Blog Details

When it comes to claiming interest deductions, many taxpayers—both individuals and small business owners—are often surprised to learn that the type of asset used as security for a loan does not determine whether the interest is deductible. Instead, what matters most is how the borrowed funds are used.

‍

Let’s break it down with two simple examples:

Using Your Home as Security – Still Deductible?

Say you use your main residence to secure a $500,000 line of credit. You then take that money and purchase an investment property outright. Even though your home (a non-income-producing asset) is the loan security, the interest on the loan is deductible because the funds were used to acquire an income-generating investment.

‍

Using an Investment Property as Security – Not Always Deductible

On the other hand, if you own an investment property and use it to secure a new loan—but then use those funds to pay down your home loan—you cannot claim a tax deduction for the interest. Why? Because the borrowed money wasn’t used for an income-producing purpose.

‍

The Key Takeaway

The deductibility of interest hinges on purpose—not on the collateral. The Australian Tax Office (ATO) focuses on what the borrowed funds were used for, not what was used to secure the loan. This principle applies whether you're managing a personal investment portfolio or running a small business.

‍

Why This Matters

Misunderstanding this rule could lead to incorrect claims and potentially an ATO audit. If you're considering refinancing, redrawing, or restructuring loans, it's essential to seek professional advice to ensure that your interest deductions are legitimate and optimised.

If you're unsure whether the interest on your loan is deductible, don't leave it to guesswork. At Plan Tax, we help individuals and small business owners make informed financial decisions and stay compliant with ATO guidelines.

Get in touch with Plan Tax today to ensure your loan structures and deductions are working in your favour. We're here to simplify tax and support your financial growth.