Debt recycling has become a popular way for Australian homeowners to gradually turn non-deductible home loan debt into investment debt. The basic idea is fairly simple: pay down part of your mortgage, borrow that amount again through a separate loan split, and use the borrowed money to invest.
But the tax assumptions behind that strategy are about to become more complicated. From 1 July 2027, changes to capital gains tax and negative gearing will affect some of the calculations investors make when deciding whether debt recycling stacks up over the long term.
The changes don’t affect every investment in the same way, though. For anyone reviewing an existing strategy, it helps to separate the different pieces of the puzzle.
A quick refresher: what does debt recycling actually do?
Say you have a $500,000 owner-occupied mortgage and $50,000 in a savings account. You could use the $50,000 to reduce your mortgage, then borrow $50,000 again through a separate loan split and invest it in shares or ETFs. You still have around $500,000 of debt, but the purpose of $50,000 of that borrowing has changed: it is now being used to acquire an investment rather than your home.
So what’s the point?
Interest on your home loan is generally not tax deductible, because your home isn’t producing income. Interest on money borrowed to buy an income-producing investment may be deductible, provided the relevant tax requirements are met.
That means debt recycling can gradually shift some of your borrowing from non-deductible home-loan debt to potentially deductible investment debt, while also building an investment portfolio.
The ATO says the tax treatment of the interest depends on how you use the borrowed money. If some of the borrowing is used privately and some for investment, the interest may need to be split between the two.
It’s also worth separating debt recycling from negative gearing. Debt recycling is a strategy for changing the purpose of your borrowing. Negative gearing occurs when the deductible expenses associated with an investment are greater than the income it produces.
What changes from 1 July 2027?
Two reforms are particularly relevant to investors thinking about debt recycling over a long timeframe.
The CGT changes
From 1 July 2027, the way capital gains are taxed will change. For affected assets, the current 50% CGT discount will be replaced by an inflation-based system with a minimum 30% tax rate. Treasury says the new rules will apply to gains that accrue from 1 July 2027 when they’re eventually realised. There are also transitional rules and some asset-specific exceptions.
For someone building a debt-recycling strategy to run for 10 or 20 years, that matters. An old spreadsheet might assume you’ll get the 50% CGT discount when you eventually sell. But simply swapping that for a flat 30% tax rate isn’t right either. If your investment spans the change, you’ll need to account for when the gain was made, the transitional rules, inflation and when you sell.
Negative gearing is changing for some property investors
The changes to negative gearing are more targeted. From 1 July 2027, negative gearing for residential property will be limited mainly to eligible new builds. Properties bought before the 12 May 2026 announcement are generally grandfathered, while eligible new builds can continue to access the existing treatment.
For affected established properties bought after the announcement, investors won’t be able to use losses against income such as wages. The losses can instead generally be used against residential-property income, including capital gains, and carried forward.
So if you’re using negative gearing as part of an investment strategy, the impact will depend on what you own and when you bought it.
What does this mean if you’re recycling into shares or ETFs?
This is where the changes to negative gearing and debt recycling need to be kept separate.
The new restrictions are aimed at residential property. They don’t mean you can no longer deduct interest on money borrowed to invest in shares or ETFs.
If you borrow $50,000 and use it to buy investments that are expected to produce assessable income, the interest may still be deductible. That potential deduction is one of the main reasons debt recycling can be attractive in the first place: you’re gradually replacing non-deductible home-loan debt with investment debt that may come with a tax deduction.
But the tax treatment follows the money, not the name of the strategy. If some of the borrowed money is used for private spending, for example, the interest may need to be apportioned. The treatment can also change if you sell the investment, move the proceeds elsewhere or invest in something that isn’t expected to produce assessable income.
So while the 2027 negative-gearing changes are important for property investors, they don’t automatically change the basic tax case for recycling debt into shares or ETFs.
The tax at the other end matters too
When assessing debt recycling, it’s easy to focus on the annual interest deduction.
But imagine borrowing to buy an ETF and holding it for 20 years. During that time, you could receive taxable distributions, claim deductions for eligible interest expenses and see the value of the portfolio rise substantially. Those things have different tax consequences.
The distributions and interest deductions affect your tax position along the way. The capital gains rules matter when you eventually sell. For a model that crosses 1 July 2027, that means you can’t necessarily apply one CGT assumption to the entire investment period. The treatment of gains accruing before and after the change needs to be considered separately.
Five assumptions to revisit
If you already have a debt-recycling strategy, these are some assumptions worth checking.
1. “I’ll get the 50% CGT discount when I sell.”
That may not be appropriate for gains accruing from 1 July 2027.
2. “Inflation just increases my cost base.”
The new system has commencement and transitional rules, so it isn’t as simple as applying an inflation adjustment to the whole cost base.
3. “I’ll pay 30% tax on the gain.”
The new system combines inflation adjustment with a minimum tax setting. It’s more complicated than simply applying 30% to the eventual capital gain.
4. “Negative gearing is finished.”
Not across the board. The changes apply to affected residential-property losses, with provisions for eligible new builds and existing properties.
Building a debt-recycling strategy
If you’re running the numbers, don’t focus only on the potential tax deduction. The investment still has to stack up after you account for the cost of borrowing and the possibility of weaker returns.
A useful model should separate:
| What to include | |
| Financing costs | Interest, loan establishment fees and refinancing costs |
| Investment income | Dividends, distributions, franking credits and foreign income |
| Current tax | Deductions and tax payable on investment income |
| Future tax | Capital gains or losses when the investment is sold |
Then try some less-than-ideal scenarios. What happens if your mortgage rate rises? What if shares return less than expected, distributions fall or the market has a prolonged downturn?
It’s also worth comparing what happens if you sell before and after 1 July 2027. For a long-term investment, the tax treatment at the point of sale can make a meaningful difference to what you actually keep.
And remember that a tax deduction doesn’t make the interest disappear. You still pay the interest; the deduction may simply reduce the after-tax cost of doing so.
Already debt recycling?
If you’ve already set up a debt-recycling strategy, the 2027 changes don’t necessarily mean you need to start again. But they are a good reason to revisit the numbers.
Check that your model reflects the new tax rules, includes the full cost of the debt and accounts for what happens if your investment returns or tax deductions are lower than expected.
It’s also important to keep the loan structure clean. If you’re using different portions of the borrowing for private and investment purposes, the purpose of each loan needs to be clear and properly documented.
The basic appeal of debt recycling hasn’t changed. You may be able to turn some non-deductible home-loan debt into investment debt, claim a deduction for eligible interest and build an investment portfolio at the same time.
The 2027 changes don’t remove those potential benefits. They just make it more important to understand exactly what your strategy is assuming before you commit to it.
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This article contains general factual information only. It does not constitute personal financial, lending, legal or tax advice. Tax laws and their interpretation can change, and transitional rules may apply. Consider obtaining advice from a licensed financial adviser, registered tax agent, lawyer and lending professional before establishing, changing or unwinding a debt-recycling strategy.
