Unlock Your Investment Potential: Tax Deductions The ATO Doesn’t Want You To Know About

It’s no secret that claiming all available tax deductions can reduce your taxable income and net you a sizeable tax refund. Income from investments such as shares, property, and cryptocurrency is no exception, meaning you must log every deduction you’re entitled to claim. You’re the one who has taken the risk of investing to make a profit – why give the Australian Tax Office (ATO) any more than you absolutely have to? 

Some examples of activities that could make interest expenses tax-deductible include:

  • Buying a rental property (even if it’s considered a capital asset like property)
  • Using a bank overdraft to pay for business expenses and operations
  • Paying for current business expenses

Just as you can claim deductions for interest expenses related to your investments, there are also provisions for claiming deductions related to the income generated from these investments. Let’s explore this in the following sections.

Claiming interest income expenses

With investment accounts such as a cash management account, you may be eligible to claim a deduction for account-keeping fees listed on your statements. However, if the account is held jointly, you can only claim the deduction for your portion of the fees, charges, or taxes. It’s important to note that you cannot claim deductions for interest on personal tax debt, such as a loan taken out to pay taxes.

Pro Tax Tip: Interest on a loan is not tax-deductible unless the funds from the loan are used to acquire or maintain an income-producing investment.

Claiming dividend and share income expenses

Interest charged on loans taken out to purchase shares or other similar investments that generate assessable interest or dividends is tax deductible. Any expenses on interest you claim can only be attributed to the business-related portion. If your loan is for both personal and business use, you’ll need to apportion the business use.

Additionally, it’s important to note that you cannot claim deductions if the income generated is exempt, such as in the case of exempt dividends.

Pro Tax Tip: Thinking about a loan but still in the information-seeking stage? If you attend an investment seminar about an existing investment, you may qualify for a tax deduction on this and other expenses that pertain to generating investment income.


Claiming managed investment trusts

Managed Investment Trusts (MITs) give you a way to invest in passive income activities collectively. They can involve shares, property, or fixed-interest assets. In MITs, member contributions are pooled, and the trust’s assets are managed by a professional manager rather than by individual members.

As an investor in these products, you must report any income or credits you receive on your tax return. This includes income or credits from:

  • Cash management trusts
  • Money market trusts
  • Mortgage trusts
  • Unit trusts
  • Property trusts
  • Share trusts
  • Equity trusts
  • Growth trusts
  • Imputation trusts
  • Balanced trusts

When seeking tax deductions for MITs, eligible expenses can include management fees, specialist journals, and interest on money borrowed for investment. However, if you made a prepayment of $1,000 or more for your managed investment, the ATO has a set of special rules that may affect the amount you can deduct.

Claiming rental and holiday home expenses

If you own a rental property, you may be able to claim a deduction for interest and borrowing expenses related to the property during the time it is available for rent. However, it is important to note that you can only claim deductions for expenses related to the income-generating use of the property.

This means investment properties will qualify, but deductions are not available for the interest on your primary residence. The general rule when borrowing to purchase an investment property is that interest charges on the mortgage are tax-deductible, but principal (or capital) repayments are not. This tax-deductibility of interest is one of the reasons why property investment is so appealing for many. It allows for negative gearing, where losses (including interest deductions) can be offset against other income on your tax return.

Pro tax Tip: You cannot claim deductions for travel expenses related to a residential rental property unless you are in the business of renting properties or fall under the category of an excluded entity.

In addition to interest on loans taken out to acquire a property, you may also be able to claim deductions for interest on loans used for other related expenses such as:

  • Renovations
  • Purchase of depreciating assets (like furniture)
  • Repairs
  • Maintenance

Note that interest on loans taken out to purchase vacant land is not generally tax-deductible. Your tax deductions most likely won’t kick in until the property is complete and actively being rented out. However, it’s always worth consulting with a certified practicing accountant in your area to ensure you’re getting every deduction you’re entitled to claim.

Claiming interest on bank accounts

Interest earned from banks or other financial institutions is considered part of your assessable income for the tax year. This is true even if the funds that generated the interest were not subject to tax. For example, if you received prize money and deposited it into your bank account, you wouldn’t need to include the prize money on your tax return. However, you would have to include the interest earned on it.

You can claim tax deductions for expenses incurred in earning interest or income from Friendly Society Bonds (FSBs). Banks and other investment entities report the interest they pay to account holders and investors to the Australian Taxation Office (ATO). The ATO checks this information against tax returns to ensure that all income is reported correctly. If there is a discrepancy, the tax return may be adjusted and penalties may apply.

Want to know more about what you do and don’t have to report on your tax return? Read our complete guide to the income you should include on your tax return.

What tax deductions can you claim?

There are several investment-related costs you can claim as deductions on your taxes. These include expenses such as management fees and costs for investment advice. You can also claim a portion of expenses incurred in managing the investments, such as:

  • Travel expenses
  • Specialist investment journals and subscriptions
  • Borrowing costs
  • Internet access
  • The decline in value of your computer.

If you are an Australian resident and receive a dividend from a Listed Investment Company (LIC) that includes a capital gain amount, you may be able to claim 50% of that amount as a deduction.

What can’t you claim as a tax deduction?

When investing in shares, certain expenses just will not fly as tax deductions. These include fees incurred for creating an investment plan (unless you are operating an investment business). You’re also unable to claim interest expenses incurred through borrowing money under a capital-protected borrowing arrangement to purchase shares, units in unit trusts, or stapled securities. Unfortunately, the ATO does not recognise these as deductible expenses.

Pro Tax Tip: You may be eligible to claim a portion of the decline in value of your computer based on the percentage of usage related to managing your investments. You can only claim this portion of the decline in value once, either as an interest deduction or dividend deduction. To learn more, visit our guide to claiming interest and dividend deductions.

Claiming Interest on Investment Loans

Claiming loan interest deductions is not a simple matter. So it’s essential to arm yourself with a clear understanding of the rules and regulations that apply. ITP’s tax agents have the knowledge and expertise to help you identify the deductions that apply to your specific situation. We’ll ensure your claims are accurate and perfectly compliant with the regulations, giving you peace of mind and the best possible financial outcome.

We value every one of our clients, which is why we provide free tax advice and guidance throughout the year. You can rely on us to guide you through loan interest deductions and maximize your tax refunds year after year. So, if you’re keen to get the most out of every tax return, contact your nearest ITP office today. Our friendly accountants are always happy to help another Australian make moves toward financial independence.