The Australian Taxation Office (ATO) has raised concerns regarding the incorrect reporting of rental property income and expenses, resulting in an estimated annual loss of $1 billion in tax revenue. A significant factor contributing to this issue is the improper claiming of interest on investment property loans. Recently, there has been an increase in ATO scrutiny of refinanced or redrawn loans, as part of their comprehensive data matching program. This program analyzes residential property loan data from financial institutions, spanning from 2021 to 2026, and cross-references it with taxpayers’ reported information on their tax returns. Taxpayers with inconsistencies in their claims should anticipate contact from the ATO to address the disparities.
If you possess an investment property loan and have utilized redrawn funds for purposes other than the original borrowing, the loan account becomes classified as a mixed purpose account. In such cases, the interest accumulated on the mixed purpose account must be divided proportionately among the different purposes for which the funds were utilized.
Conversely, if the redrawn funds are invested to generate income, then the interest pertaining to that portion of the loan may be tax-deductible. For instance, if you use the redrawn funds to finance a private holiday or pay off personal debt, the interest relating to that portion of the loan balance will not be eligible for tax deductions. In addition to apportioning interest expenses between deductible and non-deductible parts, repayments will typically need to be divided as well.
Withdrawals made from an offset account are considered savings rather than new borrowings. If you have a loan account with an attached interest offset account that reduces the interest payable on the loan, withdrawing funds from the offset account will generally increase the amount of interest accumulating on the loan. However, this withdrawal does not affect the deductible percentage of the interest expenses. Essentially, withdrawing funds from the offset account constitutes a withdrawal of savings and does not impact the extent to which the interest on the loan account is tax-deductible.
If you possess a home loan that was used to purchase your primary residence and there are funds held in an offset account, withdrawing those funds to make a deposit on a rental property will not enable you to claim any of the interest accruing on the home loan. However, redrawing funds from the home loan specifically for the purpose of acquiring a rental property allows for the interest on that portion of the loan to be tax-deductible. It should be noted that the tax treatment is contingent on how the arrangement is structured.
Do you suspect that you may encounter issues with your investment loans? Get in touch with Heaney Business Group, and we can conduct an investigation into the matter before the ATO reaches out to you.
