When it comes to building wealth through investment properties or shares, many Australians use borrowed funds to get started. The good news? If the loan drawdown is used for income-producing purposes, the interest may be tax-deductible. But there are important rules and traps to be aware of.
Here’s a breakdown of how interest deductibility works, and what you need to watch out for. 💡
🔁 1. Redraw Facilities: Be Careful with Mixed Use
Let’s say you borrow $500,000 for an investment property. A few years later, you pay off $100,000 and then redraw $50,000 to buy a car.
Result? Only the interest on the $450,000 used for the investment property is deductible. The interest on the $50,000 used for the car is not.
Key point: The deductibility of interest is based on how the borrowed money is used, not the original purpose of the loan.
Tip: Avoid using redraw for personal expenses or maintain detailed records to apportion interest correctly.
🔐 2. Security vs Purpose of the Loan
Many people believe that if a loan is secured against an investment property, the interest is deductible. Not necessarily.
The rule: It’s not the asset used as security that determines deductibility, but what the borrowed funds are actually used for.
- Borrow against your home to buy shares? ✅ Interest = Deductible.
- Borrow against your investment property to pay for a holiday? ❌ Interest = Not deductible.
Tips:
- Use a separate Loan Split for investments – Avoid mixed loans.
- Focus on the purpose of the funds, not what the loan is secured against.
💸 3. Equity Release – Deductible or Not?
Accessing equity from your home or investment property can be a great way to invest further. But again, the use of the funds matters.
- Use the funds to buy an investment property or shares? ✅ Interest is deductible.
- Use the funds to buy a new car or renovate your home? ❌ Interest is not deductible.
Tip: Keep investment and personal borrowing separate with different loan splits.
🧾 4. Record Keeping for Mixed-Use Loans
Mixed-use loans (some for investment, some for personal) are common but tricky.
ATO requires: Accurate apportioning of interest based on the use of each portion of the loan.
If you don’t track what redraws were used for, you may:
- ⚠️ Overclaim and risk an audit
- 🛑 Underclaim and miss out on tax benefits
Best practices:
- 📘 Keep a log of every loan drawdown, repayment, and redraw with the purpose noted
- 🗃️ Maintain all loan statements
- 🔀 Use split loans to separate investment and personal borrowing
- 🚫 Avoid redrawing for mixed purposes
Fixes:
- 🔄 Refinance into clearly split loans
- 💼 Use offset accounts instead of redraw to avoid accidentally tainting loan purpose
🔁 5. How Refinancing Affects Deductibility
Refinancing doesn’t reset the deductibility of interest. It continues based on the original purpose of the borrowed funds.
- Refinance an investment loan to get a better rate? ✅ Interest stays deductible.
- Refinance and draw extra for personal use? ❌ Only the portion used for investment remains deductible.
Best practices:
- 🔍 Don’t mix personal and investment debt into one loan
- ✂️ Maintain or create split loans when refinancing
- 🧹 Use refinancing as an opportunity to clean up messy mixed-use loans
🕵️♂️ 6. ATO Data Matching on Investment Loans
The ATO has significantly ramped up its data matching capabilities, especially in relation to investment property loans. Banks and lenders are now required to report detailed information about investment loans to the ATO, including:
- Loan amounts
- Interest paid
- Redraw and offset activity
- Whether the loan is classified as investment or personal
Why it matters:
- The ATO uses this data to cross-check tax returns
- If you claim interest deductions that don’t align with the loan purpose or redraw activity, you may trigger an audit
Tip:
- ✅ Make sure your loan structure matches your tax claims
- 🧾 Keep evidence of how borrowed funds were used
- 🔍 Be cautious when using redraws or offset accounts that may alter the nature of the loan
Final word: The ATO knows more than ever, so transparency and accurate record keeping are critical.
📊 Summary
| Situation | Deductibility Outcome | Best Practice |
|---|---|---|
| Redraw used for personal | ❌ Not deductible | 🚫 Avoid or track use precisely |
| Loan secured by investment property but used for private spending | ❌ Not deductible | ✅ Focus on loan purpose |
| Equity released for investing | ✅ Deductible | 🔄 Use separate splits |
| Mixed loan with unclear redraws | ⚠️ Partially deductible (if tracked) | 🧾 Keep detailed records or refinance into split loans |
| Refinance of investment loan | ✅ Still deductible | ✂️ Keep use/purpose unchanged |
| ATO data matching flags inconsistent claims | ⚠️ High audit risk | 🕵️♂️ Ensure records match ATO data |
💭 Final Thoughts
Interest deductibility is a powerful tool to help you build wealth, but it’s easy to get caught out if loans are not structured and tracked correctly. The golden rule: deductibility follows the purpose of the funds, not the loan account or security.
If you’re unsure about your current loan structure or thinking about refinancing or redrawing, speak with your accountant or financial advisor to make sure you’re maximising your deductions and staying compliant.
Need help reviewing your loan setup?
We’re happy to help clarify what’s deductible and what’s not – just reach out!
We also have connections to mortgage brokers who specialise in investment lending.