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Why You Shouldn’t Use Cash in an Offset Account to Invest

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Offset accounts are a powerful tool for managing interest on home loans—but they can also lead to costly mistakes if misunderstood. One of the most common missteps we see is using cash from an offset account to fund an investment, assuming it works the same as borrowing. It doesn’t.

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Let’s break down why using cash from an offset to invest does not produce the same tax outcome as borrowing, and what to consider instead.

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Offset Account Basics

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An offset account is a transaction account linked to your home or investment loan. The balance in the offset account directly reduces the interest charged on the loan.

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For example, if your loan is $600,000 and your offset balance is $150,000, you only pay interest on $450,000.

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But here’s the catch: the money in the offset is your cash, not borrowed funds. And when you use cash to invest, there is no interest incurred—so there’s no deduction to claim.

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Scenario 1: Offset Account Linked to Your Home Loan

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Let’s say Michael has a $600,000 home loan, and his offset account has $120,000 in it. The offset reduces his loan interest, so he’s only paying interest on $480,000.

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Michael decides to invest in shares and uses $120,000 from the offset.

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As a result, his loan interest now applies to the full $600,000 again. That’s roughly an extra $6,000 a year in non-deductible interest (at 5%).

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The tax problem?‍

This extra interest is not deductible—because the loan still relates to a private (non-income-producing) asset: Michael’s home. Using cash from the offset for investing does not change the purpose of the loan.

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Scenario 2: Offset Account Linked to an Investment Loan

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Now imagine the offset account is linked to an investment property loan.

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Sarah has a $700,000 loan for her rental property at 10 Oak Street. She has $150,000 in the offset. She then withdraws $150,000 to buy another investment at 22 Birch Avenue.

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The offset is reduced to $0, and she now pays interest on the full $700,000 again—an increase of about $7,500 per year.

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Can she claim that extra interest as a deduction?
Yes, but only against the original property (Oak Street)—not the new one. The interest deduction follows the loan purpose, which was used to buy Oak Street, not Birch Avenue.

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Why Does This Matter?

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In the short term, it might not seem to make a difference. But here’s why it matters long term:

• Future sale complications: If you sell Oak Street but still have loan debt attached to it (because the cash went elsewhere), you could be stuck with non-deductible debt.
  
  
• Ownership mismatch: If you withdraw from an offset linked to a property owned by one spouse, but invest in a property owned by another, this creates legal and tax complexity.
  
  
• Reduced flexibility: Using cash for investing removes funds that could be used for private expenses (holidays, school fees) while missing out on deductible interest that could reduce your tax.
  
  

‍The Smarter Alternative: Borrow to Invest

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If you plan to invest, consider borrowing separately rather than using offset funds. Borrowing:

• Creates a clear tax-deductible interest trail
  
  
• Preserves cash for private use (where interest is non-deductible anyway)
  
  
• Keeps your offset intact to reduce non-deductible interest
  
  

A cleaner structure also makes things easier when refinancing, restructuring, or selling.

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Final Thoughts

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Offset accounts are fantastic when used properly—but using offset cash to invest can quietly undermine your tax efficiency.

Before dipping into your offset to fund an investment, ask yourself:

• Is this the best structure?
  
  
• What are the long-term consequences?
  
  
• Would a clean, purpose-based loan give me better tax outcomes?
  
  

Speak to PlanTax Before You Invest

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We regularly help clients design smarter funding strategies that optimise both tax and flexibility. Whether you’re planning to buy your first investment or your fifth, we can help structure your borrowing the right way.

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Get in touch today before making your next move—you’ll thank yourself at tax time.