Caution: Are you reporting your rental property income expenses correctly?

The Australian Taxation Office (ATO) has estimates that the incorrect reporting of rental property income and expenses is causing approximately $1 billion in forgone tax revenue annually. A significant portion of this is related to how taxpayers are claiming interest on their investment property loans.

We've observed increased ATO scrutiny of refinanced or redrawn loans. This heightened activity stems from a substantial data matching program involving residential property loan data from financial institutions, spanning from 2021-22 to 2025-26. This data is cross-referenced with the information taxpayers have declared on their tax returns. Individuals with irregularities in their claims can expect to be contacted by the ATO to address these discrepancies.

If you have an investment property loan and choose to redraw funds for a different purpose than the initial borrowing, the loan account becomes a mixed-purpose account. The interest accruing on mixed-purpose accounts must be apportioned based on the various purposes for which the funds were used.

Conversely, if the redrawn funds are invested to generate income, the interest on this portion of the loan may be tax-deductible. However, if you've redrawn the funds for personal expenses like a private holiday or debt repayment, the interest pertaining to that portion of the loan balanced is not tax-deductible. Not only must the interest expenses be apportioned into deductible and non-deductible portions, but repayments also typically require apportionment.

Withdrawals from an offset account are treated as savings rather than new borrowings. If you have a loan account with an attached interest offset account that reduces the interest payable on the loan, withdrawing funds from the offset account will generally increase the amount of interest accruing on the loan. However, it won't alter the deductible percentage of the interest expenses. In essence withdrawing funds from the offset account constitutes a withdrawal of savings and doesn't impact the extent to which the interest accruing on the loan account is deductible. 

If you suspect that you may encounter issues in these areas, we encourage you to reach out to us, and we can investigate the matter proactively before the ATO initiates contact.