Private ruling: Rental property - borrowing expenses
Published: July 2011
Ruling period: 1 July 2008 to 30 June 2014
Date scheme commenced: 1 July 2008

Ruling: Q1: Are you entitled to claim your share of deductions for the income-producing portion of the borrowing expenses you incurred to refinance a home mortgage, where the deduction is spread over five years? | A1: Yes.

Relevant facts and circumstances: You own a property jointly with your spouse. You lived in this property until you made it available for rent. You refinanced the jointly held mortgage for this property while you were living in it. The refinancing took place approximately a year before the property became available for rent. The term of the mortgage is greater than five years. You incurred expenses for lender's mortgage insurance, valuation fees and loan establishment fees exceeding $100 in relation to refinancing the mortgage.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-25.

Reasons for decision: Summary: You are entitled to claim deductions for your share of borrowing expenses incurred in refinancing the mortgage, having regard to the extent that the borrowed monies are used for income producing purposes. | Detailed Reasoning - Detailed reasoning: You can deduct expenditure incurred in borrowing money to the extent that you use the money for the purpose of producing assessable income (subsection 25-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997)). Borrowing expenses are expenses which relate to the actual borrowing of monies. Lender's mortgage insurance, valuation fees and loan establishment fees are borrowing expenses for the purposes of section 25-25 of the ITAA 1997. Borrowing expenses are only fully deductible in the year they were incurred if they do not exceed $100 (subsection 25-25(6) of the ITAA 1997). Where the borrowing expenses exceed $100, the deduction is spread over the period of the loan or five years, whichever is the shorter period. Where the borrowed funds are used solely for the purpose of producing assessable income during an income year you can deduct the maximum amount worked out under subsection 25-25(4) of the ITAA 1997 (subsection 25-25(2) of the ITAA 1997). If you use the money only partly for the purpose of producing assessable income during an income year, you can deduct the proportion of the maximum amount worked out under subsection 25-25(4) of the ITAA 1997, having regard to the extent that you used that money for that purpose (subsection 25-25(3) of the ITAA 1997). You cannot deduct anything for an income year if you do not use the money for income producing purposes at all during that income year. In your case, you are entitled to a deduction for your share of borrowing expenses incurred when you refinanced the mortgage. As your borrowing expenses exceeded $100 your deduction is spread over five years from the date of the loan, and your deduction will need to be calculated having regard to the extent that you used the borrowed money for income producing purposes during the relevant income years. For example, a deduction is not allowable for the income year in which the refinancing occurred as the borrowed money was not used for an income producing purpose in that year. Also, the deduction for the next income year would have to be reduced to take into account the fact that the borrowed funds were only used for an income producing purpose from part way through that income year.

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