ATO Targets Risky Interest Deductions for Rental Properties

Are Your Claims Audit-Ready?

The ATO has announced it is ramping up reviews of rental property interest deductions, with a focus on incorrect and overclaimed expenses.

If you own an investment property and claim interest on your tax return, here’s what you need to watch out for to avoid audits and penalties.

🏠 What Interest Is Legitimately Deductible?

You can generally claim a deduction for interest on loans used to:

• Purchase a rental property
• Finance repairs or renovations directly related to rental income
• Refinance an existing investment loan (for the rental property only)

📌 Golden Rule: The loan purpose determines deductibility — not what the property is secured against.

🚩 High-Risk Claims Under ATO Scrutiny

1. Redrawing or Refinancing for Private Use

Risk: Using redraws to pay for holidays, cars, or personal bills.

You can’t claim interest on amounts used for personal purposes, even if the loan is secured by your rental property.

2. Mixed-Purpose Loans

Risk: Loans partly used for personal and partly for rental expenses.

Only the rental portion of interest is deductible. You must apportion interest correctly and keep detailed records.

3. Loan for Vacant Land or Private Portions

Risk: Interest during periods where the property was not genuinely available for rent.

Interest may not be deductible for land or homes that are not yet generating income — e.g. still under construction or used by family/friends rent-free.

4. Incorrectly Structured Loans

Risk: Interest on offset or line-of-credit facilities not properly tracked.

Offset accounts must be clearly separate, and interest deductions must relate solely to the investment activity.

📁 What You Should Do

✅ Keep clear records showing:

• The original loan purpose
• How any redraws or refinances were used
• Dates the property was genuinely available for rent

✅ Apportion accurately for:

• Mixed-use loans
• Periods of private use or vacancy

✅ Avoid:

• Using investment loans for private spending
• Relying on outdated or generic bank statements

The ATO uses data-matching and AI tools to detect irregularities. If your claims don’t match loan usage, you may face a review or adjustment.

Talk to us before claiming interest deductions — especially if you’ve redrawn funds, refinanced, or used the property for mixed purposes.

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 Yan Qi CA

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