Quick answer
Interest on money borrowed and used to earn business income is generally deductible, and many borrowing costs can be claimed, sometimes spread over several years. The loan principal is not deductible. What matters is how the borrowed money is used, not what the loan is called, so mixed business and private use needs apportioning. ATO interest charges incurred from 1 July 2025 are not deductible. Confirm your position with an accountant.
Key points
- The use of the funds decides deductibility, not the loan's label.
- Interest is generally deductible; principal repayments are not.
- Some borrowing costs are claimed over several years.
- ATO general interest charge from 1 July 2025 is not deductible.
Checklist
- Record what the borrowed money was used for
- Separate business and private use
- Keep loan statements and fee records
- Ask your accountant about borrowing costs
One of the first questions owners ask about a business loan is whether the interest is tax deductible. In broad terms, interest on money used to earn business income generally is. But the details, especially around mixed-use loans, borrowing costs and tax debts, are where mistakes happen. This guide explains the general principles. For your own situation, always confirm with your accountant.
The key principle: what the money is used for
Deductibility generally follows the use of the borrowed money, not the name of the loan or what secures it. If you borrow to buy stock, pay wages or purchase equipment for the business, the interest is generally deductible. If you borrow against your business and use the money for a private holiday, it generally is not. A loan secured by your home but used entirely for business can still be deductible. The ATO’s deductions guidance explains the general rules.
Interest versus principal
| Part of a repayment | Usually deductible? |
|---|---|
| Interest on business-use funds | Generally yes |
| Principal | No |
| Establishment and similar borrowing costs | Often, sometimes spread over years |
| Ongoing account fees | Often |
| Early repayment or break fees | Depends; ask your accountant |
| ATO general interest charge (from 1 July 2025) | No |
Mixed-use loans
When a loan funds both business and private purposes, the interest generally needs to be apportioned. Mixing purposes also makes record keeping harder and can cause problems in an ATO review. Where possible, keep business borrowing separate from private borrowing, and if you do use one facility for both, keep clear records of how much was used for each.
Borrowing costs
Fees such as establishment, documentation and legal costs for setting up a loan are often treated as borrowing costs. Depending on the amount and the loan term, they may be claimed over a period rather than all in the first year. Your accountant will know how to treat each one.
Tax debts and interest
A notable recent change: the ATO states that general interest charge and shortfall interest charge incurred from 1 July 2025 are no longer deductible. If you are deciding between an ATO payment plan and a business loan to clear tax debt, that change can affect the comparison. Our guide to ATO payment plans versus business loans explains how to weigh it.
Equipment finance and leases
How you finance equipment affects what you can claim:
- Chattel mortgage: the business owns the asset, so it may claim depreciation and interest.
- Finance or operating lease: the financier owns the asset; lease payments may be deductible.
The right structure depends on your tax position. Our chattel mortgage review and guide to the instant asset write-off and finance cover more.
Records you need
Keep loan contracts, statements showing interest and fees, and records showing how the money was spent: invoices, bank statements and a simple note of the purpose. The ATO’s record-keeping guidance sets out what to keep and for how long.
Do not borrow just for a deduction
A deduction reduces tax on the cost of borrowing; it does not make borrowing free. Borrow because the money will earn or save more than it costs, and treat the tax benefit as a bonus.
An illustrative example
A made-up design studio draws on a line of credit for a new computer system and also, in one month, to cover a family expense. At year end, its accountant apportions the interest so only the business portion is claimed, and the owner moves personal spending to a separate facility from then on to keep things simple.
Refinancing and deductibility
When a loan is refinanced, the deductibility of interest on the new loan generally follows the use of the original borrowed funds. If you refinance a business loan and also draw extra money for a private purpose, the new loan becomes mixed use and needs apportioning. Keep a record of how the refinanced balance was made up, and ask your accountant before combining business and private debts in one facility.
Sole traders, companies and trusts
The general principles apply across structures, but the details differ. A company borrowing in its own name claims deductions in the company’s return; a sole trader claims in their individual return; trusts have their own rules. Where a director borrows personally and lends the money to a company, the treatment can be more complex. These are areas where professional advice pays for itself.
Planning finance around tax?
If you are planning a purchase or managing a tax bill and want to understand finance options, make one enquiry. There is no credit check when you first enquire, a real person reviews it and your details go to one lending partner rather than a crowd. For tax advice on your own situation, speak with your accountant; for the finance side, start with your enquiry.
Frequently asked questions
Can I claim the whole loan repayment?
No. The principal portion of a repayment is not deductible. Interest and certain fees may be, depending on how the money is used and your circumstances.
Is interest on a home loan used for business deductible?
It can be, to the extent the borrowed funds are used to earn business income, even if the loan is secured by your home. Keep clear records and get advice, because mixed loans are common sources of errors.
Are establishment fees deductible?
Many borrowing costs may be deductible, sometimes over the period of the loan or a set number of years rather than all at once. Your accountant can confirm the treatment.
Is the ATO's general interest charge deductible?
The ATO states that general interest charge and shortfall interest charge incurred from 1 July 2025 can no longer be claimed as a deduction.
What about equipment finance and leases?
Chattel mortgages and leases are treated differently. With a chattel mortgage you may claim interest and depreciation; with a lease, lease payments may be deductible. Check with your accountant.
Do I need to keep records of how I used a loan?
Yes. The ATO expects records showing the purpose of borrowed funds and the expenses claimed. Keep loan statements, invoices and bank records.
Does GST apply to interest?
Interest is generally an input-taxed financial supply, so GST is not usually charged on it.
Can I claim interest on money borrowed to pay a tax bill?
Interest on business finance used to pay business tax debts may be deductible depending on circumstances, but the ATO's own interest charges incurred from 1 July 2025 are not. Ask your accountant how it applies to you.
Sources and further reading
We are an information site, so we do not rank lenders, publish interest rates or accept payment to feature a product. Every page is written and checked by our editorial team against official sources. Read our editorial policy and how we are funded.
