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Authorisation Number: 1011715947648

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Ruling

Subject: Lenders mortgage insurance

Question:

Are you entitled to claim mortgage insurance incurred in respect to your residence due to the purchase of investment properties?

Answer:

No.

Relevant facts

You have lived at your residence for a number of years. During the income year you purchased a number of investment properties and refinanced the loan on your residence. As part of the process you incurred lender's mortgage insurance against your own home and the investment properties. The amount of mortgage insurance you have paid is greater than $100.

You have advised that the mortgage insurance was apportioned between the investment properties, your residence and a funding account.

At the time you purchased the investment properties your residence was mortgaged. Your equity in the residence at that time was about $300,000. After the purchase of the investment properties the mortgage on your residence was increased thereby reducing your equity in the property. Your equity in the three investment properties was minimal. Accordingly the lender required mortgage insurance over all properties.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

The lenders mortgage insurance premium is a payment to enable an asset to be purchased and is to protect the bank from loss. The payment is not incurred in gaining or producing your assessable income. Therefore, you are not entitled to a deduction under section 8-1 of the ITAA 1997.

However, section 25-25 of the ITAA 1997 provides that a taxpayer can deduct expenditure incurred in borrowing money to the extent that those funds are used for the purpose of producing assessable income. Stamp duty on mortgage, mortgage registration fee, lenders mortgage insurance together with other borrowing expenses incurred, such as establishment fees, are borrowing costs to which section 25-25 of the ITAA 1997 would apply.

You had an existing loan on your residence and acquired three investment properties during the income year. In doing so your equity in the property declined. At the same time you had taken on additional loans to finance the purchase of the new investment properties with very little equity in those properties. Because of the low amount of equity available to support your overall loan position, your lender required you to take out mortgage insurance on all the loans entered into, including the refinancing of your residence.

As a default in any of the loans could act as a trigger for the lender to activate the mortgage insurance, it is not considered that the portion of the mortgage insurance applicable to loans other than those incurred in respect of the investment properties is deductible. This is because the mortgage insurance is spread over all the loans you have negotiated and only the loans applicable to the three rental properties are in respect of an income producing activity.

As the portion of the lenders mortgage insurance applicable to your residence will not be used for an income producing purpose, you are not entitled to a deduction for this portion of the expense under section 25-25 of the ITAA 1997.