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How to claim a deduction for borrowing costs

By John Kelly on January 16th, 2013

Smart Tax Bulletin

Do you or have you borrowed money to use in your business? Do you know you can claim a tax deduction for the amounts you pay to establish the loan?

However, the expenses are not deductible outright – you need to apportion them over time.

What are borrowing costs?

Borrowing costs are the costs you pay to establish a loan or a facility, either with a bank or through another lending entity.

Borrowing costs include (but are not limited to):

  • establishment fees;
  • stamp duty charged on the loan;
  • valuation fees charged to you by the lender;
  • legal fees you pay in relation to the loan (but not legal fees relating to the purchase of the asset), including legal fees charged to you by the lender;
  • title fees charged to you by the lender;
  • lenders mortgage insurance; and
  • any other fees you pay to establish your loan or facility.
How do you claim a deduction for borrowing costs?

You claim a deduction for borrowing costs over the shorter of:

  • the term of the loan; and
  • five years.
Example

Alice purchased a building for use in her business. Alice paid the following costs when establishing the loan:

  • $1,000 stamp duty on the mortgage;
  • $600 loan establishment fee;
  • $400 valuation fee; and
  • $50 land title search.

Alice’s loan is for a 20-year period. Accordingly, Alice can claim a deduction for 20% of the borrowing costs per year over five years. She will also need to apportion her deduction if the loan was established part way through the year.

If Alice spent the $2,050 of borrowing costs as set out above on 1 January 2013, her deduction for the 2013 year would be calculated as follows:

$2,050 x   181 days x  20%  = $203.32
  365 days    

Alice’s deduction for the 2014 to 2017 years would be:

$2,050 x   365 days x  20%  = $410
  365 days    

Lastly, Alice’s deduction for the 2018 year would be:

$2,050 x   184 days x  20%  = $206.68
  365 days    

As always, you can find more information on borrowing expenses from the ATO website.

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