Client Login
If you've taken out a personal loan and you're wondering whether the interest you’re paying is tax-deductible, you’re not alone. Many Australians are unsure where personal loans sit when it comes to tax time. The answer? It depends on how you use the funds.
In this blog, we discuss everything you need to know regarding personal loans and their tax implications.
Contents
Personal Loans Explained
A personal loan is a lump sum of money borrowed from a lender (such as a bank, credit union, or online lender) that’s repaid over a set term with interest. It’s typically used for things like travel, weddings, car purchases, medical bills, or consolidating debt. However, in some cases, it may also be used to fund investments or business expenses.
This is where the question of tax deductibility arises.
When is Personal Loan Interest Tax Deductible?
In Australia, personal loan interest is not automatically tax-deductible. However, if the money borrowed is used for income-generating purposes, the interest on that portion of the loan may be deductible.
Here are some examples of when personal loan interest may be deductible:
1. Investing in Shares or Property
If you use your personal loan to invest in assets that generate taxable income (such as dividend-paying shares or a rental property), you may be able to claim a tax deduction for the interest on that part of the loan.
2. Business Expenses
If you’re self-employed or own a business and use your personal loan to cover business-related costs (for example, purchasing equipment or paying suppliers), then the interest on that portion could be deductible as a business expense.
When is Personal Loan Interest Not Tax-Deductible?
Most personal loans used for non-income-producing purposes do not qualify for any tax deductions. These include:
- Buying a car for personal use
- Funding a wedding or holiday
- Paying off credit card debts
- Renovating your owner-occupied home
- Everyday living expenses
To put it simply: if the loan isn’t used to generate assessable income, and you're wondering, “Is my personal loan interest tax deductible?” The answer is no.
Can You Deduct the Loan Itself?
No. It’s important to note that only the interest portion of a loan used for eligible purposes may be deductible, and not the loan repayments or principal amount.
What About Other Types of Loans?
While personal loans are occasionally deductible (when used correctly), here’s how other types of loans are treated:
- Home loans: Interest on an owner-occupied home loan is not deductible. However, interest on an investment property loan typically is.
- Student loans: HECS/HELP repayments are not deductible.
- Credit cards: Interest may be deductible only if the expense is for business or investment purposes.
Exploring Alternatives to a Personal Loan
While personal loans are a common go-to, they’re not your only option. Depending on your financial goals, there are some loans that may offer better rates or more flexibility. Consider these alternatives to a personal loan:
- Business Loans: If the funds are for your business, a dedicated business loan might make more sense. Interest on business-related loans is more likely to be deductible, as they’re directly tied to income-generating activities.
- Car Loans: If you're buying a vehicle, a car loan could offer lower interest rates than an unsecured personal loan.
- Credit Cards: Credit cards provide a revolving line of credit but often come with higher interest rates. Be sure to understand the terms and conditions before comparing them with personal loans.
Rather than asking “Are loans tax deductible?”, it’s more useful to consider whether a personal loan aligns with your broader financial goals. The key lies in how the loan is used, and whether it contributes to generating assessable income.
If you’re unsure how your loan might affect your tax position or need help choosing the right finance option, the team at Inovayt is here to help. Our financial advisors can help you navigate your options, or you can also use our Income Tax calculator to get a clearer idea of your potential deductions.
