When taking on significant investment debt, choosing between a redraw facility and an offset account can have significant lasting impacts. Getting it wrong can significantly impact your interest tax deductibility in the future. We agree that both options offer flexibility and can reduce your interest costs, but they are very much different from a tax perspective. Let’s break down the difference and which option might be best for you.
What’s The Difference Between A Redraw Facility And An Offset Facility?
A redraw facility allows you to deposit money directly onto the loan and reduce the total loan balance, and then redraw the money later if needed. The temporary reduction in the loan balance reduces the amount of interest you pay to the bank on your loan.
An offset facility is a separate bank account that is ‘linked’ to your loan account. Deposits are made into the offset account, and the combined total of the loan balance less the offset account is used to calculate interest charges.
Both types of accounts allow deposits to be made that can be withdrawn at a later date and they both reduce the overall loan balance that is used to calculate interest.
From a tax perspective, the main difference is the availability of a tax deduction. A tax deduction for interest expense is only available if the interest is incurred in connection with earning income.
The key question to ask yourself is: what was the use of the borrowed money? Was it to acquire a property to generate rental income? In this case, an interest deduction can be claimed on the interest.
However, there is no tax deduction if the money was used for private purposes. (e.g. buying a main residence, paying personal taxes, or paying for kids’ school fees, etc.)
How Does This Work In Practice?
As an example, say you have borrowed $800,000 to acquire a property to earn income from rent. Separately, you have sold another property and are aware that you have a $400,000 tax bill due for payment within 12 months. You decide to use the $400,000 to reduce your loan balance for 12 months until the money is needed to pay the tax. Great idea, this will reduce the interest you pay!
Redraw Facility
If you have a redraw facility, you pay $400,000 directly off the loan balance and then redraw the money in 12 months. When you redraw the money, you need to assess: what is the money used for? The answer is to pay a personal tax, which is a private expense; there is no connection with earning income, and unfortunately, there is no tax deduction for that portion. The purpose of your $800,000 loan has now changed to 50% for acquiring the rental property and 50% for paying personal taxes. Therefore, moving forward, a tax deduction can only be claimed for 50% of the interest expense, as only half of the loan is now used in connection with earning income.
Offset Facility
Using the same example, $400,000 is paid into the offset account, and the $800,000 loan account is untouched. The offset facility interest is calculated on the combined balance of the loan account and the offset account, so for 12 months, the interest expense is reduced. Then, 12 months later, $400,000 is withdrawn from the offset account to pay the tax. The loan account remains untouched, and the purpose of the rental property loan has not changed, so a tax deduction is available for 100% of the interest expense on the loan. The offset facility has a different tax outcome because it is a separate bank account, and the use of money from the loan account remains unchanged.
Summary Table
| Situation | Deductibility Outcome | Best Practice |
| Redraw used for personal | ❌ Not deductible | 🚫 Avoid or track use precisely |
| Loan secured by investment property but used for private spending | ❌ Not deductible | ✅ Focus on what the loan funds are used for |
| Equity released for investing | ✅ Deductible | ⚠️ Use separate splits |
| Mixed loan with unclear redraws | ⚠️ Partially deductible (if tracked) | ⚠️ Keep detailed records or refinance into split loans |
| Refinance of investment loan | ✅ Still deductible | ✅ Keep use/purpose unchanged |
| ATO data matching flags inconsistent claims | ⚠️ High audit risk | ⚠️ Ensure records match ATO data |
How TaxDigital Can Help
Managing investment loans, particularly rental properties, requires more than just a good interest rate -TaxDigital can provide a strategic plan to protect interest deductibility and maximise your tax deductions. Contact us today at 0407 438 849 or [email protected] to book a strategic review of your investment loan structure and ensure your getting the best tax deductions possible.