Borrowing expenses can be deducted once you incur for borrowing money to the extent that you use the money for the producing assessable income. In most cases, the deduction is spread over the period of the loan. Such expenses are sometimes classified as capital in nature and therefore aren’t deductible under sec8-1.
- Stamp duty charged by your state/ territory government on the transfer purchase of the property title.
- Legal expenses including solicitors’ fees for the purchase of the property are capital expenses
- Stamp duty you incur when you acquire a leasehold interest in property such as an Australian capital territory 99 year crown lease (you may be able to claim this as a lease document expense)
- Insurance premiums where under the policy your loan will be paid out in the event that you die, become disabled or unemployed (this is a private expense)
- Borrowing expenses on any portion of the loan you use for private purposes ( for example money you use to invest in a super fund)
How to calculate borrowing cost deduction
Borrowing cost can be deducted depending on expense and it is discussed as below
- If the expenditure is $100 or less, it is totally written off in the same year the expenditure is incurred.
- If the expenditure is more than $100 it is written off over the period of the loan or the period of five years whichever is lesser.
Step 1 – The daily rate of deduction is = $1,500 ÷ (3 × 365) = $1.37.
Taxation Australia Chartered Accountants Program
Page 1-54 Core content – Unit 1
- Step 2 – The deductible amount for each year is calculated by the number of days in each fiscal year that the loan was in place. As 40% of the money is for private use, the cost must be apportioned. This apportionment is annual, as the use of the money may change from year to year.
Assuming Sandy has included the borrowing cost expenditure in the accounting profit of her business for the current income year, an adjustment adding back the expenditure and subtracting the deductible amount is required when she prepares her reconciliation from accounting profit to taxable income. In subsequent years, an adjustment subtracting the deductible amount for the particular year is required. Note: The impacts of leap years are ignored for the purposes of this calculation. In practice, they would need to be taken into account.