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What makes your debt tax deductible?

debt tax deductible

There are two kinds of debt in this world: the kind that is tax deductible and the kind that isn’t.

Knowing the difference, and how to plan your purchases accordingly, can significantly improve your cashflow, opportunities and overall financial position.

So what makes debt tax deductible or not?


Non-tax deductible debt

Let’s start by clarifying that we’re talking about whether the interest on a debt is tax deductible.

A non-tax deductible debt (also known as ‘bad debt’) is any money you borrow for a purchase that is not expected to generate a return.

For example, a car loan, personal loan or the mortgage you secured to buy your family home.


Tax deductible debt

A tax deductible debt is one that was incurred to generate taxable income.

In other words, if you borrow money in an attempt to make more money, your debt may be tax deductible.

Examples of tax deductible debt can include borrowing to invest in shares or taking out a loan to buy an investment property.


Potential benefits of tax deductible debt

If a debt is tax deductible, the interest is considered an ‘expense’ incurred in order to earn a taxable income.

Expenses are allowable tax deductions. Therefore the interest you incur on an investment loan can generally be set against your taxable income, thereby reducing your total taxable income.

Let’s consider the following scenario: say you incur a debt to purchase an investment property. The interest payments, management and maintenance costs, capital works spending and depreciation on the property may all be claimed as tax deductions.

Depending on your individual circumstances, you may be entitled to various tax deductions and concessions, which may improve your cashflow and allow you to focus on paying down your ‘bad debts’ (for example – your owner occupied home loan).



Whilst this may seem all fairly straightforward, things don’t always stay that way.

Say you take out a home loan to buy your family home. Down the track you may decide to redraw, consolidate your debts or even upgrade the family home and make your original home an investment property.

All of these actions will affect whether the interest on your loan (once you start renting it) is tax deductible. It’s important to do your homework and get expert advice before claiming a deduction.

It’s important to realise that deductibility of the debt has nothing to do with the asset that secures it.

For example, if you secure a loan that’s secured by your own home and use the funds to purchase an investment property, it’s a deductible debt.


Protect the tax deductibility of your debt

There are numerous steps you can take to protect the tax deductible status of your debt.

These can include keeping personal and income generating loans strictly separate or setting up an offset account.

The best course of action will very much depend on your personal circumstances, financial goals and obligations.

You want to get right.



Disclaimer: The content of this article is general in nature and is presented for informative purposes. It does not constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, you must consider your own particular circumstances and it is recommended you seek professional advice from a qualified taxation agent.

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