Paying interest on loans isn’t always a financial burden—especially when the Australian Taxation Office (ATO) lets you claim some of it back at tax time. But with tax laws evolving in 2025, knowing exactly which interest payments are deductible (and how to claim them properly) can make a real difference to your refund. Here’s a deep dive into tax-deductible interest for Australians, with expert tips and real-world examples to help you make the most of every dollar.
Understanding Tax-Deductible Interest: The Basics
In Australia, interest is generally tax-deductible when it’s incurred in the process of earning assessable income. That means not all interest payments qualify—only those tied to investments, business, or income-producing activities. Here’s how it works in practice:
- Investment property loans: Interest on loans used to purchase or improve rental properties is usually deductible against your rental income.
- Margin loans for shares: If you borrow money to invest in shares that pay dividends, the interest is typically tax-deductible.
- Business loans: Businesses can claim interest on loans used for operational or expansion purposes.
Personal interest—such as that paid on credit cards, home loans for your principal residence, or car loans for private vehicles—remains non-deductible. The key factor: is the borrowed money being used to generate income?
2025 Tax Policy Updates: What’s New?
This year, several ATO clarifications and legislative tweaks have put a sharper focus on the substantiation and apportionment of interest deductions. Here’s what’s changed in 2025 and what you should watch out for:
- Stricter tracing rules: The ATO now requires clearer documentation showing exactly how borrowed funds are used. If funds are mixed between deductible and non-deductible purposes, interest must be apportioned precisely.
- Refinancing and redraws: If you refinance an investment loan or redraw funds for non-investment purposes (like a holiday), only the interest on the portion still used for income-producing assets remains deductible.
- Enhanced digital record-keeping: The ATO is encouraging property investors and small business owners to use digital tools to track loan transactions and interest allocations, making audits easier and reducing disputes.
These changes mean that a casual approach to loan management could see you miss out on deductions—or worse, face an ATO review.
Real-World Examples: How Deductible Interest Works
Let’s see tax-deductible interest in action:
- Rental property investor: Sarah has an investment property with a $500,000 loan. She pays $25,000 in interest in 2024–25. Because the property was rented out all year, she can claim the full amount against her rental income.
- Mixed-purpose loan: James borrows $300,000, using $200,000 to buy shares and $100,000 for a personal car. He can only claim interest on the $200,000 portion used to invest in shares. If the total interest paid is $18,000, only two-thirds ($12,000) is deductible.
- Small business owner: Priya takes out a $50,000 business loan to upgrade her café. All interest on this loan is deductible as a business expense, helping reduce her taxable business income.
Failing to keep clear records in these scenarios can mean missing out on deductions or overclaiming—both costly mistakes.
Tips to Maximise Your Deduction in 2025
- Segregate loans: Where possible, keep investment and personal borrowings completely separate. This avoids messy apportionment calculations and makes substantiation easy.
- Document everything: Save loan agreements, bank statements, and evidence of how each dollar is used. Digital tools like property management apps or small business accounting software can streamline this process.
- Review refinancing moves: Before refinancing or redrawing, consider how the new funds will be used. Mixing purposes can dilute your deduction.
- Stay on top of ATO updates: The ATO regularly updates its guidance—especially as more Australians invest and diversify. Check their rulings on what counts as income-producing use.
With interest rates still elevated in 2025, maximising every legitimate deduction can have a meaningful impact on your cash flow.
Conclusion: Turn Interest Costs into Tax Savings
Tax-deductible interest remains one of the most powerful ways for Australians to reduce their taxable income—if you play by the rules. With the ATO sharpening its focus in 2025, careful record-keeping and a clear understanding of how your loans are used are more important than ever. Get proactive, review your loan structure, and ensure you’re claiming every dollar you’re entitled to.
