Borrowing expenses

Example: calculating borrowing expenses over 5 years

On 3 July 2018, Peter took out a 25-year loan of $300,000 to purchase a rental property. Peter's deductible borrowing expenses were:

• $800 stamp duty on the mortgage
• $500 loan establishment fees
• $300 valuation fee required by the bank for the loan.

Peter also paid $12,000 in stamp duty on the transfer of the property title. He cannot claim a tax deduction for this expense but it will form part of the cost base of the property for CGT purposes when he sells the property.

As Peter's borrowing expenses are $1,600, which is more than $100, he must claim them over 5 years from the date he took out his loan for the property. He works out his borrowing expense deduction as follows:

• For the first year, 2018–19, Peter performs the following steps
  • Step 1: work out the number of days from 3 July 2018 to 30 June 2019 (363)
  • Step 2: work out the number of days in the 5-year period from 3 July 2018 to 2 July 2023 (1,826)
  • Step 3: divide the number of days in Step 1 by the number of days in Step 2 (363 ÷ 1,826 = 0.19879)
  • Step 4: multiply Step 3 result by the total borrowing expenses of $1,600 (0.19879 × $1,600 = $318). He claims $318 as a deduction on his 2019 tax return.
• For the 2019–20 to 2022–23 income years, Peter performs the following steps
  • Step 1: works out the remaining borrowing expenses, by reducing the original borrowing expenses of $1,600 by deductions already claimed in previous years
  • Step 2: works out the number of days in the income year (remembering any leap years)
  • Step 3: works out the number of days remaining in the 5 years (this includes the number of days in the income year for which he is preparing the tax return)
  • Step 4: divides Step 2 result by Step 3 result
  • Step 5: multiplies Step 4 result by Step 1 result (equals the amount he claims as a deduction on his tax return).
• By the end of the 2022–23 income year, Peter has claimed deductions totalling $1,598 on his respective tax returns.
• In the final year, 2023–24, Peter performs the following steps
  • Step 1: works out the remaining borrowing expenses, which equals $2 ($1,600 minus $1,598)
  • Step 2: works out the number of days between 1 July 2023 and 2 July 2023 (equals 2)
  • Step 3: works out the number of days remaining in the 5 years (1,826 − 1,824 = 2)
  • Step 4: divides Step 2 result by Step 3 result (equals one)
  • Step 5: multiplies Step 4 result by Step 1 result (equals $2). Thus, Peter claims a deduction of $2 on his 2023–24 tax return.

Example: work out borrowing expenses for the maximum 5-year period

The Hitchman's (as joint tenants each with 50% interest) secure a 20-year loan of $209,000 to buy:

• a rental property for $170,000
• a car for private use for $39,000.

They pay for establishment fees, valuation fees and stamp duty on the mortgage. Their borrowing expenses on the loan total $1,670.

As their borrowing expenses are more than $100, they must apportion their deduction over 5 years because it's less than the period of the loan (20 years).

As they use part of the loan ($39,000) for a private purpose, they can't claim a deduction for borrowing expenses on this portion of the loan.

They secure the loan on 17 July 2023. They work out the borrowing expense deduction for the first year as follows:

Borrowing expenses × (number of relevant days in income year ÷ number of days in the 5-year period) × (amount of rental property loan ÷ total amount borrowed) = deduction for the year.

As joint tenants, they need to report their share (50%) in each of their tax returns.

They work out their borrowing expenses deduction as shown in the table below.