Guide · Structures & accounting

Debt recycling, properly: how the interest becomes deductible and what has to stay true

By Michael Gentry · as at September 2026

Debt recycling does not borrow a dollar more. It moves money from a home loan, whose interest the tax system ignores, into a separate loan drawn to invest, whose interest it recognises. The total owing does not change. What changes is what part of it was borrowed for, and under Australian tax law that is the only thing that decides whether the interest is deductible.

What does the strategy actually do?

It converts non-deductible home-loan debt into deductible investment debt, one pass at a time, without increasing what is owed. Money is paid into the home loan. The same amount is borrowed back through a separate loan split, drawn for the purpose of investing, and invested. The home loan is smaller, the new split is exactly that much bigger, and the split's interest is deductible because it was borrowed to earn income.

The social-media version compresses this into "turn your mortgage into a tax deduction". That is not what happens, and the difference matters. The home loan is never deductible. It shrinks. A different loan, borrowed for a different purpose, grows by the same amount, and that loan's interest is deductible on ordinary principles that predate every video about it.

Why does the same $100,000 get two different answers?

Because Australian tax law taxes interest according to what the borrowed money was used for, not what it is secured against and not where it came from. Meet Rookie Rob and Boomerang Bec. Both owe $1,000,000 on their home, both have $100,000 in the offset, and both want to buy the same shares. Rob takes the $100,000 straight out of the offset and buys them. Bec pays it into the home loan, borrows it back through a separate split drawn to buy shares, and buys the same shares.

Rob's offset drops, so his home-loan interest rises by $6,000 a year at 6%. But no new borrowing happened. His loan is still the loan that bought the house, and its interest is a private cost. Bec's split is a new borrowing, incurred to earn dividends, so its $6,000 of interest is deductible.

The principle is the ATO's own, and old. The character of interest follows the use to which the borrowed funds are put (TR 95/25). A draw-down under a line of credit, or a redraw from a loan account, is a separate borrowing whose deductibility depends on what that money is used for (TR 2000/2). An offset account is the borrower's own money sitting against the loan; taking it out is spending savings, and the loan's purpose is untouched.

The tax system refunded part of the gap between the interest and the dividends. The investment has to do the rest.

What is the difference worth?

On $100,000 at a 39% marginal rate, $2,340 a year, which is the deduction multiplied by the rate. Everything else in the comparison is identical: the shares, the debt, the interest, the dividends.

The gap scales with the marginal rate, as the table shows. And it scales with the amount: recycle $50,000 a year on top of the first $100,000, hold the total owing at $1,000,000, and the split reaches $550,000 by year ten, $195,000 of deductible interest over the decade, worth $76,050 at 39%. No investment return is assumed anywhere in those numbers; they describe the debt, not the shares.

Is this negative gearing on shares?

Yes, mechanically. When deductible interest exceeds the income the investment produces, the shortfall is a loss that reduces other taxable income, exactly as a negatively geared property's loss does. Bec paid $6,000 to receive $4,000, so her return shows a $2,000 loss, and at 39% it comes back as $780.

Which is where the honesty has to go. A deduction is a discount on a cost, not a profit. Bec is $2,340 a year ahead of Rob and still $1,220 a year out of pocket before any change in the value of the shares. The tax system refunded part of the gap between her interest and her dividends. The investment has to do the rest, through growth, rising income or both, and whether it will is an investment question that this piece does not answer.

Both loans move with the same market. The structure changes what is deductible. It does not change what is owed, or what the shares are worth.

What has to stay true for the interest to remain deductible?

Three things: the split is a separate account with nothing private ever drawn from it, the borrowed money goes straight into the investment without mixing with other funds, and the split's interest is paid by the borrower rather than by another loan. Each comes from a ruling or a case in which somebody lost the deduction, and each is permanent. The first two are below; the third has its own section.

The separate account. Redrawing the investment money from inside the home loan does create a new borrowing, but inside a mixed-purpose account. From then on only the investment share of the interest is deductible, the apportionment has to be made every year on a fair and reasonable basis, and every repayment is treated as reducing both parts in proportion, so the deductible portion shrinks whether the borrower wants it to or not (TR 2000/2). A split with its own account number replaces that arithmetic with one clean figure.

The clean path. In Domjan's case, borrowed money passed through an account holding other funds before it was spent on the investment, and the tribunal held that once funds are intermingled the use to which they were put cannot be established. The interest was not deductible. Borrowed money that sits in an offset or a joint everyday account on its way to the investment runs the same risk; a clean account opened for this only, drawn from the split and used for nothing else, is how the trail stays visible.

Why must the split's interest be paid by you and not by another loan?

Because the one version of this structure the courts have struck down is the one where the investment loan's interest is left to capitalise while every dollar of salary goes to the home loan. That is the arrangement the High Court considered in Hart's case and the ATO describes in TD 2012/1: a line of credit paying the investment loan's interest, the interest compounding onto deductible debt, the private debt paid down faster. Part IVA applied because the dominant purpose of arranging it that way was the tax benefit.

Plain debt recycling, with the split's interest paid monthly from the borrower's own money, is a different thing, and keeping it different costs nothing. Three practical rules follow.

• Interest-only on the split keeps the deductible balance the size it was made; principal-and-interest shrinks it every month and it cannot be put back without a new borrowing. Spare money goes at the home loan instead, where it cuts interest that was never deductible.
• Income-producing investments only. The deduction rests on a reasonable expectation of assessable income: dividends, distributions, rent. An asset that can only grow and never pay puts it at risk.
• If the investment is sold, the proceeds either repay the split or go directly into the next income-producing asset. A split that funded something no longer held is a deduction in trouble.

What will a lender actually let you do?

Interest-only on the split for up to 5 years at a time and about 10 years in total, investment pricing on it even though it is secured on the home, a purpose the lender can evidence, and no line of credit anywhere. That is what the current credit policy of 19 lenders comes to when it is read against this structure.

Two findings matter more than the rest. Lines of credit, the instrument older debt-recycling guides were written around, have effectively left the market: none of the 19 currently offers one for progressive investment drawdowns, so the split, drawn once, is the tool. And the exceptions cut both ways: Westpac and St George allow 15 years of interest-only on an investment-purpose split below 80% LVR where most stop at 10, while Firstmac will not offer interest-only at all when the home is the only security.

• Evidence of purpose ranges from a planner's confirmation or a statutory declaration (ANZ) and an accountant's letter (Bankwest) to a broker's file note (Macquarie); ING pays the funds straight to the investment rather than to the borrower.
• Splitting an existing loan is a no-assessment variation at ANZ and a full-servicing variation with a fee at ING; increasing a split later is a full assessment at ANZ and carries a $25,000 minimum at Macquarie.
• Dividends count for servicing at 80% almost everywhere, usually on two years of tax returns. Future dividends from the shares being bought count for nothing.

What do accountants check before they will sign off on it?

The paper trail. The file is the deduction, and a structure that produces the documents automatically is one an accountant can defend without reconstruction. In the order they are asked for:

• Separate split statements from day one, with separate account numbers.
• The disbursement from the split into a clean account, and from there into the investment.
• Contract notes or holding statements in the client's name.
• The interest on the split paid from the client's own account.
• A split statement with nothing private on it.

The order of the professional conversations matters more than most people expect. Accountant on deductibility, adviser on the investment, lender or broker on the loan structure, or all three within the same fortnight. What does not work is drawing the money first and asking afterwards: once funds have moved through the wrong account, nobody can move them back.

Does it work for property, and what did the 2026 Budget change?

The split can fund the deposit and costs on an investment property, and its interest is deductible against the rent exactly as it is against dividends. What the 2026 Budget changed is where a property's loss can go, not whether the interest is deductible.

For an established residential property contracted after 7:30pm on 12 May 2026, the property's net loss can no longer reduce salary or other income from 1 July 2027. It is quarantined: set against rental income or capital gains from residential property the investor owns, and carried forward until something absorbs it. Eligible new builds keep full negative gearing, and anything owned or under contract before the line is grandfathered for as long as it is held. The detail, including how lenders have already priced it into borrowing capacity, is in the negative gearing explainer.

Who is it for, and who should leave it alone?

People who were going to invest anyway, have equity and stable surplus income, can carry a leveraged position for a decade, and pay a marginal rate that makes the deduction worth having. The structure is simple. Carrying it is what decides whether it was a good idea: the split's interest is paid in cash every month in every kind of year, and the value of the investment can fall while the debt does not.

Rules can change. The 2026 Budget rewrote property gearing and the capital gains discount from a contract date. Interest deductibility on borrowing to invest is core tax law rather than a concession, but nobody can promise it stays untouched, which is an argument for getting a structure right rather than for rushing an investment decision.

This is general information — talk to a licensed financial adviser and a registered tax agent about your own situation before acting.