Break Fees and ATO Rental Worksheet

Hi,

I understand that mortgage discharge expenses, including penalty interest payments (i.e. break fees) are deductible in the year they are incurred. No problems thus far.

What I can't work out is which category under the ATO's worksheet do these break fees fit into:
a) Borrowing expenses
b) Interest on loan(s) <- maybe, because they are described as 'penalty interest payments'?
c) Somewhere else

Any guidance on the appropriate bucketing of this expense would be appreciated.

Thanks,
brob

 

Yes break fees would be borrowing expenses and deductible in the year incurred - generally. If selling then not deductible but may be a capital expense.

If discharging a mortgage this will be a separate expense - discharge of mortgage.

 

Thanks Rolf and Terry - that was useful, appreciate the pointers.

 

The break fee is NOT a borrowing expense. Its a form of interest. I always use the code for interest and note its a break cost. And as Terry says its only deductible if broken while the property is tenanted, NOT if its being sold, even if it is tenanted at settlement of the sale.

Borrowing expenses are costs incurred for a loan to be advanced or maintained. They may be monthly, annual or one off fees. One off fees are typically deductible over 60 months (or term of the loan if shorter) BUT NOT 5 years !!!!! Annual and monthly fees are not apportioned that way but are deductible when incurred. Any residual borrowing expenses when you discharge the loan (eg refinance or sale) will also become deductible. And new borrowing expenses at that refinance will start a new 60 mth term.

 

Paul's right - it relates to compensating the lender the interest they would have received, and is therefore an interest expense.

 

Thanks Paul and Terry - appreciate the extra detail of the explanation