CJT
it is possible the interest on the $2000 balance of the loan would still be deductible
There have been a couple of court cases decided on the behalf of the taxpayer that has allowed deductions for example for business loans where the business has failed or been sold for less than the payout value of the loan.
the interest would remain deductible as long as the loan balance remained owing however there would have to be some sort of commercial reality to how the capital portion of the loan was being reduced.
Seek some proper professional help because if you do the slightest thing wrong in structuring the loan or deviate from the reasons the court decided in previous cases the interest would be deductible then the ATO could use it as an excuse to knock out the interest deduction
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