Many business owners assume that all loan interest is deductible. The truth is, the tax treatment depends less on the loan itself and more on what the borrowed money is used for.
When Is Interest Deductible?
Think of it this way:
- If the borrowing relates to private expenses, such as buying your own home, the interest can’t be claimed.
- If the borrowing is tied to generating income—for example, investing in shares, purchasing a rental property, or funding a business—the interest is generally deductible.
Why Loan Features Make a Difference
The structure of your loan can completely change the outcome.
- Using a redraw facility counts as taking out a new loan. Whether you can claim the interest depends on how the redrawn funds are spent.
- Using an offset account doesn’t alter the loan’s original purpose. Withdrawing funds from an offset linked to a private home loan won’t suddenly make the interest deductible.
A Tale of Two Investors
Take Anne and Austin as an example.
- Anne had paid extra into her home loan and later redrew those funds to purchase shares. Because the redraw was used for an investment, the interest on that portion is deductible.
- Austin, however, used money sitting in his offset account to buy shares. Since his loan was originally for his private residence, the interest remains non-deductible. Both ended up with investments, but only Anne gets the tax benefit.
The Risks of Parking Borrowed Funds
Some borrowers draw down money intended for investing but leave it in an offset account until they’re ready. While it feels like a safe option, this strategy can backfire:
- Idle funds in an offset don’t generate income.
- The arrangement may complicate or even reduce the ability to claim deductions later.
Final Thoughts
Getting loan interest deductions right isn’t just about the money you borrow—it’s about how the loan is structured and how the funds are used. The differences can be subtle but have major tax consequences.
Before setting up or moving money between facilities, check with your accountant. We can work with your bank or broker to ensure your loans are structured for maximum deductibility.
