Annual Bank Fee for IP loan

Here is a common question.

Lets test some knowledge.

Fred has a single loan for a IP that is rented. His Bank (Westpac) charge a $395 annual fee for a discounted loan package etc.

 

I am going to guess that the most complicated, most labour intensive and least logical option is the correct answer (deductible over 5 years like LMI). But I hope I'm wrong.

 

I believe these fees are a bank charge and not a borrowing expense and to the extent they relate to an investment they would be deductible in full in the year incurred.

 

Acutally thinking further this is probably the correct answer. The annual fee is connected to the loan and would thereby be a borrowing expense.

 

Curses

 

TD 95/60 On-going management fees or retainers are deductible under section 8-1 of the ITAA 1997

Few private rulings confirm as it is an annual management fee it is deductible

RBA Content

 

A quote from the PBR:

Annual Package fee

Borrowing expenses are those directly incurred in taking out a loan for the property. If your total borrowing expenses exceed $100, they must be apportioned over a period of five years. However it is considered that the annual package fee for your investment loan is not a borrowing expense, instead we consider the fee to be a bank charge fully deductible under section 8-1 of the ITAA 1997 in the year it's incurred.

 

Of course could also be a trick question where the package fee needs to be apportioned as it has a mix of investment and non investment loans.

Of course for the fee charged to the client you would hardly recover the time spent for determining that only 45.24 was not allowed.

Im glad im no longer in that space.

 

Since most package fees ostensibly provide for transaction accounts and credit cards (often non investment) as part of the package, in addition to loan accounts, I would have thought it common to apportion the fee 50/50 deductible / non-deductible (or whatever the appropriate ratio) even if all loan accounts are investment. Is this not the case?

 

It was a trick question.
According to the heading, for the majority of the population who don't read each individual word in the question following, the annual bank fee for an IP loan is deductible each year.

This proves we need to pay an accountant to do our returns each year

 

Yes it is a trick question. It is a bank fee and is not a borrowing expense. A fee payable for a period of under 13 months and thus deductible in full, when paid, to the extent the fee it has a nexus to production of income. If added to a new loan the cost is till deductible and the payment is deemed to occur when it is incurred. So it may need to be apportioned sometimes if there is a PPOR loan, cards and IP loan (actually used) under the same facility. (typically apportioned based on the sum borrowed for each)

So what is a loan break fee ?
It is an interest cost to end a fixed term loan. It is also not a borrowing expense. The use of the loan and property at the time of the break free must be considered to determine if it is deductible even if it relates to a IP. Two issues
1. Fred terminates the fixed rate to accept a new variable rate. The IP has existing and continuing tenants. The fee is 100% deductible.
2. Mary does same but she breaks the loan after the tenant vacates. She plans to tidy up the place and sell it. Mary cannot deduct her break fee. It is now a CGT cost and she will lose 50% of its value.

 

im so glad i dont spend my days thinking of that stuff. would depress me.

 

It came about from a dispute with the ATO. They kept arguing the fee was a borrowing expense. Deductible over 60mths.

After a detailed audit that was their final letter. No changes. Just that. And it was wrong.
Quote me - Look you can issue a decision that says that but I will only write to the Commissioner and suggest you need to be trained and your advice is inconsistent with the Commissioner. So why not escalate this to your manager and withdraw the letter and avoid a lot of effort and drama.

 

@Paul@PFI would i have your permission to forward this thread to the editor of the Australian Financial Review. How many man hours were expended on a $395 amount. And they want to cap tax agents fees. this needs to get out there.

 

Best we dont upset the Commissioner. Dont want it said we bought the ATO into adverse publicity. They struggle with making friends at the best of times.

To be balanced I had a nice ATO staffer yesterday resolve a quite technical issue going back a few years. Very helpful, informative and she took a fair approach and was thorough with investigating. That arvo I then encountered yet another transfer balance The data will only appear in MyGov (and ATO cap fiasco. This process is as laughable as the old super surcharge. The costs to administer this are a joke. But that person taught me about the (beta !!) new tax agent portal that allows real time error correction so that a transfer balance commutation was cancelled. Good to see some real time problem solutions.

I'm still waiting for the PAYG sumamry fiasco to blow up. Not many people realise that 90%+ of employers dont have to and probably wont even issue a PAYG summary this year. The data will appear in MYGov and can only be prefilled after two-three weeks for agents if the employer has finalised the STP file. That is one for a journo

Read here : About Single Touch Payroll