1. The Purpose of the Loan Matters Most
The key question is: What did you use the borrowed money for?
- If the money is used for a business or another income-producing purpose, the interest is usually deductible.
- If it’s used for personal purposes (like buying a home to live in), the interest generally isn’t deductible—no matter what the loan is secured against.
Example:
Harry borrows money to buy a new home for himself. The loan is secured against his rental property, but because the borrowed money was used for a private purchase, the interest can’t be claimed as a tax deduction.
2. Redraw vs Offset Accounts – They’re Not the Same
Although redraw facilities and offset accounts can feel similar financially, the tax rules treat them very differently.
Redraw facility:
- If you’ve repaid extra on a loan and then redraw those funds, it’s treated like a new borrowing.
- The tax treatment depends on how you use the redrawn money.
Offset account:
- Money in an offset account is your savings, not a loan repayment.
- Taking money out doesn’t count as borrowing—it’s just withdrawing your own cash—so we look at what the original loan was for.
Example 1 – Lara’s Redraw:
Lara’s home loan was for her main residence. She redraws $50,000 and uses it to buy shares. Now she has a mixed-purpose loan:
- Interest on the portion for the home → not deductible
- Interest on the $50,000 for shares → deductible (as it’s for income-producing purposes)
Example 2 – Peter’s Offset:
Peter also has a home loan for his main residence. He withdraws money from his offset account to buy shares. Even though his interest bill goes up, none of that interest is deductible because the original loan was for a private home.
3. Parking Borrowed Funds in an Offset – A Trap to Avoid
Some people take out a loan intending to use the funds for an investment but park the money in an offset account until they’re ready to buy. This can cause problems:
- While the funds sit in the offset account, they’re not being used to earn income—so interest on the loan usually isn’t deductible.
- It can even “taint” the loan, meaning the interest might not be deductible later, even after you use the money for an investment.
Example – Duncan’s Offset Problem:
Duncan takes out a new loan to buy shares but parks the funds in an offset linked to his rental property loan. While the money sits there, the interest on the new loan isn’t deductible. Worse still, even if he later takes the funds out to buy the shares, the ATO may disallow the deduction because it’s hard to prove the source of the money.
4. Get Advice Before You Act
Once you’ve set up a loan or moved funds around, it can be difficult—or impossible—to fix mistakes. That’s why it’s worth talking to a tax professional before you draw down or restructure loans.
We can:
- Help you structure your loans in a tax-effective way
- Work with your financial adviser to make sure your loan supports both your investment plans and your tax position
Bottom line: The purpose and flow of funds matter. Get it right at the start to avoid expensive surprises at tax time.
