Many clients asked us about claiming loan interest as a tax deduction. It’s an interesting question. Interest treatment can significantly impact your tax position. But the rules aren’t always simple. Here’s what matters most.

Why You Borrowed Matters

The key to interest deductibility is how you use the borrowed money. Forget about loan security. Deductibility hinges solely on whether the funds finance business or income-producing activities.

Example: Harry borrows to buy a home. He secures the loan against a rental property. Result? No deduction. The funds bought a private asset, even though security was income-producing.

Redraw vs. Offset Accounts: Critical Differences

These might seem economically similar, but tax treatments are very different.

Redraw Facilities

• Paying down a loan then redrawing? That’s a new borrowing.
• Deductibility depends on how the redrawn money is used.

Example (Lara):

1. 1. Lara’s original loan bought her home.
   2. She redraws extra repayments to buy shares.
   3. Result: Mixed-purpose loan. Interest on the redrawn portion (for shares) is deductible. The rest isn’t.

Offset Accounts

• Money in offset acts like personal savings.
• Withdrawing it isn’t borrowing, even if loan interest rises.
• Deductibility depends on the original loan’s purpose only.

Example (Peter):

1. 1. Peter’s loan bought his home.
   2. He withdraws offset savings to buy shares.
   3. Result: No deduction. The loan’s original purpose (private) governs all interest.

The Hidden Risk: “Parking” Funds in Offset Accounts

More clients borrow for future investments but temporarily park funds in offset accounts. This often backfires.

Example (Duncan):

1. 1. Duncan takes Loan B to buy shares (future income).
   2. He parks Loan B funds in an offset account linked to Loan A (his rental property loan).
   3. Problem: Loan B funds aren’t earning income; they’re just reducing Loan A’s interest.
   4. Result: Likely no deduction for Loan B’s interest while parked.

Worse: Parking can “taint” future deductibility:

• Even if Duncan later buys shares with the parked funds, the ATO may deny deductions for Loan B.
• Why? Funds likely mixed with other money in the offset. Tracing the exact source becomes impossible.

Protect Yourself: Key Actions

1. 1. Get advice BEFORE structuring loans. Oversights are hard to fix later.
   2. Separate loans clearly by purpose. Avoid mixing private and income uses.
   3. Never park investment loans in offset accounts linked to private debts.
   4. Work with us and your financial adviser, structuring loans for optimal tax and financial outcomes.

Bottom line: Interest deductibility lives and dies by how you use the money. Structure correctly from day one, or risk losing deductions. Let’s talk before you commit.