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As a registered tax agent, I often see well-intentioned taxpayers make avoidable mistakes—particularly when it comes to transferring property between spouses and claiming deductions on associated loans.

One common issue that keeps coming up involves transfers made without consideration, meaning the property is effectively gifted rather than sold. While this might seem like a simple way to restructure ownership for tax purposes, it can lead to unexpected outcomes—especially when it comes to claiming interest on loans.

When Is Interest Deductible?

Generally speaking, interest on a loan is only deductible when the borrowed funds are used to purchase an income-producing asset, such as an investment property. The purpose of the loan—and how the borrowed money is used—is key.

The Trap: Transfers Without Payment

Some couples decide to shift ownership of an investment property between themselves to manage tax liabilities more efficiently. However, if the transfer is done without payment (i.e. as a gift), any new or increased loan taken out by the recipient may not be deductible—even if the property continues to generate rental income.

Let me explain with a practical example.

A Common Scenario

Jack and Jill jointly own a negatively geared investment property, each holding a 50% share. The property is worth $1 million and they have an existing loan of $500,000.

Jack decides to take full ownership of the property, aiming to boost his tax deductions. He arranges for Jill’s share to be transferred to him with no money exchanged—just a signed transfer document. The bank allows Jack to refinance and increase the loan to $800,000 under his name. All seems straightforward.

Jack begins claiming interest on the full $800,000 loan, assuming that since the property is now solely his, the full deduction should follow. But when audited, Jack is shocked to learn the ATO denies a significant portion of his claim.

Why the Claim Fails

The reason is simple: Jack didn’t purchase Jill’s 50% share. It was a gift. Therefore, the increased loan does not relate to the acquisition of income-producing property, and interest on that portion isn’t deductible. He can only claim interest on the loan amount linked to his original 50% ownership—say, $250,000—not the full $800,000.

Final Thoughts

This is a classic example of how intentions don’t always align with tax law. What seems like a harmless ownership adjustment can result in significant disallowed deductions—and a hefty tax bill.

Before transferring property, increasing loans, or making other tax-related decisions, it’s essential to get the right advice. At Plan Tax, we specialise in helping clients navigate complex tax matters with confidence and clarity. Book a consultation today to ensure your strategy is not only effective—but also compliant.