Income Tax Assessment Act 1997

CHAPTER 2 - LIABILITY RULES OF GENERAL APPLICATION  

PART 2-5 - RULES ABOUT DEDUCTIBILITY OF PARTICULAR KINDS OF AMOUNTS  

Division 25 - Some amounts you can deduct  

Operative provisions  

SECTION 25-25   Borrowing expenses  

25-25(1)    
You can deduct expenditure you incur for ^* borrowing money, to the extent that you use the money for the ^* purpose of producing assessable income. In most cases the deduction is spread over the ^* period of the loan.

For the cases where the deduction is not spread, see subsection (6).

Note:

Your deductions under this section may be reduced if any of your commercial debts have been forgiven in the income year: see Subdivision 245-E .

Income year when money used solely for the purpose of producing assessable income

25-25(2)    
You can deduct for an income year the maximum amount worked out under subsection (4) if you use the ^* borrowed money during that income year solely for the ^* purpose of producing assessable income.

Example:

In 1997-98 you borrow $100,000 and incur expenditure of $1,500 for the borrowing. You use the money to buy a house. Throughout 1998-99 you rent the house to a tenant. You can deduct for the expenditure for 1998-99 the maximum amount worked out under subsection (4).

Income year when borrowed money used partly for that purpose

25-25(3)    
If you use the money only partly for that purpose during that income year, you can deduct the proportion of that maximum amount that is appropriate having regard to the extent that you used the *borrowed money for that purpose.

Note:

You cannot deduct anything for that income year if you do not use the money for that purpose at all during that income year.

Maximum deduction for an income year

25-25(4)    

You work out as follows the maximum amount that you can deduct for the expenditure for an income year: Method statement

Example:

To continue the example in subsection (2): suppose the original period of the loan is 4 years starting on 1 September 1997. What is the maximum amount you can deduct for the expenditure for 1997-98?

Applying the method statement:

After Step 1: the remaining expenditure is $1,500 (the amount of the expenditure).

After Step 2: the remaining loan period is 4 years from 1 September 1997 (1,461 days).

After Step 3: the result is $1,500 divided by 1,461 = $1.03.

After Step 4: the result is $1.03 multiplied by 302 days = $310.06.

Suppose you repay the loan early, on 31 December 1998. What is the maximum amount you can deduct for the expenditure for 1998-99?

Applying the method statement:

After Step 1: the remaining expenditure is $1,500 (the amount of the expenditure) reduced by $310.06 (the maximum amount you can deduct for 1997-98) = $1,189.94.

After Step 2: the remaining loan period is the period from 1 July 1998 to 31 December 1998 (183 days).

After Step 3: the result is $1,189.94 divided by 183 days = $6.50.

After Step 4: the result is $6.50 multiplied by 183 days = $1,189.94.

Meaning of period of the loan

25-25(5)    
The period of the loan is the shortest of these periods:

(a) the period of the loan as specified in the original loan contract;

(b) the period starting on the first day on which the money was borrowed and ending on the day the loan is repaid;

(c) 5 years starting on the first day on which the money was borrowed.

When deduction not spread

25-25(6)    
If the total of the following is $100 or less:

(a) each amount of expenditure you incur in an income year for ^* borrowing money you use during that income year solely for the ^* purpose of producing assessable income;

(b) for each amount of expenditure you incur in that income year for borrowing money you use during that income year only partly for that purpose - the proportion of that amount that is appropriate having regard to the extent that you use the money during that income year for that purpose;

you can deduct for the income year:

(c) each amount covered by paragraph (a); and

(d) each proportion covered by paragraph (b).