Situation may arise where use a loan facility to borrow money for income-producing purpose (e.g., the acquisition of a rental property) but the client then draws further money (e.g., using a redraw facility) for private purposes. If this occurs, the loan account becomes a ‘mixed purpose account’, and the interest will cease to be 100% deductible. Instead, interest will need to be apportioned between each purpose – which is a daunting calculation.
In addition, any repayments will generally need to be applied proportionately against the income-producing and private portions of the loan balance at that time. In other words, any repayment cannot simply be applied solely against the private portion of the loan.
However, a strategy that can effectively remedy this problem is to refinance the mixed purpose loan by borrowing an equivalent amount under two separate loans or sub-accounts.
In TR 2000/2, the ATO provides that, where a taxpayer with a mixed purpose loan refinances the loan by borrowing under two separate loans (or sub-accounts) that are equal to the respective income-producing and non-income-producing proportions of the mixed purpose loan, the interest accrued on the debt incurred in refinancing the income producing portion of the mixed-purpose debt will be fully deductible.