Two clients can borrow the same amount, buy the same investment property, and end up with very different tax outcomes — purely because of how the borrowing was arranged. The difference is often tens of thousands of dollars over the life of a loan, and it is largely determined in the first week.
Important — please read: Samrat Sharma & Associates is not an Australian Credit Licence holder and does not provide credit assistance. We do not recommend loans, lenders or credit products. What we do is explain the tax consequences of how borrowings are structured, and — with your permission — pass your contact details to a licensed mortgage broker or lender who then advises you under their own licence.
Commission disclosure: we may receive a commission or referral fee from the broker or lender if you proceed with a loan. We will tell you the amount, or how it is calculated, before you engage them — just ask. We have no preference as to which lender you use and we do not recommend one. Any decision about a loan is one for you and your licensed credit adviser.
The principle everything follows from
Interest is deductible based on the use to which the borrowed money is put. Not the security offered, not what the loan is called, not which property the mortgage sits over.
Borrow against your home to buy an investment property, and the interest is generally deductible — because the funds were used to produce assessable income. Borrow against your investment property to buy a family car, and that interest is not deductible — even though the loan is secured over an income-producing asset.
The ATO applies this strictly. If part of a loan was used for private purposes, you can only claim the portion relating to producing your income.
Offset versus redraw — the distinction that matters most
These two features look almost identical on a banking app and are treated completely differently for tax.
An offset account
An offset account is a separate deposit account. Its balance reduces the interest calculated on the loan, but the loan balance itself does not change. The money in it is your own savings.
Because the loan balance never moves, taking money out of an offset account does not change the purpose of the loan. Withdraw $50,000 from the offset on an investment loan to buy a car, and the loan is still fully an investment loan. Your interest deduction goes up, because the offset balance fell — but the deductible proportion is untouched.
A redraw facility
Redraw is different. Paying extra off a loan reduces the balance. Redrawing it is new borrowing, and the deductibility of that new borrowing depends entirely on what you spend it on.
Redraw $50,000 from an investment loan to buy a car and you have created a mixed-purpose loan. Part of the interest is now non-deductible, and you must apportion it — for the life of the loan.
Same $50,000. Same car. Offset: no tax consequence. Redraw: a permanently contaminated loan and an apportionment calculation every year from now on.
Why mixed-purpose loans are so unpleasant
Once a loan has both deductible and non-deductible components, every repayment you make is applied proportionally across both. You cannot direct repayments at the non-deductible part to clean it up. The contamination persists until the loan is fully repaid.
This is why the standard approach is to keep purposes in separate loan splits. One split for private purposes, one for each investment purpose. Splits cost nothing at most lenders and make the tax treatment obvious for the next decade.
Capitalising interest, and why we are cautious
Arrangements that involve paying only minimum amounts on investment debt while capitalising the interest, in order to direct all cash at private debt, have attracted anti-avoidance attention. There is a difference between structuring your affairs sensibly and entering a scheme whose dominant purpose is a tax benefit. If someone is proposing something in this territory, get it reviewed before you sign.
Practical points that hold up
- Use offset, not redraw, on any loan with a deductible purpose. If you are unsure whether you have offset or redraw, check — a lot of people are wrong about which one they have.
- Split loans by purpose from the start. Fixing it later usually is not possible.
- Never park investment loan funds in a private account before spending them. The money can lose its character in transit. Pay from the loan to the destination.
- Keep records of what every drawdown was used for. Years later, this is what supports your claim.
- Get the structure right before settlement. Restructuring afterwards can mean refinancing costs, and sometimes the deduction simply cannot be recovered.
How our referrals work
We work with licensed mortgage brokers and lenders and are happy to introduce you. To be clear about what that involves: with your consent, we pass on your name and contact details. The broker or lender then deals with you directly and provides all credit advice under their own licence. We do not recommend particular loans or lenders.
What we do contribute is the tax side — reviewing the proposed structure before you sign, so the deductibility works the way you expect.
On commission: we may be paid a referral fee by the broker or lender if you take out a loan. We think you should know that up front, so here it is. It does not change what we tell you — our input is limited to the tax treatment, and we have no stake in which lender you choose. If you want to know exactly what we would receive in your situation, ask us and we will tell you before you engage anyone.
Need a hand with this?
If you are buying an investment property, refinancing, or you have a loan you suspect has been contaminated by a redraw, get the structure reviewed before settlement. It is far cheaper than fixing it afterwards.
Related reading
- Rental property tax mistakes: why the ATO says 9 in 10 landlords get it wrong
- Depreciation schedules: when they’re worth it and when they’re not
- Working from home deductions 2025–26: the 70 cent rate explained
- Our full range of services
Sources
- ATO – Rental properties: interest expenses
- ATO – How to claim rental expenses
- ATO – Get your rental right this tax time
This article is general information only and does not take your personal circumstances into account. Rates and thresholds are current at the date of publication. Speak to us before acting on anything you read here.
Samrat Sharma & Associates 