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Credit cards are a convenient tool for managing expenses, but they come with tax implications that are often misunderstood. Whether you’re a property investor, a small business owner, or simply someone managing a side hustle, knowing how to use credit cards correctly can help you avoid costly tax errors.

Let’s break it down.

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1. A Credit Card Is a Loan—And Loans Have Tax Rules

It’s important to remember that credit cards are a form of borrowing. This means the same tax principles that apply to other loans also apply to credit card use.

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If you pay off your card in full each month, there's typically no interest incurred, and therefore no tax deduction. But if you carry a balance and interest is charged, that interest may be tax-deductible—but only if the borrowed funds were used for income-producing or business purposes.

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2. Mixed-Use Credit Cards: Where It Gets Complicated

The problem arises when a single card is used for both personal and investment or business expenses. For example, using one card to buy both groceries and a hot water system for your rental property creates what’s known as a "mixed-purpose loan."

In these cases:

• The interest on the loan must be apportioned between deductible and non-deductible use.
  
  
• Tracking and justifying deductions becomes difficult, especially after the first statement cycle.
  
  
• You risk losing part or all of the deduction if the ATO considers the records unclear or inconsistent.
  
  

3. How to Avoid the Trap of Mixed-Use Credit Cards

Here are three simple ways to keep things clean:

• Use separate cards: One card strictly for private use and another exclusively for business or investment-related expenses.
  
  
• Time your payments carefully: If you must use the same card, ensure the balance is $0 before making an investment-related purchase. For instance, pay off your groceries first, then buy the investment item.
  
  
• Pay before you purchase: Use an offset or loan facility to transfer funds to the credit card before the transaction. This helps ensure the debt is clearly linked to the investment use.
  
  

Modern banking apps make this easier to manage, but it still requires diligence.

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4. Refinancing Credit Card Debt: Be Cautious

In theory, refinancing a credit card debt with another loan doesn’t affect deductibility as long as the original debt was investment-related. But if the original card was used for both personal and business expenses, refinancing just complicates the issue—potentially turning the new loan into a mixed-purpose debt as well.

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5. Debit Cards Are Not the Same

Unlike credit cards, debit cards draw on your own money—not borrowed funds. Once you've paid for an item using your own cash, you can't later refinance that cost and claim the interest on a new loan. Doing so is considered reimbursing yourself, which is not tax-deductible under ATO rules.

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Final Thoughts: Use Credit Cards Strategically to Stay on the Right Side of Tax Law

Using credit cards for business or investment expenses can be effective—but only if you manage them properly. Mixed-use cards can create messy records, reduce your deductible interest, and increase your risk of audit.

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Clear separation between personal and investment use is key. A little planning now can save a lot of hassle (and money) later.

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Want to make sure your credit card and loan strategies are tax-smart?

At Plan Tax, we help small business owners and individual taxpayers navigate the complexities of borrowing, deductions, and compliance with confidence.

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Book your tax planning session today and let’s ensure your financial setup supports your long-term goals—before 30 June hits.