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There are two kinds of debt in this world: the kind that is tax deductible and the kind that isn’t.

Knowing the difference, and planning your purchases accordingly, can significantly improve your cashflow, opportunities and overall financial position.

So what makes debt tax deductible or not?

Non-tax deductible debt

Let’s start by clarifying that we’re talking about whether the interest on a debt is tax deductible.

So a non-tax deductible debt, also known as ‘bad debt’, is any money you borrow for a purchase that doesn’t deliver a return.

Examples can include your credit card, car loan, personal loan or the mortgage on your family home. You need to pay these debts from your after-tax earnings.

Tax deductible debt

You can usually consider a debt tax deductible if it was incurred to generate taxable income.

In other words, if you borrow money in order to make more money, your debt may be tax deductible.

Examples of tax deductible debt can include borrowing to invest in shares or property.

Potential benefits of tax deductible debt

If a debt is tax deductible, the interest is considered an ‘expense’ incurred in order to earn a taxable income.

Expenses are allowable tax deductions. Therefore the interest can be set against your taxable income, thereby reducing your total taxable income.

Let’s consider the following scenario: say you incur a debt to purchase an investment property. The interest payments, management and maintenance costs, capital works spending and depreciation on the property may all be claimed as tax deductions.

Depending on your individual circumstances, this may entitle you to various tax deductions and concessions, it may improve your cashflow and allow you to focus on paying down your ‘bad debts’.

Complications

This may all seem fairly straightforward, but life – and finances – are often anything but straightforward.

Say you incur a debt to buy property. Down the track you might want to redraw, consolidate your debts or upgrade the family home to make the original an investment property.

All of these actions will affect whether the interest on your loan is tax deductible. And the tax office will be watching carefully, so it’s important to do your homework and get expert advice before claiming a deduction.

Protect the tax deductibility of your debt

There are numerous steps you can take to protect the tax deductible status of your debt.

These can include keeping personal and income generating loans strictly separate or setting up an offset account.

The best course of action will very much depend on your personal circumstances, financial goals and obligations.

If you’d like to find out more about whether your debt is tax deductible or not, get in touch today.

We’d be more than happy to talk you through the ins and outs!

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Found yourself with extra time on your hands? Slightly worried about meeting your home loan repayments? Want to make use of those back-to-back rate cuts? While the world has changed significantly over the past month, it’s possible to use some changes to your advantage. 

Before we go any further though, we want to say we understand there’s no shortage of Aussie families doing it tough right now. And we want to reassure you that we’re here to help you any way we possibly can – including helping you apply for support packages with your lender.

So where does refinancing fit in?

Well, the many social and financial changes that have been thrust upon us recently have combined to make it a good time to consider refinancing your home loan.

Here are five reasons why you may want to consider doing so.

1. Payment relief

When was the last time you refinanced your home loan?

If your answer was ‘one year ago’ (or longer), the finance and lending landscape has changed dramatically since then and it might be time to catch up.

There have been five RBA cash rate cuts since then since June 2019 – including two in March this year.

And while we’re on the RBA, a recent study of theirs found that borrowers who refinance with another lender, or negotiate a better deal with their existing lender, do in fact achieve interest savings.

So if you or your partner have recently had your work hours cut back and you’re starting to worry about how you’ll meet your monthly mortgage repayments, refinancing could be a more suitable option than applying for a hardship variation on your loan.

2. Consolidate your debts

Refinancing can also help you consolidate your other debts – including your credit card, car loans or personal loans – by combining them into a refinanced mortgage.

Not only will this give you one simple repayment to make each month (reducing the risk of forgetting payments and being slugged with a late fee), but all your debts will be charged at your home loan interest rate – which is usually much lower than credit card rates, for example.

3. Low-interest rates: time to lock one in?

Fixed rates have recently experienced a big drop.

In fact, Domain’s David Hyman has described the current batch of fixed interest rate loans as “staggeringly cheap”.

“Only a couple of months ago the cheapest headline rate started with a three. If you look back to this time last year rates were in the high threes,” Hyman explains.

“For someone with a half a million dollar mortgage, that is well in excess of $10,000 a year in savings. It’s never been a better time to refinance quite frankly.”

And with the official RBA cash rate now at a record low 0.25%, there isn’t a great deal of room for it to go much lower.

4. Time on your hands

One of the more common reasons home owners give for not refinancing is that they simply don’t have the time do so.

But, without pointing out the obvious, I think it’s fair to say that we have far fewer social commitments taking up our time at present.

So, if you’ve compiled a list of things to do to keep busy at home, consider adding refinancing to the list.

Once you get the ball rolling on it and get in touch with us you’ll be surprised how little you actually have to do – after all, that’s our job, right?

5. We’re available to help you, whenever you need us

Finally, rest assured that we’re available and here to help you any way we can.

During trying times like these we know that we need to support each other now, more than ever.

So if you’d like us to help you explore your refinancing, hardship variation, or support package options then please get in touch – we’re ready to jump into action and make it happen for you.