Private ruling: Rental deductions
Published: August 2014
Ruling period: Income year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the early redemption charge deductible under section 8-1 of the Income Tax Assessment Act 1997 ? | A1: Yes

Relevant facts and circumstances: You lived in a property until you lost your job. You advertised the property to rent on x and tenants moved on x. You moved back to live with you parents. The original loan was fixed for five years at a high interest rate. On x you refinanced the property by changing loans to a lower rate of interest. You were charged an early redemption fee by your financial institution.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1.

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowable where the losses or outgoings are of a capital, private or domestic nature or another provision prevents the deduction. Taxation Ruling TR 93/7 provides the Commissioner's view on the deductibility of penalty interest payments in relation to rental properties. For the purpose of TR 93/7 penalty interest payment refers to an amount payable by a borrower under a loan agreement in consideration for a lender agreeing to accept an early repayment of a loan. At paragraph [13] and [14] TR 97/3 provides: The critical factor in determining the essential character of an outgoing is the character of the advantage sought by the making of the expenditure ( Sun Newspapers Ltd. v FC of T (1938) 61 CLR 337, 363). Penalty interest is not paid for the use of the lender's money. It is paid in respect of a period when the borrower has repaid the lender and does not have the use of the money (refer R.W. Parsons, Income Taxation in Australia at para. 6.330). As a penalty interest payment is a cost directly attributable to obtaining early repayment of a loan, the questions to be answered is effectively: "what, from a practical and business point of view, is the advantage sought from an early repayment of the loan?" this is a question of fact to be answered on a case by case basis. It is considered in your circumstances that the advantage sought in paying the early redemption charge and refinancing the loan was the future interest saving obtainable from the differential in rates charged by the two loans. The payment is therefore of a revenue character and deductible under section 8-1 of the ITAA 1997.