Debt Recycling for Doctors & Dentists

Let me paint a picture...

You’re a doctor or dentit in private practice. You work ridiculous hours.

You earn excellent money. And yet… every year you hand over a
painful amount of cash to the tax office, while a home loan — however small — just sits there, quietly charging you interest you can’t deduct.

Think of Debt Like Cholesterol

Some of it is bad. Some of it is good. And if you ignore the bad stuff for long enough, it’ll quietly wreck your financial health.

Bad debt is personal debt. Your home loan falls into this bucket because the interest isn’t tax-deductible. Just like bad cholesterol, it doesn’t cause drama overnight — it slowly does damage in the background.

Here’s the kicker:
If you’re on a 50% tax rate and your home loan interest rate is 6%, that loan is really costing you closer to 12%. Ouch.

Now let’s talk about good debt. This is business or investment debt — the kind where the interest is tax-deductible. That’s the good cholesterol of the money world.

Same numbers: 6% interest rate, 50% tax rate. But this time, the real cost to you is about 3%. Big difference.

So the rule is simple:  Attack bad debt first.

It’s the most expensive debt you’ll ever have, and getting rid of it faster is one of the smartest financial moves you can make.

A Very Real Scenario

Let’s talk about a common scenario.  Imagine a doctor or dentist in private practice with:

• Gross income: $700,000 p.a.
  
• Business expenses $250,000 p.a.
  
• Net cash flow: strong, but heavily taxed
  
• Home value: $1,200,000
  
• Mortgage balance: $250,000 (not deductible)
  

On paper, you’re killing it. But here’s what usually happens next.

You:

• Pay business expenses and tax from income
  
• Gradually chip away at the home loan
  
• Carry non-deductible debt longer than necessary

Debt recycling is not about borrowing more. It’s simply this: You pay down non-deductible debt, and you borrow separately for business costs you were going to pay anyway. Same life. Same business. Same total debt. But better management of of your practice cash flow.  

How does it actually work?

Step #1: Split Your Home Loan (this is crucial)

Instead of one $250,000 home loan, you restructure it into two loan splits under the same mortgage. 

Example set-up:

You might split the existing $250,000 like this:

This is often done by:

• Keeping Split A as-is
  
• Creating Split B with a $0 balance but its own limit of $250,000. This can then be drawn down progressively as split A is reduced.
• e.g. If you  pay down $10,000 in Split A, this means you can draw up to $10,000 from Split B for business expenses. 

Important things to note:

• Your house ($1.2m) is just the security
  
• The total loan limit hasn’t changed
  
• Each split has one clear purpose
  

Clean lines. No mixing. Key idea: The property doesn’t determine deductibility. Use of funds does.

Step #2: Pay Down the Home Loan First

Now for the simple (but powerful) habit change.

All surplus income — after living costs — goes straight into Split A.

That means:

• Your home loan shrinks fast
  
• Non-deductible interest drops every year
  
• Cash flow improves quietly in the background
  

This is you aggressively lowering LDL.

Step #3: Borrow for  Business Expenses

Here’s the mindset shift.

Each year, your practice already has:

• Business expenses
  
• Tax bills
  
• Cash outflows totalling $250,000
  

Instead of paying all of that from income:

• You draw from Split B
  
• Funds go directly to the business expenses (including tax bills)
• Interest on Split B is deductible
  

You haven’t changed your lifestyle. You’ve changed which pocket the money comes from.

What This Looks Like Over Time

Let’s say over time:

• You pay off the entire $250,000 home loan
  
• You borrow $250,000 from Split B to fund business expenses and tax
  

Your position now looks like this:

Same total debt as before.

But now:

• No non-deductible interest
  
• All interest reduces taxable income
  
• Cash flow improves every single year
  

You didn’t reduce debt. You fixed the profile.

Why This Is Legal (and Very Boring)

The ATO isn’t sitting in your practice telling you how to run the show. They don’t care how much you spend on expenses, when you buy equipment, or whether you pay with cash or a loan.

That means using borrowings to fund business costs is perfectly legitimate. Done properly, it can free up your practice cash so you can reinvest in the business or smash down those nasty, non-deductible personal debts faster.

The ATO applies one simple rule: Interest is deductible based on what the borrowed money is used for.

What You Must Get Right

This only works if you:

• Use separate loan splits
• Never mix private and business spending
• Treat each loan like a sterile field
• Make sure that you actually pay the intrest on the loan for business expenses and not capitalise it.
• Have a genuine commercial reason for doing it e.g.  To eliminate personal debt and improve cash flow
  

The Big Takeaway

Debt recycling will:

• Eliminate non-deductible debt faster
  
• Reduce wasted interest
  
• Improve your after-tax cash flow 
• Make your debt work with your income
  

Or in medical terms: You’re not lowering cholesterol ,You’re improving the ratio. And over time, that’s what actually changes outcomes.

Done properly, this is one of the cleanest strategies available to high-income professionals. Done poorly, it’s a mess. If you want to know whether this works for you, that’s the next conversation to have with us.