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Ruling

Subject: Stamp duty and lender's mortgage insurance

Question 1

Are you entitled to a deduction for a portion of the stamp duty incurred in acquiring a property located in a specific state where the property was rented for a number of months prior to it becoming your home?

Answer

Yes.

Question 2

Are you entitled to a deduction for a portion of the lender's mortgage insurance where your property was rented for a number of months prior to it becoming your home?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You and your spouse purchased a house.

You rented the house for a number of months prior to moving into it.

You have incurred stamp duty and mortgage lender's insurance.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-20

Income Tax Assessment Act 1997 Section 25-25

Reasons for decision

Summary

You are entitled to a deduction for a portion of the stamp duty on your lease and the lender's mortgage insurance as your property was rented for a certain number months. Apportionment of the stamp duty must be reasonable and take into account both the actual and future use of the property.

Detailed reasoning

Stamp duty

Subsection 25-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a deduction is allowable for the costs of preparing, registering or stamping a lease of a property where the property is used solely for the purpose of producing assessable income.

Subsection 25-20(2) of the ITAA 1997 states that:

If you have used, or will use, the leased property only partly for that purpose, you can deduct the expenditure to the extent that you have used, or will use, the lease property for that purpose.

A crown lease on property in the specific state satisfies a general law requirement of a lease in that leases in the state are granted for a definite period. Therefore, section 25-20 of the ITAA 1997 applies to allow, or partly allow, costs incurred in the preparation, registering and stamping of a lease on a property in the state that has been, or will be, used by the taxpayer for the purpose of producing assessable income.

In your case, you have rented your property out for a number of months prior to moving into it. Therefore, as the leased property was only partly used for the purpose of producing assessable income, you will need to apportion any deduction claimed for the stamp duty incurred in relation to the lease, to reflect that use.

For the purposes of determining deductibility of lease costs, both actual and future use of the property need to be considered. During the months following when the expense was incurred, actual use varied between income producing and private purposes - and further into future years, private use is set to continue - meaning a deduction for lease costs can only be claimed in part. Apportionment of the costs to determine that amount which is deductible needs to be reasonable.

In calculating your deduction, you will need to determine the period of time you and your spouse would reasonably anticipate holding the property, the usage of the property for the remainder of this time and your ownership share of the property. It would be reasonable to calculate your deduction using the following formula:

stamp duty * months used for income producing purposes / length of time property will be held (in months) * your ownership share

Lender's mortgage insurance

Section 25-25 of the ITAA 1997 allows a deduction for borrowing expenses to the extent that the borrowed funds are used or are to be used during that year to earn assessable income.

Borrowing expenses are those expenses directly incurred in taking out a loan for the property. They can include loan establishment fees, title search fees and costs for preparing and filing mortgage documents. Borrowing expenses also include other costs that the lender requires you to incur as a condition of them lending you the money for the property, such as the costs of obtaining a valuation or lender's mortgage insurance.

Borrowing expenses greater than $100 are deductible over the period of the loan or five years starting on the date on which the money was borrowed, whichever s the shorter.

If the property was income producing for only part of the year, the deduction allowable will be apportioned in accordance with the following formula:

borrowing expenses * number of days property was rented

/ number of days in loan period or five year period * your ownership share

In your case you have rented your property for a number of months. Thus, you are entitled to claim a deduction for a portion of borrowing expenses. The amount of the deduction will be dependent upon the length of the loan and your ownership share of the property.