Reducing your tax bill isn’t about loopholes or aggressive tactics - it’s about how assets and debt are structured from the outset. In this episode, the team breaks down how property investors can reduce their tax bill by aligning lending with purpose, and why treating a property portfolio like a business can materially change the outcome.
Rather than focusing solely on interest rates or loan terms, reducing your tax bill comes down to understanding where debt sits, what it’s attached to, and how different ownership structures affect interest deductibility.
Reduce Your Tax Bill by Matching Debt to Purpose
At the core of reducing your tax bill is interest deductibility – specifically, whether interest costs can be deducted against rental income.
If an investor purchases a $500,000 investment property with $400,000 of lending, the interest on that $400,000 is deductible against the rental income. That interest is treated as a cost of earning income, reducing the taxable profit from the property. Without deductible interest, the full rental income would be taxed.
The issue is that many investors let banks dictate structure by default. Banks focus on security and repayment ability – not tax efficiency. As a result, investors often end up with debt sitting against the wrong property, limiting how much interest can be deducted and making it harder to reduce their tax bill.
The key isn’t the amount of debt – it’s what the debt is used for and which entity holds it.
Structuring Assets Like a Business, Not a Bank Application
A common scenario discussed in the episode involves couples buying both an owner-occupied home and an investment property at the same time.
If $600,000 of total lending is required across two $500,000 properties, the most tax-efficient approach is to place as much debt as possible against the investment property. This is typically achieved by purchasing the investment property through a look-through company (LTC) or trust, with the lending held in that entity’s name, while minimising debt on the owner-occupied home.
If done the other way around – where most of the debt sits on the family home – only a small portion of interest may be deductible. That single decision can significantly reduce the ability to reduce your tax bill over time.
Importantly, banks usually don’t care which entity holds the debt, as long as they can recover their money. This flexibility allows advisers to structure lending in a way that works for tax purposes – provided it’s done correctly from the start.
What Happens If You Got the Structure Wrong?
Restructuring after the fact is possible, but it isn’t always worthwhile.
Before making changes, advisers consider:
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How long the properties will be held
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Whether further purchases or upgrades are planned
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Bright-line implications
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Legal, accounting, and bank costs
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Break fees and potential clawbacks
If a property is likely to be sold in the near term, restructuring may not deliver enough benefit. But for long-term holders, the improved interest deductibility can outweigh the upfront costs and meaningfully reduce the overall tax bill over time.
Choosing Between LTCs, Trusts, and Companies
The episode also compares common ownership structures:
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Look-Through Companies (LTCs):
Profits and losses flow directly to shareholders based on shareholding percentages. These percentages are difficult to change later, making early planning critical.
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Trusts:
Trusts offer more flexibility. Profits can be retained or distributed to beneficiaries, allowing more control over how income is taxed from year to year.
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Standard Companies:
Losses stay within the company and do not flow through to individuals. Profits are extracted via salary or dividends, making them less common for residential investment property.
Rental losses are ring-fenced, meaning they can no longer offset personal income – regardless of structure. This makes correct debt placement even more important when trying to reduce your tax bill.
Why This Isn’t a DIY Exercise
Trying to set this up without advice carries real risk. Mistakes can include:
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Incorrect LTC setup
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Shareholdings misaligned with income levels
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Non-compliant trust administration
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Costly errors when selling or restructuring later
One missing step or incorrect assumption can undo the intended tax outcome and create larger issues down the track.
Key Takeaways
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Reducing your tax bill is about structure, not just interest rates
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Interest deductibility depends on the purpose of the debt
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Banks approve lending based on security, not tax efficiency
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Placing debt against investment property can significantly improve outcomes
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Restructuring later is possible, but costs and timeframes matter
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LTCs and trusts offer different levels of flexibility and control
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Incorrect DIY structuring can create long-term tax and legal issues
Next Steps
If you’re building wealth through property and want your structure to actually work for you, Lighthouse Accounting works alongside our mortgage and wealth teams to ensure your assets and debt are aligned from day one.
If you’d like to watch more, check out these other episodes below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
