Offset vs redraw: why the difference matters for property tax

The short answer

An offset is a separate account linked to a loan. Redraw gives you access to extra repayments already made into the loan, subject to the lender’s terms. That distinction matters when tracing what borrowed money was used for.

Neither feature is automatically the best choice for every investor. Start with how the accounts work, your intended use of the funds and the costs of the loan.

Source: ASIC Moneysmart: mortgage offset accounts.

Why the purpose of a redraw matters

The ATO treats a redraw as a separate borrowing. Interest treatment depends on the use of those funds. Securing a loan against a rental property does not make every withdrawal investment-related. A loan used partly for private purposes can require interest apportionment.

Source: ATO Taxation Ruling TR 2000/2.

A practical question before moving money

Imagine you have made extra repayments into an investment loan and now want to redraw to buy a private car. The key question is where that new borrowing goes. The rental property used as security does not answer that question for you.

Before the transfer, give your accountant the amount, the proposed destination and the transaction history. Give your broker the same proposed transaction so they can explain the loan mechanics. Keep the tax question and the product question visible in the same conversation.

Build a funds trail you can explain

A useful preparation exercise is to draw three boxes: the source account, any account the money passes through and the final use. Add the amount and date to each movement. If you cannot explain a transfer, flag it rather than guessing.

• Gather statements showing the original advance and subsequent redraws.
• Separate private spending from property-related transfers in your notes.
• Keep invoices and settlement records that explain the destination.
• Identify any planned refinancing or change in property use.

This gives your adviser a starting point for reviewing the facts. It does not determine deductibility on its own.

Questions to resolve before acting

Ask whether the proposed movement changes the use of borrowed funds, what records will be needed and whether previous transactions need reviewing. Ask the lender about access conditions, fees and the actual offset arrangements.

If you are preparing for another purchase, read what to review before buying. For the broader decision, explore tax, cash flow and borrowing together.