Strategy
Offset vs Redraw: The Tax-Deductible Debt Distinction
Most borrowers treat offset accounts and redraw facilities as interchangeable. Both reduce interest paid. Both let the borrower access cash that has effectively been used to pay down the loan. From a cash-flow perspective, the two products do similar work. From the ATO's perspective, they are fundamentally different products. For investment debt, the difference can determine whether the interest on the loan remains tax-deductible.
The structural difference
An offset account is a separate transaction account linked to the home loan. The balance in the offset account reduces the daily interest calculation on the loan, but the funds in the offset remain the borrower's own money. Withdrawals from the offset account are withdrawals of the borrower's own money.
A redraw facility is a feature of the loan itself. When the borrower makes additional repayments above the contractual minimum, those repayments reduce the loan balance. The redraw facility lets the borrower take those additional repayments back out, which the ATO treats as a new borrowing at the time of redraw.
The structural distinction sits at the heart of the tax position. Offset funds are the borrower's money; redraw funds are loan proceeds.
Why redraw can taint deductibility
On an investment loan, interest is generally tax-deductible to the extent the loan was borrowed to acquire income-producing assets. The ATO applies a purpose-of-borrowed-funds test: the use of the borrowed money at the time of borrowing determines deductibility, not the security against which the loan is held.
When a borrower redraws from an investment loan and uses the redrawn funds for personal purposes (a holiday, school fees, a home renovation on the principal residence), the ATO treats that redraw as a new borrowing for non-deductible purposes. The interest attributable to the redrawn portion becomes non-deductible from the date of the redraw.
This creates a tainted loan: a single facility now has a deductible component (the original investment-purpose borrowing) and a non-deductible component (the personal-purpose redraw). The borrower must apportion interest accurately for tax purposes from that point forward, often for the remaining life of the loan. Apportionment is complex; many tainted loans simply lose deductibility on their entire interest cost in practice because the borrower cannot reconstruct accurate records.
An offset is your money sitting beside the loan. A redraw is the loan being refilled with your money. The ATO treats them differently.
Why offset preserves deductibility
An offset account avoids the tainting problem because it is structurally separate from the loan. Withdrawals from the offset are withdrawals of the borrower's own money; the loan principal is unchanged. The investment loan retains its original purpose, and interest deductibility is unaffected.
A borrower who deposits a windfall (bonus, tax refund, sale proceeds) into the offset of an investment loan reduces interest paid without compromising deductibility. If the windfall is later withdrawn for personal purposes, the loan's interest deductibility remains intact because the original investment-purpose borrowing is unchanged.
The same outcome attempted via additional repayments and later redraw on a non-offset loan creates the tainting problem above.
The future-PPOR scenario
A common scenario where this matters is the future principal place of residence. Many investors buy an investment property they intend to move into later, or acquire a home they intend to convert to investment use after moving on.
The right structure on day one preserves the borrower's options. An investment property funded with an interest-only loan plus offset preserves the principal balance; if the property later becomes the borrower's PPOR, the loan can be repurposed (with appropriate ATO treatment) without the redraw-taint issue.
By contrast, a borrower who has been making additional principal repayments on an investment loan (rather than parking funds in offset) has effectively reduced the deductible portion of the loan. If they later move into the property, then leave again to move into a new home and rent the original out as investment, the deductible loan balance is the lower post-repayment figure, not the original purchase loan.
What the ATO may request in an audit
The ATO's position on offset and redraw treatment has been described in private rulings and public guidance over many years. The principle generally applied is consistent: purpose at the time of borrowing determines deductibility. The ATO does not need to actively audit every loan; the burden of demonstrating deductibility sits with the taxpayer claiming it.
In an audit, the ATO may request:
- Loan documentation showing the original purpose of the borrowing.
- Evidence of fund use at the time of borrowing (e.g. settlement statements, contracts).
- Records of redraws during the life of the loan, with evidence of how each redraw was used.
- Apportionment calculations for any loan with mixed deductible and non-deductible components.
How Maxfin sets up new investment loans
The default structure for a new Maxfin investment loan is interest-only with offset. This preserves the principal balance (preserving the future deductible base), allows the borrower to park surplus cash without compromising deductibility, and provides flexibility for future use changes.
Where the borrower has both deductible and non-deductible debt (an investment loan and a home loan, for example), Maxfin generally directs surplus cash flow to the non-deductible debt first. Reducing the home loan principal reduces non-deductible interest; the investment loan principal can be left intact and the offset can hold liquidity if needed.
Where existing loans are already structured with redraw rather than offset, Maxfin reviews whether refinancing to an offset structure is worth the switching cost. For loans likely to be held for a meaningful future period with active redraw activity, the structural improvement is often worth the cost.
The firm coordinates with the borrower's accountant before settlement of any new investment loan. The ATO position on a specific scenario is the accountant's domain; the loan structure that supports the position is the broker's. The two need to align.
General information only. Not credit advice and not tax advice. Lending outcomes depend on individual circumstances and are subject to lender credit criteria, terms and conditions. Where tax considerations are described, they are general in nature; advice on a specific tax position should be obtained from a registered tax agent or accountant. Maxfin holds Australian Credit Licence 384406 and is not a registered tax agent.