Guide · 5 min read

Are Business Loan Repayments Tax Deductible in Australia?

The interest is generally deductible. The principal isn't. Here's what you can claim, what you can't, and what the ATO actually looks for.

This question comes up constantly, and the short answer — the interest is deductible, the principal isn't — gets misapplied often enough that it's worth going through properly.

Here's the full picture, without the accounting jargon.

What's deductible and what isn't

Interest — generally deductible

The interest component of your business loan repayments is generally a deductible business expense under Section 8-1 of the Income Tax Assessment Act 1997, provided the loan was used for a genuine business purpose and the expense was incurred in producing assessable income. In plain terms: if you borrowed money to fund your business operations, the interest you pay on that loan reduces your taxable income.

Principal — not deductible

The principal repayment is the return of money you borrowed. It's not an expense — it's a balance sheet movement. You can't deduct it.

Fees and charges — it depends

Loan establishment fees, annual fees, and other borrowing costs may be deductible, but the rules are specific. One-off borrowing costs above $100 are typically deductible over the life of the loan (not in the year they're incurred), while ongoing fees charged for the use of the facility are generally deductible in the year paid.

The condition most people gloss over

The interest is only deductible if the loan was used for an assessable business purpose.

This sounds simple until it isn't. If you take a $200,000 business loan and use $150,000 for business purposes and $50,000 to pay off personal debts or fund a private purchase, only the interest attributable to the $150,000 business-purpose portion is deductible. The rest isn't.

The ATO applies a nexus test: there must be a direct connection between the borrowed funds and the income-producing activity.

For most SME lending — working capital, equipment, inventory, hiring — this isn't complicated. The funds go into the business, the business produces revenue, the interest is deductible. Where it gets complicated is when loan proceeds aren't cleanly ring-fenced for business use, or when there's a mix of business and personal benefit.

Factor rates and the ATO

Many non-bank business loans — particularly short-term unsecured products — are priced using a factor rate rather than a traditional interest rate. A factor rate of 1.25 on a $100,000 loan means you repay $125,000 total. The $25,000 difference is the cost of the loan.

For tax purposes, the ATO generally treats this cost of finance as deductible under the same principles that apply to interest — it's the cost of accessing borrowed money for a business purpose. But the deductibility isn't automatic — it depends on the loan structure and documentation.

Your accountant should confirm the treatment for your specific product, but factor rate finance is generally not treated differently from interest-bearing loans for deductibility purposes.

What changes with different loan structures

Equipment finance (chattel mortgage)

You can deduct the interest component of repayments. You can also claim depreciation on the asset — either the standard ATO depreciation schedule or, for eligible assets under the instant asset write-off provisions, the full cost in the year of purchase (subject to annual budget rules and thresholds, which change frequently — check the current ATO position or ask your accountant). See our equipment finance page for more on this product.

Line of credit

You can deduct the interest charged on the drawn balance, in the period it accrues. Interest on an undrawn line of credit (if any facility fees are charged) may be deductible separately.

Refinanced or consolidated debt

If you refinance to lower your rate, the interest on the new loan remains deductible provided the underlying purpose is still business use. Refinancing doesn't affect deductibility unless the purpose of the funds changes.

Keeping clean records

The ATO doesn't require you to prove deductibility upfront, but if you're audited you'll need to demonstrate the connection between the borrowed funds and business income. Clean records make this straightforward:

—Keep the loan agreement and any drawdown documentation

—Keep records showing what the funds were used for (bank statements, supplier invoices, payroll records)

—Separate business and personal accounts — never run personal expenses through a business loan

The businesses that run into problems at audit are those who mixed loan proceeds with personal spending or can't produce documentation showing the business purpose. If the records are clean, the deductibility is generally straightforward.

The bottom line for your tax return

Your loan repayments will have two components: principal and interest. Your lender should provide a repayment schedule or annual statement breaking these down. The interest figure from that statement is what goes into your tax return as a deductible expense.

If your loan uses a factor rate, the documentation from your lender should state the total cost of finance. Your accountant can apportion this correctly across the relevant financial years.

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This article is general information only and does not constitute financial, tax, or legal advice. Tax treatment depends on your individual circumstances. Consult a registered tax agent or accountant for advice specific to your situation. Avoir connects businesses with lending partners and does not provide financial advice.