt—than the loan was originally intended for. 

Those who do so have essentially converted their loan to a ‘mixed purpose account’ and must apportion any interest to the specific purpose the money was used for.

“If you’ve used any part of your original or refinanced investment property loan to cover private expenses, like buying a new car or renovating the home you live in, you can only claim an interest deduction for the portion relating to producing your rental income,” the ATO’s Assistant Commissioner Tim Loh said in May.

It is only when redrawn funds are used to produce investment income that the interest on the loan is tax deductible. 

The move comes as part of a wider crackdown by the ATO as it looks to claw back a $1.3 billion shortfall, with misuse of investment loans for personal purposes, such as holidays and other lifestyle-related expenses, attracting particular scrutiny. 

The ATO announced it was scrutinising three specific areas of interest:

1. Using investment loans for private purposes.
2. Claiming costs for repairs instead of capital works.
3. Claiming expenses for private use of property that produces no income.

While all three are non-compliant tax behaviours, the use of data-matching and the fact the ATO is now talking directly to banks and other financial institutions to corroborate income, property use, and expenses is a new strategy designed to claw back costs. 

With the ATO claiming that nine out of 10 landlords were making incorrect claims—through the omission of rental income, over-claiming on expenses, or claiming for improvements to private properties—the crackdown means landlords and investment property owners need to be more mindful than ever.

If you have concerns about the way you are claiming costs for your investment property, simply leave your contact details here.