Landlord tax deductions soar as interest rates bite property market

Since May last year, however, the RBA has driven official interest rates up to 3.85 per cent. Some economists believe the bank could use its next meeting, on June 6, to take the cash rate to fresh 11-year high of 4.1 per cent.

At that level, the interest bill on a $600,000 mortgage will have increased by more than $10,000, which investors would be able to claim as a tax deduction.


CPA Australia senior manager of tax policy Elinor Kasapidis said the increase in interest rates would flow directly through to the federal budget bottom line.

“To the extent rising interest rates aren’t mitigated by higher rents, they will result in more negatively geared landlords. This will have a flow-on impact for the federal government’s tax take,” she said.

“Changes in interest rates are a fact of life for long-term property investors. Equally, fluctuations in tax receipts are a fact of life for the government.”

Reserve Bank figures show that between July last year and March this year, property investors paid almost $19 billion in interest on the mortgages held over their rental properties. Over the first nine months of 2021-22, they paid $12.7 billion in interest.

In the first three months of this year alone, investors paid a record $7.1 billion in interest. That interest will be deductible for tax purposes. Total repayments also reached a record $10.9 billion.

CPA Australia senior manager of tax policy Elinor Kasapidis says higher interest rates will be passed through to the federal budget.

This was before the Reserve’s most recent interest rate rise and points to a multibillion-dollar increase in tax deductions by investors against their properties.

Chartered Accountants Australia NZ senior tax counsel Susan Franks also said federal taxpayers would bear some of the cost of higher interest rates through the tax deduction system.

“With rising interest rates, landlords will be claiming larger deductions against their rental income. If rental income has not increased at the same rate as interest and other rental costs, many will be finding that their rental profits are smaller or rental losses are larger. Thus, less will be flowing through to government coffers,” she said.


Franks cautioned investors that the Tax Office was collecting extra data from banks about investment property mortgages and would be looking closely at interest deductions where those loans had been redrawn or refinanced.

She said the Tax Office had already found nine in 10 investment property claims were incorrect.

“Don’t be tempted to include interest that relates to amounts redrawn under the property investment loan for private purposes as a tax deduction,” she said.

The federal Treasury’s latest report on tax expenditures, which measures the cost to the budget of various tax concessions, noted that net rental deductions were likely to jump by one-third to a record $24.4 billion this financial year before increasing again to $26.6 billion in 2023-24.

Deloitte Access Economics lead partner Pradeep Philip said the ability of landlords to claim interest as a deduction would protect renters who are facing large increases in their leases across the country.

“It’s a design feature of the system. When interest rates go down, the cost on landlords goes down, which helps them in terms of rents,” he said. “Negative gearing actually takes some of the pressure off rents as interest rates go up. By being able to claim interest rates as a tax deduction, it takes some pressure off landlords to pass those rate rises in full on to their tenants.”

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