Debt recycling is the process of converting non-deductible debt into deductible debt by following the ATO’s guidelines. 

Scroll down to the very bottom for a full table of which banks do what.

If you take the below example where you start with $800k non-deductible debt (generally there because it was used to purchase an owner-occupied property) & $200k cash, then you can:

• Pay $200k into the loan; then,
• Redraw (or re-borrow) $200k and use it for income generating purposes.

Now the $200k is considered tax-deductible as long as the $200k re-drawn was used for a deductible purpose, such as buying an investment property or shares.

This is a fairly simplistic example and it can get a bit cumbersome to understand fully and implement correctly; however, the benefit is generally well worth it.

If you debt recycle $100k at 6% interest, then you would get a tax-deduction on $6k worth of interest. 

If the effective tax rate on that deduction is 30%, as an example, then that’s an $1,800 tax deduction per year whilst in effect, which is a significant amount of money.  In this example, you’re essentially increasing the ROI on that $100k by 1.8% just by debt recycling effectively.

The higher the effective tax rate, the better the tax discount is:

According to the ATO and specifically Tax Ruling 2000/2, redraw and new loans are considered ‘new lending’; meaning they ‘reset’ the purpose of the funds, which is perfect for debt recycling.

Putting money in/out of an offset account will not change the purpose.

A good way to do it is often to save your funds in an offset account, then do the debt-recycling via redraw when you have sufficient funds available.

Methods to debt recycle:
New Loan Application
Redraw

Methods NOT to debt recycle:
Offset

When to debt recycle

You can pretty much debt recycle whenever the following 2 are true:

• You have some non-deductible home loan debt
• You are looking to spend money on an income-producing asset (shares/property included)

Note: it can be inconvenient, so it’s often worthwhile saving a sum of money in an offset and doing it in one go when you have a sufficient sum

Another note: there’s no do-overs, especially with property. Once you own the property, you can’t then borrow funds to ‘purchase’ the asset, because it’s already owned.

Security vs Purpose

A quick thing to understand which often loses people: the purpose (for tax purposes) has nothing to do with the security.

You can have non-deductible debt against an investment property if you redraw/borrow for personal reasons.

Likewise, you can have deductible debt against your PPOR (principal place of residence) if you redraw/borrow for income generating purposes.

The logistics of debt recycling

Let’s look at a simple example of debt recycling: you simply put $200k into your home loan, then you redraw $200k for income generating purposes.

Now, $200k of your $800k loan is considered tax-deductible.

This would be considered a ‘mixed purpose’ loan to the ATO, where you could claim 25% of the total interest as tax-deductible.

But there are much more complex ways of doing it; and it’s generally worth understanding these as it’ll often give you a much better structure overall.

Before we go into the next section, we need to understand limits and balances on a home loan.

Your limit is how much you can draw your loan down to.

Your balance is how much you current owe.

So if your limit is $800k but your balance is only $600k, that means you can draw an extra $200k out of your loan (to bring the $600k up to it’s limit).  We’d consider this to mean you have $200k in redraw available.  This will often show in internet banking under your home loan as ‘funds available’.

Now that we understand that, let’s look at:

Splitting a loan to define a single-purpose on each split

Probably the most common way of debt recycling, and specifically good for things like shares. 

Here’s how it would work if you wanted to invest $200k cash into shares:

• Take a loan with $800k limit, $800k balance (i.e. $0 redraw)
• Split it into:
  • $600k limit with $600k balance
  • $200k limit with $200k balance
• Pay $200k into the $200k balance loan, leaving you with:
  • $600k limit with $600k balance
  • $200k limit with $0 balance
• Redraw the $200k to your Brokerage account or similar to purchase shares.  Now you have:
  • $600k limit with $600k balance
  • $200k limit with $200k balance – but this can be considered tax-deductible

This isn’t always ideal for property purchases as you often don’t know how much you’ll need upfront.  If you have a $600k pre-approval, what if you buy for $570k?

You can wait until you’ve signed a contract, but you’ll need to pay the initial deposit a couple of days after that.  If you want the initial deposit funds to be part of the debt recycling, then you’ll need to have your loan split very quickly, which most banks can’t do.

So then there are:

Mixed purpose loans

As eluded to earlier, we can simply do all of this without splitting it.

This is much easier for a property purchase as you can simply overestimate.  For example:

• If you have a pre-approval for $600k and expect to spend $150k to complete the purchase, you could put $160k into your loan, giving you:
  • $800k limit
  • $640k balance
• Then you go and find a property for $500k, and only estimate you need $125k.  You can simply draw down the funds as you need them:
  • $5,000 initial deposit
  • $600 to building and pest
  • $20,000 balance deposit
  • $100,000 extra needed at settlement
• Now you would have:
  • $800k limit
  • $765,600 balance
• Now you can redraw the extra $34,400 into your personal account and go on holiday, or whatever.

It’s very important to always keep a record of everything and why something is tax deductible.  If the ATO asks, the onus is on you to prove why it’s deductible.  So it’d be good to keep a written log along with any receipts.

Nevertheless, now you could consider that $125,600 of your $800k loan is deductible.  Meaning you could claim 15.7% of the total interest as a tax deduction.

Much simpler!

But there’s a problem with mixed debt loans:

Any additional repayments (including future debt recycling) will pay down part of the deductible debt.

So using our previous example where 12.7% of our debt is deductible, 12.7% of any extra payments into the loan are considered to go towards paying down deductible debt.

It would be much better if we could just pay down 100% non-deductible debt each time.

TR2000/2 Second Exception (paragraph 18): Separating mixed debt

The ATO’s Tax Ruling 2000/2 has a specific exception we can use to make our lives much easier.

Check this out:

So if we reset our example to some simpler figures of $600k non-deductible and $200k deductible, we have a 75%/25% mixed debt.

If you refinanced this into $200k and $600k, the usual rules would stipulate that both of those new loans are 75%/25% mixed debts.

Our Second Exception under TR2000/2 means we can instead treat it as $200k deductible, and $600k non-deductible as long as we refinance it equivalently.

Putting it together to debt recycle on a property purchase

So lets put together everything to make it as easy as we can.

Lets do a mixed debt for the initial purchase: letting us simply draw down what we need, as we need it.  We’ll keep solid records so we know exactly what portion of the redraw was used for tax deductible purposes. 

Once settlement is complete, we can tally up the deductible expenses, and split our home loan appropriately, keeping records whilst we do it. Loan splitting is generally free (call your Bank/Broker if needed) but often takes a few weeks, so doing it after settlement takes a lot of the stress out of things:

Pitfalls of Debt Recycling

The most common issues with debt recycling I see are:

• Some banks will close a loan account if paid down to $0, meaning you cannot redraw. Ensure this doesn’t happen or leave $1k or so in the home loan account.
• Splitting a loan is slow in most cases, so make sure you will have your funds available when they’re needed
• Try not to ‘muddy’ the purpose by mixing the redrawn funds with your personal funds.

The first two points can be resolved by recycling into a mixed purpose loan, then splitting after-the-fact.

The third point: just make sure when redrawing it goes directly to it’s purpose.  Some banks will let you make bill payments using redraw.  Otherwise, you can just redraw it into a special purpose bank account so it’s clear the money in is the same as the money out.

Don’t redraw $50k into your main transaction account, go to Coles and spend $500, then move $50k into your Share Brokerage Account.  This may be accepted but I’m just not too sure!

Notes on completing an equity release and debt recycling

Releasing equity as a tax-deductible loan is not technically debt recycling; however, the fundamentals are so similar it’s easy to cover off on this now.

If you release $200k equity, as an example, you can simply spend that split on an income-producing purpose and consider it tax-deductible.  However, with our clients, it’s very common to release the equity before completing a property purchase.

Hence, the easiest way to think about this: you release the cash, then you debt recycle against the new loan / split.

So, it’s common a client might:

• Release $200k equity as cash (as a separate split)
• Purchase a property for $650k, which may require $155k of funds.
• Use $155k of the $200k split, forming a mixed-purpose split.
• After settlement, split that $200k into $155k + $45k.
• With the $45k, they can then either:
  • Leave the cash in the loan/offset for future use; or,
  • Spend on something else deductible, like a share purchase; or,
  • Call the bank and have that $45k split combined into the core home loan, then keep the $45k cash for personal use

Debt Recycling into a Trust

Despite popular belief, you can debt recycle into a Trust (or Company).

This basically means we turn your individual non-deductible debt into deductible debt where the deduction is claimed by the entity in question.

Here’s how it works:

• You debt recycle normally in your personal name
• When redrawing, your income generating purpose is to lend the money at Commercial Rates to an entity.
  • This must be done with a written/formal loan agreement

And here’s how this looks for both entities:

• The individual has:
  • An interest expense (lets say $12k p.a. as an example) to the bank, which is tax deductible.
  • An interest income ($12k) from the Trust, which is taxable income.
  • Hence, net $0 for the individual.  They are a flow-through entity.
  • NOTE: many Accountant’s recommend the individual lends at a higher rate and therefore ‘at a profit’.
• The Trust now has:
  • A loan from the bank (lets say $640k)
  • A loan from the individual ($200k)
  • Hence they claim the tax deduction on the interest for a full $840k in this example

Per the ATO Community page, the interest on the individual/Trust loan agreement should be equal or greater to the interest the individual pays to the bank.

But why would you want to get an extra deduction in a Trust?

It’s simply an extra deduction for the Trust on paper, much like claiming depreciation.  This lets the Trust have a higher Accounting Loss, which means future profits may be able to be withdrawn tax-free by offsetting the loss.

But keep in mind that there are multiple ways to get funds into a Trust:

• Loan money to the Trust.  Often better for tax deductions and an overall tax position.  But this offers less protection as the Trust owes you money.  Meaning that if you personally become liable for a large amount of money, the Courts may order those debts to be repaid by the Trusts in full.  Hence, the loaned amount of money is not protected.
• Gifting money to the Trust.  No tax deduction here but it should provide proper alienation of funds meaning it’d be highly unlikely they would need to be returned.

My understanding on the above is definitely not as well educated as I’d like it to be, so please take it with a grain of salt.  If you’re playing around with Trusts (debt recycling or not), get yourself an Accountant and run everything past them before taking action.  Likewise, if asset protection is an issue, then talking to a Solicitor would be a good idea.

Which lenders debt recycle effectively

I would say Macquarie is number 1.  They can split a loan any number of times and do it in 3 business days via their online chat.  They also allow you to pay the split down to $0 and can redraw almost immediately.

It’s not uncommon for clients to have an ‘investment split’ ready to go with Macquarie and just split for various purposes as they go. 

But most banks can do it in one way or another.  The below highlights who can do what but please discuss with your bank/broker directly before doing anything.  A lot of this information was given verbally and as-such isn’t necessarily correct, and can change over time.  But it should be a solid starting point.

The first column ‘cash-out on stated purpose’ is not technically related to debt recycling. It somewhat helps to figure out if lenders will still give you the cash if you’re hitting your debt ceiling with that lender.  It’s there because clients will often:

• Borrow against equity to take cash as a separate split.  It’s helpful if the lender will simply give the cash, rather than restricting the flow of funds or what you end up doing with it.  Then,
• Use the cash to pay the loan down to $0 without closing it (if the bank allows). 
• If this is interest-only for 5 years: there will be no interest/repayments for 5 years, which essentially provides a pseudo line-of-credit.
• Then the client can draw down the funds and split as necessary if they’re looking to purchase multiple properties and/or have other purposes.
• Even if at a debt ceiling with that lender, a non-bank will often fund the subsequent purchase.

Lender	Cash-out on stated purpose	Pay down split to $0 without the loan closing	Split	Redraw	Max # of splits	Offset details
CBA	Up to $1mil < 80% or $300k > 80%. May want to see future servicing for property purchases.	$0 balance would be closed.	Yes via phone to 132224	Yes, free online	No known limit	Multiple available and can do against different splits
ANZ	Yes, but must be able to demonstrate servicing on future purchase	$0 balance would be closed	Done via a Loan Change Request which requires Credit Assessment	Yes, free	No limit	One offset total
Westpac	No limit to 80%, no need to show servicing for a future purchase	Yes	Yes via phone to 1800674360. Takes 10 business days	Yes, free	8	Yes against various splits
NAB	No limit and don’t need to service future debt	“It shouldn’t but I would not suggest to leave a HL at $0 balance”	Can be split by completing RTC and ‘probably takes a while’	Yes, free online	RTC form lets you split 1 into 2. You can have more by repeating the process. $8 per month PER SPLIT	Up to 10 but $8 p.m. per split
St George	No limit to 80%, no need to show servicing for a future purchase	Yes	Yes via re-pricing. ETA up to 2 weeks.	Yes, free	5	Up to 10 total against whichever splits
UBank	No limit to 80%, no need to show servicing for a future purchase	Yes	Via phone, no fee. Expected to be a few days.	Yes, fully transactional redraw and free.	Flex product: 4 per security	Up to 24 offsets. Can be against different splits (9 per split). Joint or sole names against joint loan.
Macquarie	No limit to 80%, no need to show servicing for a future purchase	Yes	Via online chat, takes 2 – 3 business days	Yes, free online and instant	A lot (10 or more I think)	Up to 10 offsets, can be against different splits
AMP (Masterlimit)	Up to 80% max $250k without evidence. Up to 70% max $500k. Do not need to service future debt.	Yes	Form required and taking 10 business days currently	Free online	10	10 offsets per split
Firstmac	Need evidence and will control funds. Don’t need to service future debt.	$0 balance would be closed	Online form, ETA unknown but probably slow	Yes, free online under $20k. Over $20k is a form plus a few days.	10	1 offset
MA Money	80% no limit. Future servicing should be considered.	Yes	Yes via manual form. Takes 10 business days.	$5,000 per day online or 48 hours via phone for > $5k	4	4 max – 1 per split ($10 p.m. each)
Bankwest	Yes (80%) – do not need to service future debt.	Yes, would keep a balance of minimum $1000 to keep loan open.	Via maintenance request – up to 10 business days.	Free online	9	Multiple and against any split
Brighten	No limit up to $500k, evidence needed over $500k.	Unknown	Yes, form to complete, then a few weeks	Max redraw is $5K per day online. Anything over this amount will need to be actioned by our team & they charge $50	5	Can offset various splits but $15 per offset account.
ING	No limit but will service future debt	Yes	5 business days (process unclear, maybe call ING)	Yes, free	2 for Orange Advantage. Unlimited for Simplifier	1 offset on each split (max 2) under Orange Advantage
ME Bank	80% up to $750k. No need to do future servicing.	$0 balance would be closed	Phone 13 15 63. “Can be done pretty quickly”	Min. $100 but free online	Unlimited (6 on submission)	10 offsets (unspecified whether against different splits)
HSBC	Restricted to $250k or 25% of the ‘main loan’ amount. Also need evidence if LVR is over 70% and it’s being used for property. Future servicing required.	Yes	A few days via phone	Online free	6	Max 1 offset per loan split up to 3. Fees payable above 3.

ALWAYS check directly with the bank before acting on the above. The info cannot be relied on fully and is to be used as a guide only. This information has come from a variety of sources including personal experience, online information, and discussions with bankers.

Best banks for debt recycling:
Macquarie Bank
UBank
Westpac
St George
AMP (Masterlimit)

Worst banks for debt recycling:
ANZ
NAB looks poor for many splits
ING looks poor for many splits

Feel free to reach out with any questions.  If you’re looking for a Broker to assist in investing and/or setting up the right structure, please check out our reviews and info on our website.

Sources: https://www.ato.gov.au/law/view/pdf/pbr/tr2000-002.pdf