Using Redraw to invest
Withdrawing from a loan is considered new borrowings for tax purposes. So the same principles apply as to all loans. It is generally the use the borrowed funds are put to that determines deductibility. The security of the loan does not matter for tax deductibility reasons.
The reason that using redraw is generally a ‘no no’ is that it usually results in a mixed purpose loan. If there are other monies which have been drawn down and used for other things then increasing one loan to buy a property will result in a mixed purpose loan. See my other tip on why not to mix loan purposes.
So unless your loan account balance is $0 it is best not to use redraw but to set up a new split before borrowing.
However where your loan is Interest Only it is possible to use redraw and to later split the loan into the relevant portions. If doing this you should not make any deposits to the loan account other than interest.
Ideally you would split before borrowing but some people buy property at short notice with no planning and in these cases it would be better to use redraw than to use cash to pay the deposit as a mixed loan can be unmixed later – see Tax Tip 44.
The main point is that using redraw will result in a mixed purpose loan – unless the redrawn amount is used for the same purpose as the underlying loan. So avoid redrawing if possible.
Written by Terry Waugh, CTA & lawyer at Structuring Lawyers, www.structuringlawyers.com.au