Is the interest on a loan to buy a business tax deductible?

In most cases, yes. Interest on money you borrow to buy a trading business is generally a deductible business expense, because the money is used to buy an asset that produces assessable income. The catch is in the detail: only the interest qualifies, only the business share counts, and the way you structure the purchase decides who gets to claim it.

That matters more than people expect when they’re weighing up a purchase. The after-tax cost of borrowing is part of whether the deal works, and getting the set-up wrong at the start is hard to unwind later.

What does the ATO actually say about interest on business borrowing?

The ATO’s list of deductible operating expenses includes interest on money borrowed for “producing assessable income or purchasing income-producing assets”. Buying a café, a workshop or a cleaning business with ongoing contracts fits that description neatly: you borrow, you buy the business, and the business earns the income you pay tax on.

The same page lists legal expenses incurred in borrowing money and ordinary bank fees as deductible operating expenses. So the costs of arranging and running the loan are often claimable too, although your accountant will decide exactly how and when.

What isn’t deductible is the principal. Each repayment has two parts. The interest is a cost of using someone else’s money. The principal is simply you handing that money back, so it’s not an expense at all.

Does it matter if the loan is secured on my home?

Not for deductibility. This is the point that trips up the most buyers, and it’s worth slowing down on.

Plenty of business purchases are funded with property security, because goodwill is hard for a lender to rely on. Many buyers use equity in their home through a second mortgage behind their existing home loan. Owners sometimes assume that because the house is the security, it’s a “home loan” for tax purposes. It isn’t. The ATO’s guidance on interest focuses on how the borrowed money is used and expects you to keep records of that use, as its page on interest and transaction expenses makes clear.

The flip side is also true. Borrowing against the business and spending part of it on a family car makes that part private, whatever secures it.

Situation	How the interest is usually treated
Loan secured on your home, all funds used to buy the business	Generally deductible, because the use is income-producing
Loan secured on business assets, part used for a private purchase	Only the business share is deductible
Home loan redrawn to pay the purchase deposit, mixed with private redraws	Messy; needs careful apportioning and records
Separate loan, funds paid straight to settlement	Cleanest; the paper trail proves the use
GIC accruing on an overdue tax bill from 1 July 2025	Not deductible

How do you keep the deduction clean?

The simplest protection is separation. Use a loan account that only ever holds the purchase money, and have the funds paid directly to the seller’s solicitor or the settlement agent. That one decision does most of the record-keeping for you.

A few other habits help:

• Don’t redraw for private spending. A redraw on a business loan for a holiday turns part of the balance private, and every interest charge after that has to be split.
• Keep the settlement statement. It shows exactly where every dollar went on the day.
• Fund working capital clearly. If the loan includes a buffer for wages and suppliers, keep it in the business account so its use is obvious.
• Note the purpose in writing. A short file note from your accountant at the time is worth far more than trying to reconstruct it three years later.

If you’re still working out how to fund the deal itself, the business acquisition loans page walks through how lenders view goodwill, stock and working capital.

Who should borrow: you, a company or a trust?

This is where structure and tax overlap, and it’s worth settling before you apply for anything.

As a general principle, the entity that borrows the money and uses it to earn income is the one that claims the interest. If a company owns the business and earns the income, it usually makes sense for the company to borrow, with you as a guarantor. If you borrow personally and then hand the money to a company or trust, the tax treatment can still work, but it depends on how the money moves between you, and that’s squarely a question for your accountant.

The structure also changes what a lender asks for. A company borrower means company financials, director guarantees and sometimes a general security agreement. A personal borrower means your own income and assets. Neither is better in every case; they’re just different paths.

Mid-page note: if you already know the structure and want to see what funding might look like, start a quick enquiry about your purchase. There’s no credit check at that first step.

What about the other costs of buying a business?

Buying a business throws up a lot of costs besides interest, and they don’t all get the same treatment. The ATO’s page on depreciating assets and capital expenses explains a few of the categories:

• Equipment that comes with the business is generally a depreciating asset, claimed over its effective life, with small business incentives available for eligible items.
• Certain business set-up costs are generally deducted over five years, with immediate deductions available for some professional advice costs for eligible businesses.
• Due diligence advice can fall within the professional advice rules, but the ATO notes you can’t use those rules to claim the cost of acquiring business assets themselves.

In plain terms: some costs are claimable straight away, some over several years, and the purchase price of the business itself is a capital cost, not a deduction. Your accountant will allocate them, and a clean settlement statement makes that job far quicker.

Should you borrow to clear an ATO debt that comes with your plans?

Sometimes a buyer is also carrying an ATO debt in an existing business, or a partner buyout reveals one. That raises a tax question that changed recently.

Until mid-2025, owners could at least deduct the GIC on an overdue tax bill. That ended with 2025 legislation: GIC and shortfall interest charge that accrue from 1 July 2025 no longer reduce your taxable income, whatever year the original debt came from. Borrowed money is treated differently: interest on a loan taken to meet income tax obligations remains on the ATO’s operating-expense list.

That doesn’t mean refinancing a tax debt is automatically the right move. It does mean the comparison has shifted, and it’s worth running the numbers with your accountant. Our ATO tax debt loans page explains how lenders look at businesses carrying tax debt.

Illustrative example

Illustrative only. A buyer is purchasing a suburban bakery for $380k plus $40k of working capital. She owns her home and uses a second mortgage over it for the full $420k. The loan is a separate account, and the funds go straight to the vendor’s solicitor at settlement and to the bakery’s new business account for the buffer.

Her accountant has set up a company to own the bakery, so the company borrows and she guarantees the loan, with her home as security. Because every dollar was used to buy and run the business, the company’s interest is generally deductible. Two years later she’s tempted to redraw $30k for a car for her partner. Her accountant points out that would make part of the loan private and complicate every year’s claim, so she funds the car separately.

Ready to put numbers on your purchase?

Working out the after-tax cost of borrowing is a sign you’re close to buying. The next step is finding out what a lender would actually offer. Property-secured business loans run from $20k to $5m, and unsecured options typically from $5k to $500k sized on turnover and bank statements, so most purchases fall somewhere in that range.

Our enquiry takes about a minute and there’s no credit check when you first get in touch. We won’t send your details to a pile of lenders, so you won’t be fielding calls from strangers. A real person looks at the purchase, your structure and the security you have, then rings you to talk it through. Please answer the form accurately, including how you plan to own the business, so the first option we raise fits the deal.

See what your purchase could qualify for →