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Edited version of private ruling
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Ruling
Subject: Rental property expenses
Are you able to deduct the early exit penalty on a loan for an investment property where the mortgage has not been discharged?
No.
This ruling applies for the following period:
Year ended 30 June 2009
The scheme commenced on:
1 July 2007
Relevant facts and circumstances
You purchased a rental property a number of years ago.
The tenant vacated the property and you repaid the balance of the mortgage loan.
The property was then incorporated into your principle residence.
The mortgage was not discharged as it was used as security by the same bank for another facility.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Taxation Ruling 93/7 sets out the Commissioner's view on the deductibility of penalties incurred for the early payment of a loan in full.
The economic cost payment represents a "penalty interest payment" as described in TR 93/7.
TR 93/7 states in effect that:
A penalty interest payment is generally deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) if:
· the loan moneys were borrowed for the purpose of gaining or producing assessable income or for use in a business carried on for that purpose, and
· the payment is made in order to rid the taxpayer of a recurring obligation to pay interest on the loan, where such interest would itself have been deductible if incurred.
In your case, the loan was borrowed for the purpose of gaining or producing assessable income as the loan funds were used to purchase a rental property.
However, while the payment of the economic cost did rid you of a recurring obligation to pay interest, that interest would not have been deductible to you if it had been incurred- as you then used the property as part of your principle residence.
TR 97/6 goes on to say that a payment made to discharge a mortgage would normally be deductible under section 25-30 ITAA 1997 but it would not be a borrowing cost so no deduction would be allowed under 25-25 ITAA 1997.
You have not discharged the mortgage so the payments you made are not deductible under section 25-30.
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