Can a personal loan be used for tax exemption?

For many Aussies, personal loans are used in an emergency or when trying to consolidate debt. Meanwhile, some people get personal loans when they need cash for paying off credit card debt or repairing their home.

From a tax perspective, many of the loan expenses are, as the name suggests, personal. Personal costs cannot be claimed on your tax. However, if the personal loan is used for paying educational fees or funding business expenses, it may be possible to get a tax exemption on the interest you have to pay on the loan.

When you may be able to get a tax exemption from a personal loan

When taking out a personal loan, tax exemption may not always be a primary concern - often, it’s about meeting a cash shortfall. But in some circumstances, part of the cost you have to pay back could be tax-deductible. It’s worth keeping paperwork and checking with a financial advisor or accountant about claiming a tax exemption if there’s a business reason for your loan.

Suppose you’ve taken a personal loan to pay for a career advancement course which could make you eligible for a promotion. Since the course is probably directly related to your job, the cost of the course may be considered a deductible self-education expense. Funding this expense through your loan could qualify you for a tax exemption on the loan interest. Again, it depends on how directly related the course is to your career. A tax professional should be able to advise you about this.

While it’s less common to use a personal loan for this purpose, you may also be able to claim a tax deduction on the interest if you use a part or all of the personal loan to buy, repair, or renovate a rental property. In such cases, you will need to keep track of how much of the personal loan you use for these non-personal expenses. The interest on that part of the loan amount alone may be eligible for tax exemption. If you use a personal loan for business expenses such as renting an office or leasing a car, the interest you pay on the personal loan may be considered tax-exempt.

When do I need to pay taxes if I take out a personal loan?

Generally, we pay tax on the income we earn.  For example, when you earn income from renting out a property you own, you have to pay tax on that.  Unless loans are earning you income, you shouldn’t pay tax on them (except when they attract earnings). However, there are other charges you will have to pay, such as interest to the lender.

Compare personal loans