Frequently asked questions
What is debt recycling?
Debt recycling replaces non-deductible home loan debt with tax-deductible investment debt. The ATO allows you to deduct interest on money borrowed to invest in income-producing assets. By recycling debt, you gradually convert your non-deductible mortgage into a deductible investment loan, reducing your tax bill each year.
Is "mortgage recycling" the same as debt recycling?
Yes — "mortgage recycling", "loan recycling", and "debt recycling" all describe the same strategy: paying down non-deductible home loan debt, then redrawing and investing that amount so the interest on it becomes tax-deductible. "Debt recycling" is the term used by the ATO and most Australian financial advisers, but you'll see the others used interchangeably.
Is debt recycling legal in Australia?
Yes — it is a legitimate tax strategy, but it must be structured correctly. The ATO requires a clear, direct link between the borrowed funds and the income-producing investment. Always consult a licensed financial adviser or tax accountant before implementing.
What are the risks?
Your investments can fall in value while your debt remains fixed. A sharp market downturn can significantly worsen your net position. Debt recycling amplifies both gains and losses — it is not appropriate for everyone.
How is the tax saving calculated?
The calculator multiplies your marginal tax rate by the deductible expenses each year. For shares and ETFs this is just the investment loan interest. For investment properties it also includes annual maintenance costs, since both interest and maintenance are ATO-deductible against rental income. This represents the reduction in your tax bill from claiming those deductions.
What changed in the 2026 Federal Budget? 2026 Budget
The May 2026 Federal Budget introduced three changes affecting debt recycling, effective from 1 July 2026 or 1 July 2027:
- Tax rate cut — the $18,201–$45,000 bracket drops from 19% to 15% base (17% including Medicare). Effective 1 July 2026. Reduces the value of deductions slightly for lower-income earners, but lowers your overall tax bill.
- Negative gearing restriction — established investment properties purchased after 12 May 2026 can no longer use rental losses to offset salary income. Effective 1 July 2027. New builds and properties purchased before 12 May 2026 are grandfathered.
- CGT discount removed — the 50% CGT discount is replaced by inflation indexation plus a 30% minimum tax rate for assets acquired after 12 May 2026. Effective 1 July 2027. You now pay tax only on real (inflation-adjusted) gains, at your marginal rate with a 30% floor.
What are the new 2026–27 income tax brackets? 2026 Budget
The updated rates (including 2% Medicare levy) from 1 July 2026:
- $0 – $18,200 → 0%
- $18,201 – $45,000 → 17% (down from 21%)
- $45,001 – $135,000 → 32% (down from 34.5%, threshold raised from $120k)
- $135,001 – $190,000 → 39% (threshold raised from $180k)
- $190,001+ → 47%
This tool uses these 2026–27 rates. Your marginal rate is shown next to the income field and drives all tax saving calculations.
What is the negative gearing restriction and who does it affect? 2026 Budget
From 1 July 2027, investors who purchase an established investment property after 12 May 2026 can no longer offset rental losses against their salary or wage income. Previously, if your interest and expenses exceeded your rental income, the shortfall reduced your taxable salary — a significant tax benefit when negatively geared.
Under the new rules, excess losses are quarantined and can only be applied against future rental income or capital gains from the same property. The following are not affected:
- Properties purchased before 12 May 2026 (grandfathered)
- New build properties purchased after 12 May 2026
Select your property type in the calculator to model the correct scenario for your situation.
If negative gearing is restricted, how do I still save tax? 2026 Budget
The restriction does not eliminate tax deductions — it caps them at your rental income. Your expenses (interest + maintenance) are still deductible, but only up to the amount of rental income earned. This effectively makes your rental income tax-free, which is still a real saving.
Example: rental income $5,000, total deductible expenses $14,400 at a 32% tax rate:
- Old rules: deduct full $14,400 → tax saving of $4,608
- New rules (restricted): deduct $5,000 (capped at rental income) → tax saving of $1,600
- The $9,400 excess loss is quarantined — not lost forever, but cannot reduce your salary tax this year
The calculator shows both scenarios so you can compare the impact.
How did CGT change under the 2026 budget? 2026 Budget
Before the budget, investors selling assets held longer than 12 months received a 50% CGT discount — effectively paying tax at half their marginal rate on capital gains.
For assets acquired after 12 May 2026, the 50% discount is replaced by inflation indexation: the original cost base is adjusted upward each year by the assumed inflation rate (default 2.5%). You then pay tax only on the gain above that indexed cost base, at your marginal rate with a minimum of 30%.
This means you are taxed only on real gains, not inflation-driven paper gains. For assets with strong real growth well above inflation, the old 50% discount was better. For assets with modest real growth close to inflation, the new indexed approach can produce a lower CGT bill.
Why does "Without Budget Changes" sometimes show lower wealth than current rules? 2026 Budget
This is counterintuitive but mathematically correct in certain scenarios. The "Without Budget Changes" card uses the old 50% CGT discount, which gives an effective tax rate of 16% on the full nominal gain (at 32% marginal rate). The new rules apply 32% to the much smaller inflation-adjusted gain.
When capital growth is only slightly above inflation — for example, a share portfolio growing at 3% p.a. with 2.5% inflation — the indexed gain after 20 years is very small. The new rules produce a lower CGT bill than the old 50% discount, making the post-budget "Wealth Gain After CGT" higher.
You will see the old rules produce a clearly higher number when your capital growth assumption significantly exceeds inflation — for example, an investment property growing at 6% with 2.5% inflation.
Why is net wealth negative in the year table?
Net wealth in this tool is calculated as: investment value minus all outstanding loan balances (both home loan and investment loan). Early in the projection, the debt is large relative to your investment portfolio, so the number is negative for both the recycling scenario and the baseline.
This does not mean you are insolvent — it simply does not include your home's value or other assets. What matters is the difference between the two columns. If the recycling net wealth is less negative (or more positive) than the baseline, debt recycling is building more wealth. The "Wealth Gain" card and verdict banner reflect this difference.
How does this debt recycling calculator work?
Enter your home loan balance, interest rate, property value, and the amount you plan to recycle each year. The calculator models two parallel scenarios year by year: your baseline (standard mortgage with no recycling) and the debt recycling scenario. It calculates the deductible investment loan interest, annual tax saving at your marginal rate, investment portfolio growth, and net wealth at each year — then shows you the cumulative wealth gain from recycling.
What do the ATO debt recycling rules say for 2026?
The ATO requires a clear and direct link between the borrowed funds and the income-producing investment — the loan proceeds must go directly into shares, ETFs, or another income-producing asset, not be mixed with personal spending. The 2026 Federal Budget introduced two relevant changes: a restriction on negative gearing for newly purchased established investment properties (from 1 July 2027), and a shift to CGT indexation replacing the 50% discount for assets purchased after 1 July 2025. Debt recycling into shares or ETFs is unaffected by the negative gearing restriction.
What is a practical debt recycling example?
You have a $600,000 home loan at 6% interest. You draw $20,000 of equity from your offset account and invest it in a broad ASX ETF. The $20,000 investment loan generates $1,200/year in deductible interest. At a 34.5% marginal rate that's a $414 annual tax saving. The ETF earns 9% p.a. (capital + dividends). You repeat this each year as your home loan reduces. Over 20 years the compounding of tax savings and investment returns can add hundreds of thousands of dollars compared with a standard mortgage — this calculator models that precisely for your numbers.
Is this debt recycling calculator suitable for Australian investors?
Yes — it is built specifically for the Australian tax system. It uses current Australian marginal tax rates (including the 2% Medicare levy), the 2026–27 Federal Budget tax bracket changes, Australian CGT rules (including the new indexation method), and the 2026 negative gearing restrictions. It covers both shares/ETF debt recycling and investment property debt recycling.
Debt Recycling Calculator