Australian property tax and expatriate tax expert STEVE DOUGLAS explains the tax implications when refinancing your property loan.

Q. If I refinance my Australian property loan, will I lose my tax deduction?

A. Refinancing your property usually improves the interest rate or general terms on the loan and is also advisable if you wish to use the built-up equity in your property to assist with the purchase of another property. What matters most is what the original drawdown of the loan was used for. Any subsequent change or refinance keeps the original purpose and appropriate tax treatment. If you increase your loan, a pro-rata allocation of the loan against the different uses is made and applied against each expense. It’s irrelevant what the loan is secured against, or what it may be called, the sole deciding factor is what the money was used for.

          If you borrowed A$80,000 to buy a property for the purpose of renting, the bank advances the money to the settlement agent, so it’s clear the loan is designated for that property and since it’s rented, you can claim a tax deduction. If you borrow an additional A$20,000 to renovate the property, the loan will be considered as part of the property expenditure. Thus, interest against the new total of A$100,000 still remains tax deductable.
          But if you borrow another A$25,000 to go on vacation, using the equity in the house as collateral and increasing your loan to A$125,000, you’ll not be allowed to claim this amount – since it’s for private purposes. You’ll incur a pro-rata claim of 100/125, or 80 percent, of the interest as a deduction and the remaining as private with no claim allowed.
          Should you decide to use the equity to help with a deposit on another rental property, that portion would be a deduction against the new rental property – not the original one. If you refinance with another bank later, this ratio comes with the new loan as the original use is tracked forward. It doesn’t matter how many times this occurs, each time a redraw or refinance happens you simply recalculate the ratio and bring that forward.

          If the loan is in a single amount any repayment will be allocated in the ratio of the loan use. So if you wanted to pay off the A$25,000 holiday loan, only 20 percent would be allocated to reduce that portion on a proportionate basis. To avoid confusion, split such loans.