Interest deductions for tradies: risks and opportunities

Every tax season, we hear the same question from tradies: “Can I claim the interest on that loan?”

It’s a fair question, and the answer can make a big difference at tax time. But the rules around interest deductions aren’t always clear-cut, and small mistakes can lead to denied deductions or ATO scrutiny.

The purpose of the loan matters most

When it comes to interest deductions, why you borrowed the money is what counts, not what the loan is secured against.

If the funds are used for business or income-producing purposes, the interest is generally deductible. If it’s used for something private, it’s not.

Example: Harry borrows against his rental property to buy a family home. Even though the loan is secured by an income-producing asset, it’s a private expense — so the interest isn’t deductible.

Keeping business and personal borrowings separate is key.

Redraw vs offset - don't mix them up

Redraw and offset accounts might look similar, but they’re treated differently for tax.

If you redraw money, that’s a new borrowing, and the interest depends on what the redrawn funds are used for. With an offset account, you’re just using your own savings, so there’s no new borrowing and no deduction.

Example:Lara redraws $20,000 from her home loan to buy shares; interest on that part can be deductible. Peter uses $20,000 from his offset account to buy shares; none of it is deductible.

Be careful parking borrowed money

If you borrow for business or investment but park the funds in an offset account until you’re ready, that interest usually isn’t deductible while it’s sitting there. Once borrowed funds and personal money mix, it’s almost impossible to trace, and future deductions can be denied.

Why it matters

For tradies juggling loans for utes, tools, or a shed, getting the loan structure right can save thousands. Done well, it can reduce taxable income and improve cash flow. Done poorly, it can lead to denied deductions or issues with the ATO.

As a former supermarket owner turned Chartered Accountant, I’ve seen both sides, and a little planning upfront always pays off.

The bottom line

Interest deductions are a real opportunity for trade and maintenance businesses, but only when loans are structured correctly.

Before signing your next loan or shifting funds, get advice first. We can help you separate personal and business debt, avoid redraw and offset traps, and protect your tax position.

If you want clear guidance on setting up and mastering your books, check out our Bookkeeping Series course here.