Is your loan interest really deductible? 

We often get asked whether interest on a loan can be claimed as a tax deduction. 

The golden rule is simple: it depends on what the money was borrowed for. 

Why did you borrow the money? 

• Borrow to buy a private home → no deduction. 

• Borrow to buy shares, a rental property, or a business etc → interest is generally deductible. 

Redraw vs Offset Accounts 

This is where people often trip up: 

• Redraw facility: Treated as a new borrowing. Deductibility depends on what you spend the redrawn money on. 

• Offset account: Treated like your savings account. Taking money out is not borrowing, so deductibility doesn’t change. 

Case Study: Anne vs Austin 

• Anne’s redraw: Anne paid extra into her home loan, then redrew funds to buy shares. Because the redraw is a new loan for an investment, the interest on that portion is deductible. 

• Austin’s offset: Austin parked savings in his offset account, then withdrew the money to buy shares. Because the original loan was for his private home, none of the interest is deductible. 

Same outcome financially, very different tax outcome. 

Parking borrowed funds in an offset 

Some clients borrow money to invest “later” but park the funds in an offset in the meantime. This is risky: 

• While in the offset, the borrowed funds aren’t producing income. 

• Worse, it may “taint” the loan, making it hard to ever claim deductions, even if you eventually invest. 

Key takeaway 

Loan structuring is an area where little mistakes can cause tax problems. Always check with your accountant before setting up or moving money around loan facilities. We can work with you and the bank/broker to make sure your loans are structured correctly to maximise the interest deductibility.