Offset Account Tax in Australia: What the ATO Says

The money you save through an offset account is not taxed. The ATO does not treat the interest you avoid paying as income, so nothing goes on your tax return. That holds only while the account is a true offset arrangement. It also says nothing about whether the interest on your loan is deductible, and that second question is where people lose money.

This guide covers both sides: why the savings are tax-free, when that could change, and how an offset account interacts with investment property, redraw facilities and the similarly named “tax offsets” on your return.

TL;DR

• Interest you save through a genuine offset account is not assessable income, so you pay no tax on it.
• A savings account pays interest that is taxed at your marginal rate. An offset account pays nothing, so there is nothing to tax.
• On an investment loan, deductibility depends on what the borrowed money was used for. Parking cash in an offset does not change that.
• Redrawing from a home loan and moving the money into an offset linked to an investment loan does not make the interest deductible.
• A “tax offset” on your return is a different thing entirely: it reduces tax payable, not loan interest.

Table of Contents

• Why offset account savings are not taxed
• Offset account tax treatment at a glance
• Investment loans: you claim the interest charged, not the interest saved
• Offset versus redraw: where the tax trap sits
• Not to be confused: tax offsets
• Costs and limits that affect your real return
• Our view: model the tax and the timing together
• Run your own offset scenarios
• Practical checklist before you rely on an offset
• FAQ
• Sources

Why offset account savings are not taxed

An offset account is a transaction account linked to a loan. Interest is calculated on the loan balance minus the offset balance. Put $50,000 in the account against a $500,000 loan and you are charged interest on $450,000.

The ATO’s position is that in an acceptable offset arrangement you do not earn interest on the deposited funds, and so you do not pay income tax on the interest savings. The saving is the absence of an expense, not a receipt. There is no income to declare.

The underlying ruling is Taxation Ruling TR 93/6. It accepts offset arrangements provided there is no entitlement to receive interest on the deposit account. If an account is in credit and does earn interest, that interest is fully assessable and the offset’s tax benefit is lost for that period.

In practice, ordinary bank offset products are built to meet this condition. You should still check that your account is described by your lender as an offset linked to your loan, not a separate savings product with a rate attached.

A worked example

These figures are hypothetical and ignore fees and rate changes. Say your loan rate is 6% and you hold $50,000 in the offset all year.

• Interest avoided: $50,000 × 6% = $3,000 a year.
• Tax on that $3,000 through an offset: nil.
• The same $50,000 in a savings account paying 6%: $3,000 of interest, added to your taxable income.

If your marginal rate were 30% (again, for illustration only), you would keep $2,100 from the savings account and $3,000 from the offset. The higher your marginal rate, the wider that gap. We go through the comparison in more detail in our guide to offset account vs savings account.

Offset account tax treatment at a glance

The next sections explain the three trickiest rows.

Investment loans: you claim the interest charged, not the interest saved

If your offset is linked to an investment property loan, the offset reduces your interest bill. That also reduces the deduction you can claim. The deduction follows the interest the lender actually charges, which is lower than it would be without the offset.

That is not a tax penalty. It is the same cash outcome you wanted: less interest paid, and no tax paid on the saving. A reader on a discussion forum put it simply: you can claim the interest charged, not the principal repayments. That is consistent with the ATO’s interest expenses guidance for rental properties, which allows a deduction for interest on a loan used to buy a rental property that is held to produce assessable income.

It is also why many investors prefer to keep spare cash against the home loan, where there is no deduction to lose, and keep the investment loan at full balance so the deductible interest is larger. Whether that suits you depends on your structure, and a registered tax agent should confirm it. We cover the mechanics in our offset account investment property guide.

Mixed-purpose loans need records

Some loans are partly private and partly investment. The ATO says that where a loan is used for both purposes you must apportion the interest, and you cannot simply repay the private portion first. Repayments are apportioned across both parts for the life of the loan.

If you have a split like this, keep loan statements and a record of how the borrowed funds were used. It is the single most useful habit for avoiding a disputed deduction years later.

Offset versus redraw: where the tax trap sits

Both features let you put spare cash against your loan. Their tax effects can be very different once an investment property is involved.

With an offset, your money sits in a separate account. The loan balance and its purpose are untouched. With a redraw, extra repayments reduce the loan itself, and you later borrow the money back. If you redraw and spend it on something private, you have created a private-purpose debt inside what may have been an investment loan.

MoneySmart notes that deposits into an offset generally do not change the character of the loan, whereas mixing private and investment debt through redraws can complicate the deductibility of interest.

A specific ATO ruling shows the other direction. When funds redrawn from a home loan are deposited into an offset linked to an investment loan, the interest on the redrawn amount is not deductible. The ATO treats it as using savings to cut interest costs, not as using borrowed money for an income-producing asset.

A separate private ruling reached the same answer on money taken from an offset account to buy shares: no deduction for interest on that use. Private rulings bind only the person who asked, so treat them as illustrations of the ATO’s reasoning, not as law for your own case.

For a side-by-side look at the cash savings rather than the tax, see offset vs redraw.

Not to be confused: tax offsets

Searches for “offset account tax” often land on pages about tax offsets, which are unrelated to your mortgage. According to the ATO, a tax offset (or rebate) reduces the tax you pay on your taxable income. It is different from a deduction, which reduces the taxable income itself.

Most tax offsets are non-refundable, meaning they cannot take your tax payable below zero. The private health insurance rebate is an example of a refundable one. Some are calculated automatically by the ATO, and others you claim in the offsets section of your return.

So: an offset account cuts loan interest. A tax offset cuts your tax bill. Same word, different tools.

Costs and limits that affect your real return

The tax treatment is only half of whether an offset is worth it. Fees can eat into the saving.

As one example, CommBank lists a $10 monthly Offset Feature fee for linking accounts to certain loan types, and the number of offset accounts allowed per loan ranges from one on a Digi Home Loan to 99 on a Standard Variable Rate loan. Other lenders charge no monthly fee for offsets. Check your own loan’s product disclosure, since terms change.

A quick test: a $10 monthly fee is $120 a year. At a 6% loan rate, you need roughly $2,000 sitting in the offset just to recover that fee in interest saved. An offset with a small average balance can cost more than it saves. Offsets are also usually tied to variable-rate loans, so check this if you have fixed your rate.

On the other side, APRA data shows how much Australians rely on them. In its December 2023 release, offset balances had risen to 11 per cent of credit limits, the highest share since that data series began, and these balances act as a buffer against higher repayments.

Our view: model the tax and the timing together

We build modelling software for Australians, and the same pattern turns up often. People ask whether an offset account is “worth it” as if it were a single yes or no. It is really three questions that interact.

First, is the saving tax-free? Yes, if the arrangement is a true offset. Second, which loan should the cash sit against? That depends on whether the loan is deductible, because a dollar of interest saved on a non-deductible loan is worth more after tax than a dollar saved on a deductible one. Third, what happens to the balance over time? A buffer that is $80,000 today may be $20,000 after a renovation, a school-fee year or a few years of early retirement.

Those answers change the picture most for people retiring before preservation age, where the offset often funds the “bridge” years before super is accessible. A spreadsheet can handle one scenario. It gets awkward when you want to compare keeping a large offset against paying down the loan, with an investment property and super contributions in the same plan.

Our advice is to write down your assumptions, run two or three versions, and stress them with a higher rate and a lower balance. If the plan only works in the optimistic case, you want to know that before you commit.

— Aerowealth Team

Run your own offset scenarios

If you want to see how an offset balance, loan rate and investment property change your retirement age or net worth, AeroWealth lets you compare scenarios side by side with Australian rules built in. The Free plan is a good place to start. Pro is $7 per month and adds bridge mode for early retirement, advanced mortgage features and expanded scenario planning. If you prefer to start in a spreadsheet first, see our notes on a mortgage offset calculator in Excel.

Practical checklist before you rely on an offset

1. Confirm the account is a linked offset and that you have no entitlement to interest on it.
2. Identify whether the linked loan is private, investment or split.
3. If it is an investment loan, keep records of the loan’s purpose and any redraws.
4. Avoid redrawing from a home loan to fund investment-linked deposits without advice.
5. Calculate the monthly fee against your average balance.
6. Revisit the balance each year as your cash needs change.

If your loan structure is complicated, or you have already redrawn on a loan that funded an investment, see a registered tax agent or a licensed financial adviser before lodging your return. The ATO’s rulings turn on the facts of each case.

FAQ

Do I pay tax on the interest I save with an offset account?

No. The ATO does not treat interest saved through an acceptable offset arrangement as assessable income. The benefit is that you pay less interest, not that you earn any. This depends on there being no entitlement to interest on the offset balance.

Can I claim a deduction for an offset account on an investment property?

You can claim interest the lender actually charges on an investment loan, provided the borrowing was used to produce assessable income. The offset lowers that interest, so it lowers the deduction too. You cannot claim interest you avoided paying.

Does using redraw funds in an offset make the interest deductible?

Not according to the ATO. In its ruling on redrawn home loan funds deposited into an offset linked to an investment loan, the interest on the redrawn amount was not deductible. Get advice before moving funds between loans.

Is a tax offset the same as an offset account?

No. A tax offset reduces the tax payable on your return, while an offset account reduces the balance your lender charges interest on. They share a name and nothing else.

Can I have more than one offset account?

Often yes, but it depends on the lender and the loan type. CommBank, for example, allows from one to 99 per loan depending on the product. Some lenders charge a monthly fee for the feature, so compare the cost with your balance.

Sources

• ATO: offset account interest and redrawn funds ruling
• ATO: Taxation Ruling TR 93/6
• ATO: interest expenses for rental properties
• ATO: private ruling on interest and shares bought from an offset
• ATO: about tax offsets
• MoneySmart: pay off your mortgage faster
• CommBank: Everyday Offset Account
• APRA: property exposure statistics highlights, December 2023

Recommended

• Offset Account vs Savings Account: Which Wins in Australia?
• Offset Account Investment Property: Australian Investor Guide