Tax Tip 428: Borrowing Costs and Borrowing and Parking the Borrowed Money

This post is related to Tax Tip 423: Borrow and Park in Offset and Fees Before Using the Money Tax Tip 423: Borrow and Park in Offset and Fees Before Using the Money



What happens if money is borrowed and borrowing costs related to the loan are incurred before the borrowed money is actually used?


Example

Homer borrows $100,000 to invest in shares. This takes his loan over 80% LVR and there is $5,000 in LMI incurred.

Just before settlement though the market shoots up and Homer doesn’t want to invest just yet. He parks the money into an isolated offset account against the $100,000 split and waits. It is 6 months before he buys $100,000 worth of shares.

Homer has actually wasted 6 months of claims of the borrowing costs. Borrowing costs are deductible over 5 years, or the life of the loan (see tax tip 229). But they are only deductible if the borrowing is used to produce income. This means, for Homer’s specific situation, that Homer can only start claiming the borrowing costs 6months after incurring them and he only has 4.5 years left that he can claim. He will miss out on being able to claim 10% of the LMI costs and I don’t think that could be a capital expense either.

See also

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

 

Correct. It can also work the other way too. Lets say Barney borrowed to buy his new home. 6 months later he rents it out. The borrowing costs of 4.5 years could become deductible