Warning For Those Redrawing Investment Loans
The Australian Taxation Office (ATO) estimates that incorrect reporting of rental property income and expenses is costing around $1 billion each year in forgone tax revenue. A big part of the problem is how taxpayers are claiming interest on their investment property loans and whether they’re redrawing from them.
We’ve seen an uptick in ATO activity focussing on refinancing or redrawing loans. This activity is a result of a major data matching program of residential property loan data from financial institutions from 2021-22 to 2025-26. This data is being matched to what taxpayers have claimed on their tax returns. Those with anomalies can expect contact from the ATO to explain the discrepancy.
If you have an investment property loan and redraw on the loan for a different purpose to the original borrowing, the loan account becomes a mixed purpose account. You need to apportion the interest accruing on mixed-purpose accounts between the different purposes for which you used the money.
On the other hand, you may use redrawn funds to produce investment income. If so, the interest on this portion of the loan should be deductible.
For example, if you redraw on the loan to pay for a private holiday or personal debt, the interest on that portion of the loan isn’t deductible. You’ll need to split the interest expenses into deductible and non-deductible parts. Repayments will usually need to be apportioned as well.
How does this work with offset accounts?
Banks treat withdrawals from an offset account as savings rather than a new borrowing. If you withdraw funds from your offset account, it’ll reduce the interest payable on your linked loan. You’ll typically increase the interest that accrues on the loan. However, this won’t change the deductible percentage of the interest expenses. That is, when you withdraw funds from the offset account this is really a withdrawal of savings. It won’t impact on the extent to which interest accruing on the loan account is deductible.
Withdrawing funds from an offset account to buy a rental property won’t make the home loan interest deductible. But if you redraw funds from the home loan to purchase the rental, the interest on that portion should be deductible. The tax treatment always depends on how the arrangement is structured.
You must ensure that if you’re going to redraw from your investment loan, that you align it with the original purpose of the loan and you speak to your advisors first. Reach out to Aintree Group Wealth to get started.
For advice on the tax implications involved, please contact Aintree Group Chartered Accountants here.
This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your financial advisers.
