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Authorisation Number: 1011988481286

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Ruling

Subject: Lender's mortgage insurance

Question

Are you entitled to claim a deduction for your share of the income-producing portion of lender's mortgage insurance where the deduction is spread over five years?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You purchased a property as your principal place of residence, and incurred lender's mortgage insurance costs associated with the loan.

The loan is for a period greater than five years, and you took out the loan jointly with your spouse, who is also a joint owner on the property title deed.

After six months, you rented out this property and purchased a new principal place of residence.

Reasons for decision

Summary

You are entitled to claim deductions for your share of borrowing expenses incurred in obtaining the mortgage, having regard to the extent that the borrowed monies are used for income producing purposes.

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 from when the property was income producing.

As your borrowing expenses exceeded $100 the deduction is spread over five years from the date of the loan.

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 year.

For example, in your case the amount allowable as a deduction for the first income year must be reduced to take into account the fact that the borrowed money was not used for an income producing purpose for the first six months.