ATO’s warning in Investment Loan Reporting
The ATO has raised concerns over the widespread misreporting of income and expenses related to rental properties, estimating an annual loss of approximately $1 billion in tax revenue. A significant contributor to this issue lies in the questionable practices surrounding the claiming of interest on investment property loans.
The increased focus from the ATO is specifically aimed at scrutinizing refinanced or redrawn loans. This heightened attention arises from an extensive data matching initiative that encompasses residential property loan data obtained from financial institutions, covering the period from 2021-22 to 2025-26. The meticulous cross-referencing of this data with taxpayers' reported information means that individuals with discrepancies may expect communication from the ATO, as they seek clarification on the inconsistencies.
For those with investment property loans engaging in redraws for purposes differing from the original borrowing, the loan account transforms into a mixed-purpose account. It becomes imperative to apportion the interest accruing on such accounts among the various purposes for which the funds were utilised.
If the redrawn funds are invested to generate income, the interest on this specific portion of the loan remains tax-deductible. on the other hand, if funds are redrawn to cover personal expenses like a vacation or to settle personal debts, the interest linked to this part of the loan balance becomes non-deductible. This not only necessitates the apportionment of interest expenses into deductible and non-deductible components but also typically requires a proportional allocation of repayments.
Futher, it is vital to understand that withdrawals from an offset account are treated as savings rather than fresh borrowings. In cases where a loan account is paired with an interest offset account reducing the loan’s payable interest, withdrawing funds from the offset account may elevate the accruing interest on the loan. However, this does not alter the deductible percentage of interest expenses. In essence, withdrawing funds from the offset account constitutes a savings withdrawal, maintaining the existing deductible status of interest accruing on the loan.
If a home loan, initially used for a private residence, has funds in an offset account, withdrawing those funds to finance a rental property deposit does not grant eligibility to claim interest on the home loan. However, if funds are redrawn from the home loan explicitly for acquiring a rental property, the interest accruing on this portion of the loan becomes tax-deductible. It is crucial to emphasize that the tax implications always hinge on the specific structuring of the arrangement.
In conclusion, property investors are urged to proactively engage with the nuances of investment loan reporting. Staying informed about the regulations governing redrawn loans and offset accounts not only ensure their tax compliance so mitigate the risk of unnecessary investigation by ATO, but also fosters a transparent and compliant financial environment.
Talk to us today if you have any queries regarding the above.
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Disclaimer:
The information and content provided in this publication are purely for informative purposes. It is not meant to serve as advice, and you should not act specifically on the basis of this information.