The treatment of interest expenses on loans can significantly impact your tax position, but the rules are more nuanced than many realise. At the heart of it lies one important question: What are the borrowed funds used for?
Purpose of the Loan
Interest is generally only deductible if the funds are used for income-producing or business purposes. It doesn’t matter what the loan is secured against. For example, borrowing to buy a personal residence won’t make the interest deductible—even if the loan is secured against an income-generating asset.
Redraw vs Offset
A redraw facility is treated as a new loan. Deductibility depends on what the redrawn funds are used for.
Offset accounts, on the other hand, act like savings accounts. If money is withdrawn, it’s not considered borrowed—so any resulting interest is not deductible unless the original loan itself was for income-producing purposes.
Common Trap: Parking Funds
Withdrawing borrowed money and parking it in an offset account before investing can jeopardise deductibility. The ATO may not accept that the borrowed funds were used for income production, particularly if the funds are mixed or delayed.
What You Should Do
Before entering into a new loan arrangement or using redraw/offset features, consult a tax adviser. Once a loan is misstructured, it can be difficult or impossible to fix without long-term tax implications.
