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When it comes to property investment, borrowing strategies can make a significant difference in both cash flow and tax outcomes. A common misconception I hear from clients is:
"I don't want to borrow more against my positively geared property—it might become negatively geared."
This line of thinking often leads to missed opportunities and confusion about what actually determines the deductibility of interest.

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It’s Not About the Property—It’s About the Purpose

The most important thing to understand is this: the deductibility of interest depends on how the borrowed funds are used—not which property is used as security.

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Let’s say you own a property at 123 Smith Street. It’s positively geared, and you currently have a 50% loan-to-value ratio (LVR). You decide to refinance and increase the loan to 90% in order to purchase another property at 456 Jones Street. The extra borrowings are used entirely for that new investment.

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In this case, the additional interest isn’t claimed against 123 Smith Street. It’s deductible against the income from 456 Jones Street, because that’s the purpose for which the money was borrowed. The cash flow from your original property remains unaffected for tax purposes.

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Loan Structure Matters: Why You Should Split Loans

To avoid confusion and simplify your tax reporting, it’s important to split your loans. This becomes especially relevant if one of the properties is sold, or if the owners of the properties differ (such as joint ownership with a spouse).

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Take this example: Tom has a $500,000 loan used to buy Property A. Property A appreciates, and Tom increases the loan to $600,000. He uses the extra $100,000 to purchase Property B, which is also an investment. If both loans are lumped together, he must apportion the interest between the two properties, which can be messy and increase the risk of errors.

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But if Tom had kept the original and additional borrowings in separate loan accounts, the interest would be clearly attributable:

• $500,000 loan = Property A
• $100,000 loan = Property B

This clear separation is not only easier to manage—it reduces the risk of compliance issues, especially if one of the properties is sold or transferred.

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Key Considerations for Smart Borrowing

• Loan security ≠ loan purpose: Just because a loan is secured against Property A doesn’t mean the interest must be deducted against it.
• Ownership differences matter: If Property A is owned jointly with your spouse but Property B is not, misattributing interest could lead to incorrect tax reporting.
• Sale of one property affects deductibility: If a property is sold and the loan remains, incorrectly claimed interest could trigger an audit or even affect capital gains tax (CGT) calculations.

Final Thoughts: Plan Your Property Finances with Purpose

Understanding how to structure your investment loans and where to allocate interest expenses can make a significant difference in your tax outcomes. Don't fall into the trap of assuming loan security determines deductibility—focus instead on how the funds are actually used.

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Need help reviewing your loan structure or planning your next investment purchase? Now is the perfect time to get ahead of the curve.

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Start planning your tax strategy today—book a tax planning session with us to ensure your loan arrangements, deductions, and ownership structures are optimised before 30 June. Smart planning now can save you thousands later.