Is a business loan tax deductible?

The short version

Mr gets this question constantly, usually around June. Here’s the plain answer, with the usual “check with your accountant” at the end because tax has detail.

• The loan amount: not deductible. Borrowed money isn’t income, so repaying it isn’t an expense.
• Interest on business borrowing: generally deductible, when the money is used to earn business income.
• Borrowing costs: often deductible, sometimes spread over time rather than claimed at once.
• The ATO’s general interest charge: no longer deductible if incurred on or after 1 July 2025.

Why isn’t the loan itself deductible?

Because it isn’t spending. When a lender pays you $100k, you haven’t earned anything; you’ve taken on a $100k obligation. When you repay that $100k, you haven’t incurred a cost; you’ve cleared the obligation. The cost of borrowing is the interest and fees — so that’s where deductions live.

What the borrowed money buys may have its own tax treatment. Stock becomes cost of goods. Wages are deductible. Equipment is depreciated, or written off instantly if it qualifies under the small business rules — see should you borrow before 30 June?.

What decides whether the interest is deductible?

Use. The ATO’s three golden rules for business deductions apply: the expense must be for your business and not private use; if it’s for both business and private use, you can only claim the business portion; and you must have records to prove it.

So the question is: what did the borrowed money pay for?

Money used for	Interest generally…
Stock, wages, rent, suppliers	Deductible
Business equipment or vehicles (business use)	Deductible (business portion)
Paying a business tax debt	Generally deductible — confirm with your accountant
Buying a business	Generally deductible
A family holiday or private car	Not deductible
Mixed purposes	Only the business share

Note what doesn’t decide it: the security. A loan secured over your home but used entirely in the business generally follows the business use. A “business loan” spent on private things doesn’t become deductible because of its name.

Why keep business borrowing separate?

Because mixing makes the deduction harder to prove and easier to lose. If you redraw private money from a business facility, or put business money through a personal loan, you’ll need to untangle the proportions — and the third golden rule (records) starts to bite. Mr’s advice: keep business loans in the business’s name or clearly ring-fenced, and pay them from the business account.

What changed with ATO interest?

Before 1 July 2025, the general interest charge (GIC) and shortfall interest charge on tax debts were deductible. From that date, the ATO confirms that any GIC incurred on or after 1 July 2025 can’t be claimed, regardless of whether the debt relates to an earlier year. GIC is calculated on a daily compounding basis.

That changes the maths on carrying a tax debt. Our guide to ATO interest no longer being deductible works through it, and business loans with an ATO debt explains how lenders view it.

An illustrative example

A Wollongong electrician borrows $80k against his investment unit. He uses $60k to buy a second work van and $20k for a family trip. Only the interest on the $60k business portion is generally deductible to the business, and he’ll need records to show the split. If he’d taken two separate loans — one for the van, one personal — the record-keeping would have been simpler.

What about the other fees?

Establishment fees, legal costs, valuation fees and other borrowing costs relating to business loans are commonly deductible, but some must be claimed over a period rather than in one year. Your accountant will know the right treatment. For a full rundown of the fees themselves, see what a business loan actually costs.

What records should I keep?

The third golden rule — records — is where deductions are won or lost. Keep:

• the loan agreement and letter of offer;
• statements showing interest and fees charged;
• evidence of what the borrowed money paid for (invoices, contracts, settlement statements);
• a note of any private use and how you calculated the business portion.

If the loan is in your personal name but used in the business, that last point matters even more. A short written record made at the time beats a reconstruction at tax time.

Does the business structure change anything?

The principle — use decides deductibility — is the same, but who claims it and how differs. A company claims interest on its own loans in its own return. A sole trader claims business interest in their individual return. Trusts and partnerships have their own rules about where deductions sit. If you’re borrowing personally to lend to your company, or the company is borrowing for something that benefits you personally, ask your accountant before you sign — those arrangements have extra tax rules attached.

Borrowing for the business? Ask Mr first

Get the structure right before you borrow and the tax side gets simpler. Ask Mr in about 60 seconds — tell us what the money is for and whose name the business is in. There’s no credit check to enquire, your details aren’t passed along a chain of lenders, and a real person will help you set up borrowing that’s clearly for the business. Accurate answers on purpose help with both the loan and the paperwork afterwards. See if you qualify.