Redraw vs. Offset: Reviewing Investment Loan Practices

The Australian Taxation Office (ATO) suggests that incorrect reporting of rental property income and expenses is causing an annual loss of approximately $1 billion in tax revenue. One of the main issues is how taxpayers claim interest on their investment property loans.

Recently, the ATO has become more focused on loans that have been refinanced or redrawn. This increased scrutiny comes from a major data-matching effort involving residential property loan data from financial institutions, spanning from 2021 to 2026. The ATO is comparing this data with what taxpayer’s report on their tax returns. Those with inconsistencies can expect to hear from the ATO to clarify the differences.

How is interest affected when redrawn funds are used for different purposes?

If you have a loan for an investment property and you use the redrawn funds for a different purpose than the original loan, it turns the loan into a mixed-purpose account. You’ll need to split the interest that accrues among the different purposes for which you used the money.

On the other hand, if you use the redrawn funds to generate income from your investment, you can deduct the interest on that part of the loan.

For example, if you use the redrawn funds for a personal vacation or to pay off personal debt, you can’t deduct the interest related to that portion of the loan balance. In such cases, you need to separate the interest expenses into deductible and non-deductible parts, and you may need to allocate repayments accordingly.

How offset accounts impact loan interest?

When you withdraw funds from an offset account, it’s considered a withdrawal of savings, not a new loan. If you have a loan account with an attached offset account that reduces the interest you pay on the loan, taking money from the offset account will increase the interest on the loan, but it won’t change the deductible portion of the interest. In essence, withdrawing funds from the offset account affects savings, not the deductibility of interest on the loan account.

If you have a home loan that was originally used to buy your primary residence and you have funds in an offset account, withdrawing those funds to use as a deposit on a rental property won’t let you claim any interest on the home loan. However, if you redraw funds from the home loan to purchase a rental property, you can deduct the interest on that part of the loan. The tax treatment depends on how you structure the arrangement.

If you are unsure about the implications of your loan? Let our Lending Solutions team guide you in optimizing your financial strategies. Call us today to ensure you are you are on the right track and making the most of your investments.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.