With interest rates remaining elevated and widely expected to stay higher for some time as inflation continues to present challenges, many clients are reviewing their current lending arrangements and considering refinancing options.
In addition, we are seeing refinancing driven by the need to fund or restructure ATO debt, noting that interest on ATO liabilities is not tax deductible, which can further impact cash flow and overall tax outcomes.
While refinancing can be beneficial from a cash flow perspective, care should be taken to ensure loan structures remain tax effective.
Key Considerations
Purpose of the loan is critical
The ATO determines interest deductibility based on how the borrowed funds are used, not the security provided.
Mixing loan purposes can create issues
Combining personal (non-deductible) and investment (deductible) borrowings within the same loan can impact interest deductibility. This commonly occurs where all debt is rolled into a single loan facility.
Cross-collateralisation risks
Where multiple properties secure a single loan, or one property secures multiple loans, it can make it difficult to clearly trace the use of funds.
Common Issues We Are Seeing
- Refinanced loans being consolidated into a single facility
- All personal and investment debt combined into one loan
- Loan splits not being maintained or clearly documented
- Banks focusing on lending security rather than tax outcomes
Why this matters
- Interest may become partially or fully non-deductible
- Increased complexity in tracking and substantiating interest claims
- Potential ATO scrutiny if loan purpose cannot be clearly demonstrated
What to consider before refinancing
- Maintain separate loan splits for different purposes
- Avoid combining private and investment debt into a single loan
- Ensure loan structures allow clear tracing of funds
What this means for you
If you are reviewing your lending, considering refinancing, or restructuring debt (including ATO liabilities), it is important to ensure the structure is set up correctly from both a cash flow and tax perspective.
We strongly recommend involving us early in any refinancing discussions so we can work alongside your broker or lender to ensure the structure is appropriate and avoids unintended tax consequences.
We have seen a number of recent cases where loan structures have been simplified by lenders but have resulted in unfavourable tax outcomes.
Warmest regards,
Adam and the Stable Team.