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Ruling
Subject: Rental property - borrowing expenses
Question:
Are you entitled to claim a deduction for the income-producing portion of your borrowing expenses, which were incurred to purchase your property, where the deduction is spread over five years?
Answer:
Yes
This ruling applies for the following periods:
Year ended 30 June 2011
Year ended 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
The scheme commences on:
01 July 2010
Relevant facts and circumstances
You and your spouse signed a contract to purchase a property.
From the settlement date you lived in this property as your main residence.
After a period of time living in the property you moved out and started renting it.
In obtaining your loan for the property you incurred the following borrowing expenses:
· registration fee
· mortgage insurance
· a loan establishment fee.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 25-25
Income Tax Assessment Act 1997 subsection 25-25(2)
Income Tax Assessment Act 1997 subsection 25-25(3)
Income Tax Assessment Act 1997 subsection 25-25(4)
Income Tax Assessment Act 1997 subsection 25-25(6)
Reasons for decision
Note that all subsequent legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.
Section 25-25 allows a deduction for your borrowing expenses to the extent that you use the funds for the purpose of producing assessable income.
Subsection 25-25(6) provide that the borrowing expenses will only be fully deductible in the year they were incurred if they do not exceed $100. Where the borrowing expenses exceed $100, the deduction is spread over the period of the loan or five years, whichever is the shorter period.
When you use the borrowed funds solely for the purpose of producing assessable income during a financial year, you can deduct the maximum amount worked out under subsection 25-25(4) (subsection 25-25(2)).
However, when the borrowed funds are only used partly for producing assessable income during a financial year, then you can only deduct a portion of the maximum amount worked out under subsection 25-25(4), having regard to the extent that you used the borrowed funds for that purpose(subsection 25-25(3)).
In addition, if you do not use the borrowed funds for producing assessable income at all during the income year then you are not entitled to any deduction for that year.
In your case, it is accepted that your borrowing expenses satisfy the requirements under section 25-25. Accordingly you are entitled to claim a deduction for the income-producing portion of your borrowing expenses, which were incurred to purchase your property, where the deduction is spread over five years.