Redraw vs Offset for an Investment Property: The Tax Trap to Avoid

If you’ve read our guide comparing offset accounts and redraw facilities, you already know how each one works day to day. On an investment property, the choice has a second consequence most borrowers don’t find out about until tax time: which one you use can change how much interest the ATO actually lets you claim.

The quick answer

An offset account never touches your loan balance, so it never changes what the loan was originally borrowed for. A redraw does. Pull money out of an investment loan for anything other than the investment itself (a holiday, a car, paying down your own home) and the ATO treats that portion of the loan as a new, separate purpose. If that purpose isn’t income-producing, the interest on it stops being tax-deductible.

Why redrawing creates a mixed-purpose loan

Interest deductibility in Australia follows what the borrowed money was used for, not the property the loan is secured against. Once you redraw funds and spend them on something private, your original single-purpose investment loan becomes a mixed-purpose loan. From that point, the interest has to be apportioned between the deductible part and the non-deductible part, and that split follows the loan until it’s fixed or paid off.

Worked example: say you have a $500,000 investment loan, fully deductible. You redraw $50,000 to help with a deposit on your own home. Interest on the remaining $450,000 stays deductible. Interest on the $50,000 you pulled out for a private purpose no longer is. At a variable rate of 6.90%, that’s roughly $3,450 a year in interest you can no longer claim, on that portion alone, for as long as it’s outstanding.

Why offset accounts don’t have this problem

Money sitting in an offset account is still your money. Withdrawing it is treated as spending your own savings, not as new borrowing. Because the loan balance and the amount originally borrowed never change, the loan’s purpose never changes either. You can draw the offset down to zero and build it back up as many times as you like without touching the deductibility of a single dollar of the loan.

The trade-off works both ways too. Money in an offset account against your own home doesn’t retroactively make any part of that loan deductible, even if you later use the freed-up cash for an investment. What matters is what the borrowed money itself was used for, not which account it happens to sit next to.

What this means in practice

If a loan is genuinely for investment purposes, keep it that way. Spare cash for personal use is safer sitting in, or coming from, an offset account or your everyday savings, not a redraw against the investment loan. If you’ve already redrawn and mixed a loan, most lenders can split it into two separate loan accounts, one deductible, one not, which at least stops the problem from getting messier from here.

Common questions

Does this apply to my own home loan too? The same principle applies to any loan, but it only affects deductibility if part of the loan is meant to produce income. Redrawing on your own home loan for personal spending doesn’t cost you a deduction you weren’t getting anyway.

What if I’ve already redrawn and mixed the loan? The loan stays mixed going forward, but you’re not stuck. Many lenders will split an existing loan into two accounts along the line you specify, separating the deductible and non-deductible portions from that point on. Get this done, and get a registered tax agent to help apportion the historical interest, before your next return.

Does the ATO actually check this? Yes. The ATO runs data-matching programs cross-checking loan and redraw activity against what’s claimed on tax returns, so this isn’t a rule that only surfaces in an audit that never happens.

This guide covers offset accounts and redraw facilities generally. For advice on your own loan and tax position, speak to a registered tax agent.

See the numbers for your own loan

None of this changes the day-to-day mechanics of what an offset account saves you. Run your own numbers through the calculator to see what keeping funds in offset, rather than redrawing them, is worth on your loan balance and rate.