I have a situation where I am about to do some renovations to my home (PPOR) that will require about $100K to fund. Even though I have a large share portfolio that if partly liquidated could fund the $100K, I want to keep the shareholding intact and borrow the money required for the renovations. However, if the purpose of the loan is not for investment, the loan interest would not be tax deductible.
Although in principle I believe that following is an acceptable way to fund the renovations whilst maintaining my shareholding and still be able to claim a tax deduction on loan interest, I am not sure if the mechanics of what I am doing would be acceptable to the tax office.
I use a CommSec Cash Account (CCA) for settling my share sales and purchases. I plan to open a line of credit (LOC) with a lender that allows me to borrow up to $100K say. When a bill comes through from the builder, I plan to sell some shareholding I have (preferably one that is in the red to avoid CGT) that realises approximately the amount owed to the builder. More or less at the same time I buy back the same shareholding to maintain my same position in that company. I then transfer from my LOC an amount exactly equal to the purchase cost to the CCA.
When settlement occurs T+3, there will be sufficient funds in the CCA to meet the purchase and once the share sale settles, I will have sufficient funds to pay the builder's bill directly from the CCA.
Now since the purpose of my drawdown on the LOC was to buy shares, I would assume that the interest on it is tax deductible. The builder was paid using the proceeds of a share sale, not from the LOC. However, having everything flow through the CommSec Cash Account creates perhaps some ambiguity that the ATO might disprove of. For instance, even though the transfer from the LOC to the CCA was for exactly the amount of the purchase transaction, once in the CCA it gets mixed up with whatever funds may be sitting in the CCA at the time (dividend payments, proceeds from unrelated sales etc.). When the purchase transaction settles, could the ATO simple say that the purchase was satisfied by other funds that may be in the CCA and thus the LOC drawdown was simply transferring funds between accounts and not related to the share purchase?
If the above process is acceptable, it would seem a tax friendly way of being able to borrow to fund a non-investment expense so long as one has an equivalent amount tied up in non-geared share investments.