Is interest on a business loan tax deductible?

When a business owner borrows against property, the tax question usually comes second, after “can I get the money in time?” It deserves more attention than that. Whether the interest is deductible, and when, can change the true cost of a short-term loan and even which structure makes sense.

This guide explains how the ATO approaches interest and borrowing costs on a property-secured business loan, using its current published guidance. It’s written to help you ask your accountant the right questions, not to replace them. Every structure is different, and a ten-minute conversation before settlement is worth far more than a fix afterwards.

Is interest on a business loan tax deductible?

Generally, yes, when the money is used to earn assessable income. The ATO’s list of deductible business operating expenses includes interest on money borrowed to produce assessable income or to buy income-producing assets. The same list includes interest on money borrowed to meet income tax obligations and employer super contributions.

The test is about use. Interest is deductible to the extent the borrowed money is put to an income-producing purpose. Money that funds stock, wages, equipment, a commercial property the business operates from, or a tax bill of the business sits on the deductible side. Money that pays for a family holiday or a private car does not.

Key terms at a glance

• Assessable income: the income your business is taxed on; borrowing to earn it is what makes interest deductible.
• Borrowing expenses: one-off costs of getting the loan, such as establishment fees and mortgage document costs.
• Prepaid interest: interest paid upfront for some or all of the term.
• Capitalised interest: interest added to the loan balance and repaid at exit.
• GIC: the general interest charge the ATO applies to overdue tax debts.

Does it matter which property secures the loan?

No, and this is the point that surprises people most. The ATO’s own example makes it plain: a loan secured against a rental property but used to buy a new private home isn’t deductible, because the money isn’t being used to produce income. The reverse also holds. A loan secured over your family home can be a business loan if the funds go into the business.

That matters for secured business finance, because the property with the most equity is often the owner’s home or a director’s investment property. Using it as security doesn’t make the loan private. Using the money privately does. If another person’s property is involved, our guide to third-party security explains how that’s set up, and company or trust-owned property covers entity-owned security.

How are fees, prepaid interest and other loan costs treated?

Cost	How the ATO generally treats it	What to watch
Interest	Deductible to the extent the money is used to earn assessable income	Apportion if part of the loan is used privately
Establishment and lender fees	Borrowing expense, spread over five years or the loan term if shorter	Totals of $100 or less are deductible in full straight away
Legal costs to prepare and lodge the mortgage	Borrowing expense; legal costs of borrowing and of discharging a mortgage also appear on the ATO’s operating expense list	Ask your accountant which treatment applies to each invoice
Prepaid interest	Small businesses can usually claim it upfront under the 12-month rule	Other taxpayers may have to spread it
Bank fees and charges	Listed as deductible operating expenses	Keep the statements
ATO general interest charge	Not deductible if incurred on or after 1 July 2025	Applies even when the tax debt relates to an earlier year
Stamp duty on buying property	Not a borrowing expense; it’s a capital cost	Talk to your accountant about the cost base

Borrowing expenses

The ATO’s borrowing-expense guidance lists items such as loan establishment fees, title search fees the lender charges, and the cost of preparing and filing mortgage documents, including solicitors’ fees. You claim them over five years or over the term of the loan, whichever is shorter. If the total is $100 or less, it’s deductible in the year you incur it.

For a 12-month private loan, that “term of the loan” alternative matters: the costs are spread over the loan’s life rather than five years. And if you repay early, the ATO says the remaining balance can be claimed in the year of repayment. The ATO explains this rule most fully in its rental property guidance; your accountant will confirm how it applies to a business borrower.

Prepaid interest

Interest on a private loan can be prepaid or capitalised, so there may be no monthly repayments during the term. Prepaying has a tax angle. Under the ATO’s prepaid expense rules, a small business entity can generally claim prepaid expenditure, including prepaid interest, in the year it is paid if the period it covers is 12 months or less and ends no later than the last day of the following income year. Amounts under $1,000 are excluded from the prepayment rules and deducted when incurred. Taxpayers outside the small business rules may need to spread the deduction over the period covered.

Capitalised interest

Capitalised interest is added to the loan balance and repaid at exit. Two questions belong with your accountant: when that interest is incurred for tax purposes under your loan terms, and how any interest charged on the capitalised amount is treated. Our capitalised interest worked example shows how the balance builds month by month, which helps your accountant model it.

What if the loan is used partly for business and partly privately?

It gets messy, so avoid it if you can. The ATO requires interest on a mixed-purpose loan to be apportioned between the deductible and private portions for the life of the loan, and it points to Taxation Ruling TR 2000/2 for how. Repayments don’t let you choose which portion to pay down first.

The ATO also explains that redraws and refinances keep the character of what the money is used for. If you refinance a loan that funded the business, the new loan takes on that business character to the extent it repays the old one. If you borrow extra in the same refinance for private use, that slice is private.

The practical fix is simple: keep business and private borrowing in separate loans or separate splits, and keep a clean paper trail showing where every dollar went.

How does this change the maths of paying an ATO debt?

Since 1 July 2025, the general interest charge and shortfall interest charge the ATO imposes can’t be deducted if incurred on or after that date, even when the underlying debt relates to an earlier year. We cover the change in ATO interest no longer deductible.

That shifts the comparison. Carrying an ATO debt now costs its full face value after tax. Interest on a business loan used to clear income tax obligations may be deductible, which narrows the gap between the two options. Your accountant can run the after-tax comparison for your entity before you choose. If clearing the debt with property equity looks right, our page on paying an ATO debt with property equity explains how it works, or you can ask whether your property qualifies.

Illustrative example: a Ballarat engineering company owes $280k in company income tax and wants $120k for a new press brake. Illustrative: it borrows $400k for 12 months, with the director’s home offered as third-party security, and interest is prepaid. Every dollar goes to the company’s tax debt and plant, so the company’s accountant treats the interest as deductible business interest and, because the company is a small business entity and the prepayment covers 12 months, claims it in the year paid. The $5,000 of establishment and legal costs is spread over the loan term and the balance is claimed when the loan is repaid early from a refinance. Had $50k gone to a private renovation, that slice would have needed separating and apportioning.

Who should be the borrower?

Ideally, the entity that uses the money to earn income: the company, the trust or the individual running the business. A director’s or family member’s property can still be the security.

Sometimes it suits an individual to borrow and pass the funds to their company or trust. That can work, but the on-lending needs proper documentation and your accountant’s input before settlement, not after. Getting the borrower right at the Letter of Offer stage is far easier than fixing it later. Our guide to the Letter of Offer shows where the borrower and guarantors are named.

What records will your accountant need?

Keep a short file for every secured loan:

• the signed Letter of Offer and loan agreement;
• the settlement statement showing fees, prepaid interest and where funds were paid;
• invoices or statements proving the business use of the money (the ATO payment, the equipment invoice, the supplier payments);
• loan statements showing interest charged or capitalised each period;
• the payout statement when the loan is repaid.

Those documents also let you calculate the total cost of a short-term loan properly, which is the figure that should drive your decision.

Weighing up a secured loan for the business? See if you qualify

Once your accountant has confirmed the tax treatment, the next question is whether your property can do the job. Our lending partner fundU lends from $20k to $5m against residential, commercial or industrial property, with no formal valuation required and interest that can be prepaid or capitalised.

There’s no credit check when you enquire, and your details aren’t passed around to a list of lenders. A specialist reads every enquiry. Give accurate answers about the property, what’s owing on it and how the loan will be repaid, and you’ll get a straight answer quickly. Start your 60-second enquiry.