How to handle borrowing expenses

Discussion in 'Accounting & Tax' started by Barneymaroon, 15th Feb, 2020.

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  1. Barneymaroon

    Barneymaroon Well-Known Member

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    The ATO says I can immediatly deduct borrowing expenses. However my lender included all these in the loan amount to me so am deducting interest on these (tiny fraction of capital of course). Please send a link to on the great tax tips if this is covered.

    Clearly I would rather get a break on the expenses now, not on the interest.

    Do I pay down the expenses on the loan and then declare the expenses?

    Do I declare the expenses and pay the refund to the loan?

    Do I just declare the expenses and keep to ATO refund?

    I know its not a large amount - but nor is my margin on my IP ;-)

    Thanks in advance!


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  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    I hope the ATO didn't say that because it is incorrect. The law states that borrowing expenses are deductible over 5 years with the first and last apportioned.

    I don't really understand what you are asking but want to say you can claim something that is deductible even if you borrowed to pay it.

    Tax Tip 229: What are “Borrowing Expenses” for tax purposes? Tax Tip 229: What are “Borrowing Expenses” for tax purposes?
     
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  3. Barneymaroon

    Barneymaroon Well-Known Member

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    You are correct. Deductible over 5 years. Thaks for lnk.

    The default is for lenders I have dealt with is to add all these to the loan (of which the interest is deducted). I did not ask them to do that, and it is not in my financial interests to do so - as it is surely better to claim the expenses rather than add them to the loan. I am asking if it is OK to repay the amounts to the loan and deduct the expenses (over 5 years) instead.
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    You can claim expenses the same whether they are added to a loan or not. This doesn't change anything as you have still incurred the expense.

    If you borrow to replace a broker toilet in an investment property you can clam both the toilet and the interest.
     
  5. Barneymaroon

    Barneymaroon Well-Known Member

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    Good to know. I had not thought of borrowing to pay for maintainence - but your above example make sense. Much appreciated.
     
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  6. Barneymaroon

    Barneymaroon Well-Known Member

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    Hmmm. Surely if the repair was $1000, and I got $500 tax return then I should not claim interest on the $1000 right?
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Why?
     
  8. Barneymaroon

    Barneymaroon Well-Known Member

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    Because I got the 500 return, then after the return comes in I have only spent 500. To contine to claim interest on the 1000 would not seem appropriate.. and therefore I *presume* the ATO would not accept paying interest on the 500 i recieved as a refund.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Nope that is not the case.

    If you borrowed to buy the property there would be no need to reduce deductions by the amount of tax you 'get back'. Same here.
     
  10. Barneymaroon

    Barneymaroon Well-Known Member

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    OK, thanks for clarifying.
     
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  11. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    1. The repair (assuming it is one) is deductible when paid
    2. The Borrowing Expenses are loan fees (not interest) charged and are deductible over 60mths
    3 The loan interest on the borrowing for the repair is also deductible.

    All these increase deductions. The higher deduction = a higher refund at your marginal tax rate. ie Spend $1000 = Higher deduction is probably 1/3rd. Not 50% I suspect.
     
    Last edited: 17th Feb, 2020