How to Calculate Loan Interest Portions Based on Use

Posted On: Thursday, February 21, 2019

Q: Mr A has obtained a loan $250k using his residential house as security. For example, he used $100k for personal use and used $150k for investment use.

Unfortunately, his loan statement does not distinguish the monthly interest and principal payment for personal use and investment use.

What’s the best way to calculate the interest and principal payment of investment use for deductibility? Mr A wants to make sure to know the way of calculation to satisfy the ATO in case of enquiry.

Answer

Retain detailed records of the disbursement of funds at the time the loan was taken out. The “use” test as consistently applied by the courts determines deductibility of interest. You demonstrate that loans have been used to acquire income producing assets by having the written evidence to justify such a claim in the event of an ATO audit. If 60% of the funds have been applied to genuine investments, then 60% of the interest is tax deductible.

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