Calculator
Loan & Credit Line Tax Savings Calculator
Loan & Credit Line Tax Savings Calculator
The ATO traces the purpose of the borrowed funds — not the property securing them.
Annual Tax Saving
$9,620
Deductibility Analysis
Every dollar of the $26,000 interest on this facility traces to income-producing borrowings, so the full amount is deductible: at your 37% marginal rate the ATO effectively refunds $9,620 a year, cutting your true borrowing cost to 4.09%. Guard that position — park private spending in an offset or a separate loan, because a single redraw for a holiday contaminates the facility proportionally forever.
*Estimates assume interest is deductible under the general deductions rule to the extent borrowed funds are used to produce assessable income, and that you have records tracing that use. Apportionment, Part IVA anti-avoidance, and ATO ruling practice can change outcomes. Educational only — confirm your position with a registered tax agent.
When Borrowed Money Becomes a Tax Shield
Australia is one of the few countries where interest on money borrowed to invest — in shares, managed funds, or rental property — is generally deductible against your other income. The rule comes from the general deductions provision of the tax law: you can deduct interest to the extent the borrowed funds are used to produce assessable income. Crucially, deductibility follows the purpose of the borrowed dollars, not the property securing them. A mortgage over your family home drawn down to buy an ASX ETF portfolio produces deductible interest; a loan against an investment unit redrawn to fund a European holiday produces none. This 'purpose tracing' principle creates both opportunity and trap lines. Debt recycling — systematically redrawing equity from your home to invest — converts non-deductible home-loan interest into deductible investment debt one slice at a time, and is one of the most powerful legal tax strategies available to Australian professionals. The trap side: redraw facilities are single pots. Redraw $20,000 for a car from a $400,000 investment-property loan and 5% of every future dollar of interest becomes permanently non-deductible, because the facility's purpose has been contaminated proportionally. The offset account is the clean alternative. Money sitting in an offset reduces the interest you pay while leaving the loan balance untouched, so your deductible capacity stays intact — which is why experienced investors park salaries and savings in offsets attached to investment loans rather than paying them in as redraws. This calculator prices all three levers: how much of your interest the tax office effectively refunds at your marginal rate, what an offset balance saves without touching deductibility, and your true after-tax borrowing cost once the deduction is counted.
Tracing Purpose, Pricing the Deduction
The arithmetic starts with annual interest: loan balance multiplied by the rate. An offset balance reduces that figure — interest is charged only on the balance net of the offset — but importantly it does so without reducing the loan itself, so the full facility remains available for income-producing use. What remains is then split by purpose: the share of borrowed funds actually applied to shares, property or business produces deductible interest, and the private share produces interest that is a pure after-tax cost. The deduction is valued at your marginal tax rate. Deductible interest multiplied by that rate is your annual tax saving — the amount by which your assessment falls because the interest reduced taxable income. Net after-tax cost is interest minus saving, and dividing it back through the balance gives the effective after-tax rate: at a 37% marginal rate including Medicare, a 6.5% investment loan really costs about 4.1%, which is precisely why geared strategies must clear a much lower bar than their headline rates suggest. Two refinements matter in practice. First, apportionment follows the money, not time alone: if 90% of drawn funds bought income-producing assets, 90% of each year's interest (including rate rises) stays deductible until the loan is repaid or re-drawn. Second, the anti-avoidance rules can deny deductions where schemes dominate — borrow-and-distribute arrangements or round-robin repayments designed purely to manufacture deductions. Keep bank statements showing where every drawdown landed; the tracing records are worth more than the calculator.
Expert Insights
Redraw Contaminates; Offset Preserves
Every extra dollar paid into a redraw reduces the loan balance — including its deductible portion — and every dollar redrawn for private spending permanently converts part of the facility to non-deductible use. An offset achieves the same interest saving with the opposite effect: the loan balance never moves, so the deductible share stays pristine. Direct every salary payment and spare cash into an offset attached to your investment loan, and treat redraw like a contaminant.
Split Loans Make the Audit Trivial
When part of a facility is deductible and part is not, most banks will split it into two accounts with separate balances. The investment split's statements become self-proving evidence of purpose at tax time, and rate movements, fees and offset arrangements stay cleanly attributed. Restructuring before you mix purposes takes one phone call; unpicking a contaminated facility years later involves forensic reconstruction the ATO does not have to accept.
The After-Tax Rate Sets Your Hurdle, Not the Headline Rate
A fully deductible investment loan at 6.5% costs about 4.1% after tax for a 37% taxpayer — so a diversified portfolio expected to return 7% clears the hurdle by nearly 3 points before capital growth. But the shield cuts both ways: if the assets fall, you still owe interest whose after-tax cost is real cash flow. Size gearing so the after-tax repayment burden survives a dividend cut and a rate rise together, not just the base case.
Actionable Tips
- 1
Open the Offset Before You Need It
Attach a 100% offset account to your investment loan or line of credit now and route every dollar of salary and savings through it. You earn an effective pre-tax return equal to the loan rate — risk-free and untaxed — while the deductible loan balance sits untouched. Over a decade this habit routinely outperforms a savings account earning taxable interest, simply because the offset 'return' is the avoided interest itself.
- 2
Document the Paper Trail From Day One
Keep the settlement statement, drawdown requests and brokerage confirmations linking each borrowing to its income-producing purchase. If the ATO ever asks why 80% of your facility was deductible, contemporaneous records answer in minutes; reconstructed spreadsheets invite challenge. Photograph the purpose trail annually and store it with your tax file — the deduction survives audits only when the tracing does.
- 3
Recycle Debt in Chunks, Not All at Once
Debt recycling works best in disciplined steps: pay your bonus into the home loan, redraw exactly that amount into your ETF or property deposit, then repeat next year. Each cycle shifts another slice of non-deductible debt across to deductible at your marginal rate — worth up to 47 cents in the dollar of interest for top-bracket earners. Model each chunk here first to confirm the after-tax cost and your capacity to service it through a rate rise.
Real-World Examples
Daniel Recycled $150k Into Dividends
Daniel, a dentist on the top marginal rate, paid his annual bonus into his home loan then redrew it into a portfolio of franked ETFs — five years running, $30,000 at a time. By year five, $150,000 of his mortgage had become deductible debt costing about 4% after tax, while the dividends and franking credits covered most of the interest. His accountant filed the drawdown-to-purchase paper trail he'd kept from day one, and the structure survived review untouched.
Priya's Redraw Cost Her $2,100 a Year
Priya held a $380,000 investment-property loan and redrew $38,000 — ten per cent — for a kitchen renovation in her own home. From that point, 10% of every year's interest was non-deductible: roughly $2,300 a year at her rate, compounding for the life of the loan. Refinancing and formally splitting the facility recovered some ground, but the lesson stuck: renovations belong on a separate loan, never on the investment facility's redraw.
The Kowalskis Kept the Offset Discipline
Ana and Marek ran every wage into the $200,000 offset attached to their $600,000 investment loan, cutting interest by around $12,000 a year while preserving the full deductible balance. When Marek went freelance, they drew a separate $40,000 line of credit for business equipment rather than touching the investment facility. Two clean facilities, two clean statements — their tax agent reconciled the entire year's interest in under an hour.
Glossary of Terms
- Purpose Tracing
- The ATO method of matching borrowed dollars to their end use: interest is deductible only to the extent the funds were applied to producing assessable income, regardless of the security offered.
- Debt Recycling
- A strategy of repeatedly paying non-deductible home-loan debt down and redrawing the same amount to buy income-producing investments, converting interest into a deductible form slice by slice.
- Offset Account
- A transaction account whose balance is netted against the linked loan before interest is calculated — reducing interest without reducing the loan balance or its deductibility.
- Contaminated Facility
- A loan whose funds have been partly used for private purposes, permanently fixing a non-deductible share of all future interest until the loan is repaid.
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Ivy Sinclair-Wren
Financial Chaos Analyst
Ivy Sinclair-Wren is a Financial Chaos Analyst covering investing, AI, wealth psychology, and the emotional consequences of opening finance apps during market crashes. Based in Melbourne, she specializes in demystifying the Australian tax code and helping users navigate the intersection of spreadsheet logic and human irrationality.