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

Discussion in 'Accounting & Tax' started by Terry_w, 12th Aug, 2019.

Join Australia's most dynamic and respected property investment community
  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    For tax reasons it is importance to ascertain what a ‘borrowing expense’ is as these may be deductible under section 25-25 ITAA97

    INCOME TAX ASSESSMENT ACT 1997 - SECT 25.25 Borrowing expenses

    Legal expenses related to the loan and mortgage

    - Drafting costs

    - Advice costs

    Valuation fees

    - Security related valuations of properties for loans

    Bank fees

    - Application fees

    - Lenders legal fees

    - Settlement fees

    Lenders Mortgage Insurance

    - Only on loans associated with investing
    See Tax Tip 33: Deductibility of LMI Tax Tip 33: Deductibility of LMI
    Tax Tip 34: Deductibility of LMI on loan increases Tax Tip 34: Deductibility of LMI on loan increases
    Tax Tip 35: Is LMI Deductible in These Situations? Tax Tip 35: Is LMI Deductible in These Situations?

    Stamp duty on mortgages

    - This has been abolished in most states

    - Stamp duty on LMI too

    Brokerage fees

    - An upfront fee charged by mortgage brokers for example.

    Borrowing costs can be deducted

    - In full if they are less than $100 in total, or
    - Over 5 years (apportioned first and last), or
    - The life of the loan if less than 5 years
    - But only to the extent that the loans relate to the production of assessable income or business expenses.
     
    craigc, Peter P, Mike A and 1 other person like this.
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    A rate lock fee or a switching fee is also a borrowing expense we are commonly asked about.

    I avoid using the general description of "deductible over 5 years" as its often misunderstood by taxpayers who think 20% each year is deductible. The ATO calculation here demonstrates the method of calculating each year based on the number of days which affects the first and the last years amounts as Terry says.
    https://www.ato.gov.au/uploadedFile.../TaxTimeToolkit_Rental-borrowing-expenses.pdf

    The "loan term" rule often creates a tax benefit that can be missed when a loan subject to borrowing expense is later refinanced or repaid early. Same or different lender. However switching with the same lender from variable to fixed rate or vice versa may not be sufficient to trigger a new loan. It may be the same loan on revised terms. A new advance used to pay property outgoings of even $100 or so may be a strategy to address this issue. The former loan is refinanced and a new purpose test applies.

    When a loan is either repaid early or refinanced the residual deduction at that time can be considered and may be claimed provided the property is still a IP. However if the property loan is repaid and discharged on sale and there is no tenant (ie vacant sale) then the residual may only be a CGT third element cost since the property was not income producing when the discharged occurs.
     
  3. property_geek

    property_geek Well-Known Member

    Joined:
    31st Jul, 2015
    Posts:
    239
    Location:
    Australia
    @Terry_w
    Is account service fee tax deductible ?
    see image.
     

    Attached Files:

  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    Is that a loan service fee?

    Should be deductible straight away. Not a borrowing expense.
     
    Paul@PAS likes this.
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    $395 annual package fee charged by many lenders is a common query.

    1. Not a borrowing expense. Its a bank fee.
    2. May be partly or fully deductible depending on what package elements the taxpayer utilises.
    3. May need to be apportioned between private use and also for each property impacted by the fee. Typically a fair and reasonable basis ie the loan balances involved. Not just 50/50
     
    craigc and Peter P like this.
  6. mr_alex

    mr_alex Well-Known Member

    Joined:
    28th Jan, 2017
    Posts:
    227
    Location:
    Gold Coast
    Hi Paul, if I had refinanced an IP to a new lender, and my old lender charged me a 'fee for attending settlement' could this be claimed at EOFY or would it follow the general borrowing costs deduction rules because it's not a residual amount from the original establishment of the loan.
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    It would likely be a discharge of mortgage cost as that is what the attendance is for. Even if it was a borrowing cost the loan is ending anyway so could be claimed in full
     
    mr_alex likes this.
  8. mr_alex

    mr_alex Well-Known Member

    Joined:
    28th Jan, 2017
    Posts:
    227
    Location:
    Gold Coast
    Thanks Terry.
    Would the fact that the property was originally a PPOR affect deductibility of this?

    say I lived in it 5 years and rented it out for 5 years before refinancing.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    if it is income producing at the time of refinancing I wouldn't think it matters
     
  10. HonestShiba

    HonestShiba Well-Known Member

    Joined:
    17th May, 2020
    Posts:
    666
    Location:
    VIC
    What if the property was originally bought as a PPOR and then after 1 year was converted to an IP? Can the remaining 48 months of borrowing fees be deducted over 4 years?

    If the loan was then refinanced once the PPOR turned to IP is it instantly deducted?
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    Yes. The remainder can be claimed providingvthe borrowing expense solely relates to that property acquisition or its refinance.
    The refinance may trigger the residual to be claimed. Refinance doesnt mean a change in the loan product eg fixed to variable
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    Yes to both

    LMI is a big one. We got someone a 95% loan once and then quickly refinanced them to another lender where the valuation came in higher so the LVR was 80%.
     
    Paul@PAS likes this.