The $10,000 Redraw Mistake: How Your Offset Account Is Quietly Killing Your Tax Deduction
- Interest on a loan is deductible only if the borrowed funds are used for an income-producing purpose.
- A redraw is treated as a new borrowing — the purpose test applies to whatever you spent it on.
- An offset accountis separate from the loan; moving money in and out doesn't affect deductibility.
- A single personal-purpose redraw permanently splits the loan into deductible and non-deductible portions.
- The fix isn't free — you can split the loan at the bank to stop future leakage, but historical interest is lost.
The Rule Nobody Reads: It's the Purpose, Not the Security
The ATO's framework for when loan interest is deductible sits in Taxation Ruling TR 2000/2 and the seminal Federal Court case Domjan v FCT. Both confirm the same principle with almost ruthless simplicity:
The implications are sharper than most investors realise:
- A loan secured against your investment property is not automatically deductible.
- A loan secured against your own home can be fully deductible — if you used the funds to buy shares, an investment property, or any other income-producing asset.
- Once money's drawn from a loan, what it gets spent on determines whether the interest on that portion is deductible. Forever.
The Same $50K, Two Very Different Outcomes
The clearest way to see the trap is to trace a single $50,000 withdrawal through both paths. In one, your loan is untouched and fully deductible. In the other, your loan is permanently split.
The key difference: money in an offset stays your money — the loan balance (and interest calculation) never changes. Money in a redraw is loan repayment — taking it back out is a fresh borrowing, and its deductibility is judged by what you spent it on.
Put Your Numbers In
The damage isn't just the interest itself — it's the lost tax deduction compounded over every year of the loan you have left. Slide your numbers into the calculator to see what a single redraw actually costs.
Simplified model — assumes flat interest on the tainted portion and a static marginal rate. Real loans amortise, so the annual cost declines slightly over time, but the cumulative order of magnitude holds. Doesn't account for Medicare levy or CGT implications.
Three Redraws That Catch People Out
How to Unwind a Tainted Loan
If you've already made a personal redraw, you can't retroactively reclaim the deductions you've lost. What you can do is stop the leakage from here and make future interest cleaner to apportion. Four practical moves, in order of priority:
Six Misconceptions Worth Unlearning
| Misconception | Reality |
|---|---|
| "The loan is against my rental, so the interest is deductible." | Security is irrelevant. What the borrowed funds were used for — and are currently being used for — is the only test. |
| "I'll just put it back and it'll fix itself." | Paying the redrawn amount back doesn't undo the taint. The interest for the period the funds were personal remains non-deductible. |
| "Offset and redraw are basically the same thing." | They look similar in your banking app but their legal structure is different. Offset = your money reducing interest. Redraw = extra repayment that you can pull back out as a new borrowing. |
| "Storing investment funds in offset keeps them deductible." | No. Mixing draws with other money breaks the nexus. Investment redraws should go straight to the investment purchase, never parked. |
| "The ATO won't notice." | The ATO gets full loan data — redraws and balances — from all major banks. The property management data-matching program cross-references this against rental income claims. |
| "I can just claim 100% and work it out later." | Claiming 100% when the loan has a known personal component is an audit trigger. The ATO prefers a small over-claim found voluntarily to one it has to dig out. |
FAQ
The questions our agent sees most often from investors discovering they've already tapped redraw.
The Bottom Line
Redraw looks like a feature. For a tax-aware investor it's a trap — one tap for a personal expense and a slice of your loan becomes non-deductible for the life of the loan. The fix is almost always boring: ask the bank to split the account, keep each sub-account tied to a single purpose, and route personal spending through an offset account or a separate personal facility.
If you've already done it — don't panic, don't try to paper over it, and don't invent creative loan-tracing arguments. Call your bank about a split, direct extra repayments to the personal portion, and lodge a voluntary amendment if you realise past years' claims were over-stated. The ATO is dramatically more forgiving of taxpayers who correct themselves.
This article is general information only and does not constitute tax advice. Interest deductibility interacts with property use, trust and company structures, cross-collateralisation, and Part IVA. Get independent advice from a registered tax agent for your specific circumstances.
Loan taint is one category. Depreciation schedules, borrowing costs, land tax, CGT cost base — the calculator totals everything you're likely missing and tells you how fast Lodgey pays back.
See my total savings →Sources
- Australian Taxation Office — TR 2000/2: Deductibility of interest on refinancings and mixed-purpose loans
- Domjan v FCT (2004) 56 ATR 1218 — security versus purpose for interest deductibility
- Commissioner of Taxation v Hart (2004) 217 CLR 216 — Part IVA and linked-loan arrangements
- HLB Mann Judd — "How to protect your investment loan deductions"
- BAN TACS — "Mixed Purpose Loans Explained"
- Aintree Group — "Warning for those redrawing investment loans"
- Passive Investing Australia — "Redraw vs Offset"
- r/AusFinance and r/fiaustralia community threads on split-loan mechanics