Loan Redraw vs Loan Offset

Loan Offset Account vs Loan Redraw

What’s the difference?


Thinking of investing in shares or property using your home loan?  How you access those funds—whether via an offset account or a loan redraw—can make a big difference at tax time. Understanding the distinction could mean the difference between a tax deduction… or none at all.

There is a distinction between drawing money from an offset account and redrawing funds from an existing loan, and misunderstanding this difference could lead to unintended tax consequences.   Let’s break it down.

1. How Do Offset Accounts and Redraws Actually Work?

Offset Account

An offset account is a transaction account linked to your loan. Any money sitting in the offset account reduces the interest charged on your home loan but does not directly repay the loan itself.  It is a separate bank account.

For example, if you have a home loan of $500,000 and $100,000 in an offset account, you are only charged interest on $400,000. However, you still have a loan of $500,000 and a separate bank account with $100,000 that can be accessed at any time.

Redraw Facility

A redraw facility allows you to make extra payments onto your loan and then draw them back out, if and when required.  Unlike an offset account, these funds have been used to pay down the loan principal.

For example, if your original loan was $500,000 and you made an extra $50,000 in repayments, your loan balance would be $450,000. If you then redraw $50,000, your loan balance increases back to $500,000.

2. Tax Implications of Using Each for Investment

In determining whether loan interest is deductible, we need to examine the original purpose of the loan. For example, if you borrowed $500,000 to purchase your main residence, the interest on this loan is not deductible as the loan funds were not used to purchase income producing assets.

The same principle applies when looking at offset against and loan redraws.

Using Money from an Offset Account to Invest

If you withdraw funds from your offset account to purchase shares or an investment property, you are essentially using your own money. This means you are not borrowing funds for the investment, and as a result, the interest on the original loan remains non-deductible.

Redrawing from a Loan for Investment

If you redraw funds from an existing loan and use them to invest in income-producing assets, the interest on the redrawn amount may be tax-deductible, provided the funds are used solely for investment purposes.

If the funds are mixed with personal use (e.g., part used for investments, part for a holiday), only the investment-related portion is deductible.

Example

Sarah has a $600,000 home loan and $100,000 in an offset account.  She wants to buy an investment property.  If she uses the $100,000 from her offset account, it won’t create a tax-deductible loan and the interest on her $600,000 home loan will remain non-deductible.. But if she redraws $100,000 from her existing loan and uses it solely for the property, the interest on that amount could be deductible.

4. Alternative Strategies

If you have funds in an offset account but want to maintain interest deductibility, one alternative is to borrow separately (e.g., take out an investment loan or a separate equity loan). This allows clear separation between investment and personal debt while preserving your home loan’s tax benefits.

5. When is an Offset Account the Smarter Choice?

An offset account can be highly beneficial for home owners who may later turn their home into an investment property.

If you think there is a possibility that you might convert your home into an investment property in the future, keeping savings in an offset account rather than making extra loan repayments can help preserve tax deductibility of the interest in the future.

5. Key Takeaways

The way you access funds for investment can have significant tax implications. Using an offset account means you’re spending your own money, whereas redrawing from a loan could allow you to claim tax deductions on interest.

We help investors make smart funding decisions that protect both their cash flow and tax position. Book a strategy session today to get personalised advice tailored to your goals..

DISCLAIMER: The information in this article is general in nature and is not a substitute for professional advice.  Accordingly, neither TJN Accountants nor any member or employee of TJN Accountants accepts any responsibility for any loss, however caused, as a result of reliance on this general information.  We recommend that our formal advice be sought before acting in any of the areas.  The article is issued as a helpful guide to clients and for their private information.  Therefore it should be regarded as confidential and not be made available to any person without our consent,

Selling a property? Do you need a tax clearance certificate?

Property Sales

Do you need a tax clearance certificate?

 

From 1 July 2016, purchasers of residential property were required to withhold 10% of the purchase price where the property cost was more than $2 million (this changed to 12.5% and $750,000 from 1 July 2017).  The ultimate goal of the withholding regime was to have tax withheld for the anticipated capital gain for foreign vendors.  However, under the legislation all sellers are deemed to be foreign vendors.  Australian residents could only avoid the withholding obligation by obtaining a clearance certificate from the ATO and providing it to the purchaser.

Recently, the Government announced that from 1 July 2025, it would increase the withholding rate to 15% and reduce the threshold for withholding to $0.  As such (provided the relevant legislation is passed for these changes), from 1 July 2025, all Australian resident vendors of property will be required to obtain a clearance certificate to provide to the purchaser.  Failure to do so will result in 15% of the sales proceeds being withheld by the purchaser and remitted to the ATO.

What do you need to do?
 
If you are an Australian resident selling property, currently you will need to obtain a clearance certificate from the ATO if the sales price is more than $750,000.  From 1 July 2025, all Australian resident vendors will need to obtain a clearance certificate.

DISCLAIMER: The information in this article is general in nature and is not a substitute for professional advice. Accordingly, neither TJN Accountants nor any member or employee of TJN Accountants accepts any responsibility for any loss, however caused, as a result of reliance on this general information. We recommend that our formal advice be sought before acting in any of the areas. The article is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our consent.