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Important

Offset accounts are brilliant for flexibility. They also create an opportunity to structure borrowings in a way that can improve your after-tax outcome over the long term. This article is a practical, plain-English worked example showing why the ‘where the money comes from’ question matters when you buy an investment property.

Offset accounts are brilliant for flexibility. They also create an opportunity to structure borrowings in a way that can improve your after-tax outcome over the long term.

This article is a practical, plain-English worked example showing why the “where the money comes from” question matters when you buy an investment property.

If you get the steps right at the start, the difference can be worth well over $100,000 across the life of a loan in the right circumstances.

If you get it wrong, you can permanently lose deductions and end up with a messy “mixed purpose” loan that is painful to unwind.

The key concept: the ATO follows the purpose of the borrowing

The ATO generally asks a simple question when you claim interest:

What was the borrowed money used for?

If the borrowed money was used for an income-producing purpose (for example, buying an investment property), then interest on that borrowing is generally deductible.

If the money was used for a private purpose (for example, buying your home or personal spending), then the interest is generally not deductible.

This is why the “paper trail” and the exact steps matter. Interest deductibility is not about what you meant to do. It is about what you actually did with the funds.

The common trap: “I just used the money in my offset”

Let’s say you have:

• A home loan with an offset account
• Money sitting in the offset
• Equity available (you can access more loan funds if needed)
• A plan to buy an investment property

You then need a deposit and stamp duty, so you simply transfer the cash from your offset straight to the solicitor.

It feels clean and sensible. It is also the step that can cost you a fortune in long-term deductions.

Why?

• Money in an offset is your savings
• When you pay the deposit from the offset, you are not borrowing that amount
• No borrowing = no deductible interest for that portion

You might still have a big deductible investment loan for the “main” 80%, but you may have accidentally turned the deposit component into permanently non-deductible “dead debt”.

Worked example (round numbers)

Assume:

• Investment property purchase price: $800,000
• Deposit (20% to avoid LMI): $160,000
• Stamp duty and legals (estimate): $40,000
• Total cash needed up front: $200,000
• Interest rate: 6%
• Marginal tax rate (example): 45%

Option 1: Paying the deposit and duty directly from the offset (often sub-optimal)

Steps:

• You transfer $200,000 from the offset to pay the deposit and stamp duty
• You borrow $640,000 (80%) against the investment property

Outcome:

• Deductible loan: $640,000
• Not deductible: the $200,000 you funded from savings (you may still owe your home loan, but that debt remains private)

Annual interest on deductible portion:

$640,000 × 6% = $38,400 deductible interest per year (ignoring principal repayments)

Option 2: The “two-step” approach (offset → loan → redraw) to create investment borrowing

This is the approach that can materially change the tax outcome if executed correctly.

High-level steps:

• Transfer the $200,000 from the offset into the home loan — this reduces the home loan balance
• Redraw $200,000 from the loan — then pay the deposit + stamp duty directly from the loan redraw for the investment purchase

Why this can work:

• When you redraw from a loan, you are borrowing
• The ATO then asks: “What is the purpose of that borrowing?”
• If the redraw is used to fund the investment purchase costs (deposit + duty), the purpose is investment-related

Outcome (in this simplified example):

Deductible borrowings:

• $640,000 investment loan against the property plus
• $200,000 redraw borrowing used for deposit + stamp duty

Total potentially deductible loan: $840,000

Annual interest potentially deductible:

$840,000 × 6% = $50,400 deductible interest per year

Difference between options:

$50,400 − $38,400 = $12,000 extra deductible interest per year

Tax impact (example at 45% marginal rate):

$12,000 × 45% = $5,400 tax saved per year

Long-term impact (simple illustration only):

$5,400 per year × 20 years = $108,000 tax saved

That is where the “this can be worth over $100k” claim comes from. The actual benefit varies depending on:

• Interest rates over time
• Your marginal tax rate over time
• How quickly you pay down the loan
• Whether the loan stays “clean” and not mixed
• The property and overall strategy

But the core point stands: the setup and the funds flow matter a lot.

The critical part: you must keep the loan purpose “clean”

The ATO is generally not the problem here.

The problem is people doing the steps loosely and creating a mess.

Common mistakes that ruin the outcome:

• Paying the deposit straight from the offset “because it was easier”
• Redrawing into a personal everyday account and mixing it with groceries, bills, school fees, and weekends away
• Using one loan split for multiple purposes (private and investment)
• Redrawing in multiple transactions with unclear tracking
• Not keeping statements and settlement evidence showing the funds went to the investment purchase.

Once a loan becomes mixed-purpose, interest deductibility can become:

• Part deductible, part non-deductible
• An ongoing apportionment headache
• Hard to clean up without refinancing and restructuring

Best-practice implementation tips (practical, not theoretical)

If you want to use this method, the practical guardrails are:

• Speak to your adviser early — ideally before the broker finalises the structure and before you sign documents
• Use separate loan splits — one split for the private home debt, one split specifically for the investment deposit/duty borrowing, one split for the investment loan against the property (if relevant)
• Pay investment costs directly from the loan redraw — where possible, pay straight to the solicitor’s trust account or settlement agent
• Keep the paper trail clean — keep evidence: loan statements showing the offset transfer into the loan, redraw transactions, settlement statement / deposit receipt, clear references in transaction descriptions
• Avoid “temporary parking” of funds

The cleaner the flow from loan to settlement, the easier it is to defend if ever reviewed.

When this strategy may be less suitable

This approach is not a magic trick and it is not always appropriate. Situations where extra care is needed include:

• You are likely to use redraw frequently for mixed personal spending
• You are not disciplined with separate accounts and tracking
• Your lender does not support clean splits or redraw transparency
• You are likely to refinance, consolidate, or restructure repeatedly without documenting the purpose

In those cases, you can still invest successfully, but the “perfect deductibility outcome” may not be worth the complexity unless you are prepared to maintain the structure properly.

The blunt takeaway

If you take nothing else from this:

• Using offset savings for a deposit can reduce your future deductions
• Drawing the funds from the loan (redraw) can create deductible investment debt
• The ATO focuses on purpose
• The benefit can be very large
• The setup must be done properly from day one

If you are doing this, do not wing it. Get the structure right before you commit, and keep your loans clean.

Disclaimer: This article provides general information only and does not take into account your personal financial circumstances. It is not financial or tax advice. You should seek independent advice from a qualified professional before making decisions about tax, legal or financial planning matters, along with loan structures or entity structure.