Are Business Overdraft Interest and Fees Tax Deductible in Australia?

One of the most common questions we receive from SME owners is whether their business overdraft costs are tax deductible. The short answer is yes - in most cases. But the details matter.

This article is general information only. Always speak with your accountant about your specific situation.

The General Rule

Under Australian tax law, interest and fees on a business overdraft are generally tax deductible if the overdraft is used for business purposes. The ATO allows deductions for interest expenses where the borrowed funds are used to produce assessable income.

What Is Deductible

• Interest charges - the daily interest charged on amounts you draw for business use
• Establishment fees - the upfront fee to set up the facility
• Line fees - the ongoing fee for maintaining the facility
• Monthly service fees - flat fees charged by the lender
• Annual review fees - fees for annual limit reviews
• Broker fees - if any broker fees apply (with OverdraftMe there are none)

What Is Not Deductible

• Interest on any portion of the overdraft used for personal expenses
• Drawings used for private purposes (holidays, personal purchases)
• Interest on amounts used to pay non-deductible expenses

Mixed Use - Business and Personal

If you use a business overdraft for both business and personal purposes, you can only deduct the portion attributable to business use. For example, if 80% of your drawings are for business purposes, 80% of the interest is deductible.

This is why it is important to keep your business and personal finances completely separate. A dedicated business bank account and business overdraft makes this straightforward.

How to Claim It

• Keep records of all overdraft statements showing interest and fees charged
• Record the purpose of each drawing if you use the facility for mixed purposes
• Include the total interest and fees as a business expense in your tax return
• Your accountant or bookkeeper should handle this as part of your annual tax preparation

The Cash Flow Benefit

The tax deductibility of overdraft costs makes the effective cost lower than the stated rate. For example, if your overdraft rate is 20% p.a. and your business tax rate is 25%, the after-tax cost of the overdraft is approximately 15% p.a. This is an important consideration when comparing overdraft costs to other financing options.

Frequently Asked Questions