Offset vs Redraw: The Wrong Account Choice Costs You $9,165 Per Year

Let me explain how one wrong account choice silently costs you $9,165 per year in tax — and approximately 90% of Australian property investors have it set up wrong.

The difference between an Offset account and a Redraw facility looks trivial on the surface. Both let you park spare cash against your mortgage to reduce interest. Both feel like the same thing.

They are not the same thing. And the tax consequences of getting it wrong are devastating.

The difference that costs you thousands

Offset: Your savings sit in a separate transaction account linked to your loan. The bank calculates interest on the loan balance minus the offset balance. Your money is your money — you deposit and withdraw freely. The loan itself never changes 1.

Redraw: You make extra repayments directly into the loan, reducing the outstanding balance. When you redraw that money, the ATO treats it as a new borrowing. The tax deductibility of the redrawn amount depends entirely on what you use it for — not what the original loan was for.

This distinction comes from ATO Tax Ruling TR 2000/2, which establishes that the purpose of borrowing (not the security asset) determines deductibility. When you redraw from your home loan, the original purpose (buying your home) is irrelevant. The new purpose (whatever you spend the redrawn money on) determines whether the interest is deductible 2.

Real example: John loses $9,165 per year

John has a $500,000 home loan. He inherits $300,000 and puts it into Redraw to save on interest. Smart move — his interest is now calculated on $200,000.

Three years later, John buys a new house to live in and converts the old house to an investment property. He redraws the $300,000 to use as a deposit on the new home.

John assumes his investment property loan is still $500,000 and all the interest is tax-deductible.

Wrong.

The $300,000 redraw was used for a private purpose (buying a new home). Under TR 2000/2, the interest on that $300,000 is permanently non-deductible. Only the remaining $200,000 of the loan generates deductible interest 3.

The tax cost: $300,000 x 6.5% interest rate = $19,500 in annual interest that's now non-deductible. At the 47% marginal tax rate, that's $9,165 per year in tax that John pays unnecessarily.

If John had used an Offset account instead, his $300,000 would have sat separately. When he converted the property to investment, the full $500,000 loan would be deductible because the original loan purpose (buying what is now the investment property) was never altered.

Same money. Same interest saving during the home ownership period. Completely different tax outcome on conversion. The Offset path saves $9,165 per year. Every year. For the life of the investment loan.

Second trap: investment property Redraw for personal use

Emily has a $100,000 investment property loan. She puts $50,000 in extra repayments into Redraw to reduce interest. Six months later, she redraws $50,000 to buy a car.

That $50,000 redraw was used for personal consumption. The interest on it is permanently non-deductible — even though the original loan was for an investment property 4.

The amount is smaller. But the principle is identical. Redraw money gets re-characterised based on the new use. Offset money never does.

The rule is simple: if there is any chance — any chance at all — that your property might become an investment property in the future, use an Offset account. Not Redraw. The annual fee difference between the two (typically $300-$400) is trivial compared to the tax consequences.

The ATO is actively auditing Redraw transactions for tax years 2021-22 through 2025-26. They're matching bank Redraw data against tax return interest deduction claims. Approximately 90% of rental property owners have some form of incorrect interest deduction claim 5.

When I review client loan structures — which I do at the start of every engagement — the Offset/Redraw issue is the first thing I check. It takes five minutes to verify. It saves thousands per year. And it's wrong more often than it's right.

If you're reading this and you have money in Redraw: talk to your accountant. Today. The longer the wrong structure persists, the more years of deductions you lose.