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Edited version of your private ruling
Authorisation Number: 1012456666052
Ruling
Subject: Early mortgage discharge fees
Question
Are you entitled to a deduction for the fees incurred due to the early repayment of the balance of your investment loan?
Answer
Yes
This ruling applies for the following period
Year ended 30 June 2013
The scheme commences on
1 July 2012
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
During the year ended 30 June 20XX, you and your spouse purchased an investment property, for which you took out a fixed rate loan for a period of years. At all times, the investment property was rented out or available for rent.
In 20YY, you sold your main residence, finalised your investment property loan and moved into your former investment property. In finalising the loan, you were charged fees for repaying the loan early. The mortgage on the property was discharged when the loan was repaid.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 25-30
Reasons for decision
Section 25-30 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for expenditure incurred to discharge a mortgage in the following circumstances:
· where the mortgage is given by the taxpayer as security for the repayment of money borrowed by the taxpayer and used by the taxpayer for the purpose of producing assessable income;
· where the mortgage is given by the taxpayer as security for the payment of the whole or part of the purchase price of property bought by the taxpayer and used by the taxpayer for the purpose of producing assessable income.
Taxation Ruling TR 93/7 is about whether penalty interest payments are deductible. In referring to section 67A, the former equivalent of section 25-30 of the ITAA 1997, it states:
11. We do not consider that so-called penalty interest is, in fact, in the nature of interest. This is so even if the loan agreement uses the term "penalty interest". The description of an item used in any relevant agreement is not conclusive of its character… To call a payment "interest" does not conclusively determine that it in fact answers that description. Nor does it prevent the payment from being an outgoing of a capital nature.
17. Where repayment of a loan is secured by mortgage, penalty interest payable on early repayment may be deductible under section 67A. Section 67A provides a deduction for expenditure (excluding principal or interest payments) incurred in connection with the discharge of a mortgage securing repayment of moneys borrowed for the purpose of producing assessable income. Unlike subsection 51(1), deductibility is not affected by whether the expenditure is capital or revenue in nature. As previously discussed, so-called penalty interest is not, in fact, in the nature of interest, and is therefore not excluded on this basis from deductibility under section 67A.
19. Where penalty interest is paid upon repayment of a loan incidental to the disposal of an asset, the payment is not taken into account…in calculating the amount of any capital gain or capital loss arising on the disposal. The payment would not be included in the cost base of the asset…In particular; it is not within the categories of "incidental costs" of acquisition or disposal…and, as it is not in the nature of "interest"…
In your case, you borrowed money solely to fund the acquisition of the rental property, which was used for the purpose of producing assessable income. As such, the fees that you incurred by repaying your fixed interest rate investment loan early and discharging the mortgage with regard to that loan are deductible under section 25-30 of the ITAA 1997.
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