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The Australian Taxation Office (ATO) estimates that the misreporting of rental property income and expenses is causing an annual loss of around $1 billion in tax revenue. One significant contributor to this issue is how taxpayers are handling interest claims on their investment property loans.

Data Matching Program Alert

We’ve observed an increased focus from the ATO on refinanced or redrawn loans. This heightened scrutiny results from a comprehensive data matching program covering residential property loan data from 2021-22 to 2025-26. The ATO is cross-referencing this data with taxpayers’ claims on their tax returns. Anomalies in reporting can trigger ATO inquiries.

Mixed Purpose Accounts and Interest Apportionment

If you redraw on your investment property loan for a purpose different from the original borrowing, your loan account becomes a mixed-purpose account. In such cases, interest accruing on the account needs to be apportioned between each distinct purpose.

Deductibility Depends on Usage

If the redrawn funds are used to generate investment income, the interest on this portion of the loan may be deductible. However, if the funds are used for non-investment purposes, like a private holiday or personal debt repayment, the interest on that portion is not deductible. Proper apportionment is crucial for both interest expenses and repayments.

Offset Account Considerations

Withdrawals from an offset account are treated as savings rather than new borrowings. While withdrawing funds from an offset account may increase interest on the loan, it doesn’t alter the deductible percentage of interest expenses.

Structured Arrangements Matter

The tax treatment depends on how your arrangement is structured. For example, redrawing funds from a home loan to acquire a rental property may make the interest on that portion deductible. However, withdrawing funds from the same loan for other purposes might not have the same tax benefit.

How We Can Help

If you suspect any issues with your investment loan arrangements, don’t wait for the ATO to contact you. Contact us and we can thoroughly investigate the matter, ensuring you are proactive in addressing any potential discrepancies.

Think you might have a problem? Contact us now!