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Edited version of private ruling
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Ruling
Subject: Loan penalty interest deduction
Question:
Can you claim a percentage of the penalty interest paid for early repayment of a loan for an investment property after you have moved into it as your principal place of residence part way through the income year?
Answer:
Yes
This ruling applies for the following period
Year ending 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You purchased a rental property in the relevant year and it was then rented from around then until the end of the following year. You sold your main place of residence around then and moved into the rental property in later.
You used the funds from the sale of your principal place of residence to pay off the outstanding loan on the former rental property subsequently.
You paid out the investment loan as soon as the funds were available from the sale of your residence, in order to minimise the interest you were paying.
As a result of paying out the investment loan early, you incurred penalty interest charges.
Reasons for decision
Taxation Ruling TR 93/7 examines the deductibility of penalty interest payments. Penalty interest payment refers to an amount payable by a borrower under a loan agreement in consideration for the lender agreeing to accept an early repayment of a loan.
Where a borrowing is used to acquire an income producing asset, and an early repayment adjustment fee is paid to rid you of a recurring obligation of paying interest on the loan and the interest would itself have been deductible, you are entitled to a deduction, under section 8-1 of the Income Tax Assessment Act 1997 for the early repayment amount.
In your case, the property was only income-producing until the relevant date and the interest would only have been deductible for the income producing period. As such you are entitled to a deduction for 50% of the penalty interest amount you incurred.