Do mortgage offset accounts and redraw affect my tax deductions?

For an owner-occupied home, neither the offset account balance nor redraw have tax implications because mortgage interest on your home is not tax deductible anyway.

For an investment property, however, the interaction between offset accounts, redraw, and deductibility is significant. Interest is only deductible to the extent the loan was used to acquire or improve an income-producing asset. If you redraw money from your investment property loan for personal purposes (holidays, car, etc.), the interest on that redrawn amount is no longer deductible, even though the loan is nominally secured against the investment property. This mixed-purpose loan problem requires careful record keeping to apportion deductible and non-deductible interest.

An offset account attached to an investment property loan does not create the same problem. Money sitting in the offset simply reduces the interest that accrues; it does not change the purpose of the underlying loan. If you later withdraw the offset funds for personal use, you haven't changed the loan purpose because the loan itself hasn't changed. Many investors deliberately use offset accounts (rather than redraw) for this reason. The ATO has provided guidance that mixing purposes via redraw can permanently contaminate a portion of the interest deduction.