Rental Property Expenses - deductibility of loan establishment fees

Can the taxpayer claim a deduction for loan establishment fees for borrowing money to purchase a rental property under section 25-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes, the taxpayer can claim loan establishment fees as a borrowing expense under section 25-25 of the ITAA 1997 as the fees are a cost of borrowing money for the purpose of producing assessable income. The timing of the deduction is subject to further requirements.

The taxpayer purchased a rental property and incurred loan establishment fees exceeding $100 on the funds borrowed to purchase the property. The funds were borrowed for a term of 20 years.

Section 25-25 of the ITAA 1997 provides that a taxpayer can deduct expenditure incurred in borrowing money to the extent that those funds are used for the purpose of producing assessable income. Loan establishment fees together with other borrowing expenses incurred (for example, lenders mortgage insurance, stamp duty on the mortgage contract, broker's commission, underwriter's fees) are borrowing costs under section 25-25 of the ITAA 1997.

Subsection 25-25(6) of the ITAA states that borrowing costs not exceeding $100 dollars are fully deductible in the year in which they are incurred. If the total borrowing costs exceeds $100, the deduction is spread over the period of the loan or 5 years - whichever is the shorter period. Subsection 25-25(4) of the ITAA 1997 sets out the process for calculating the deductible amount for an income year where the borrowing expenses exceed $100 dollars.

The taxpayer is entitled to claim a deduction for the loan establishment fees as a borrowing expense as they are a cost of borrowing money for the purpose of producing assessable income. As the fees are greater than $100 and the period of the loan is greater than 5 years, the amount deductible in the year of income is obtained by dividing the undeducted expenditure by the number of days remaining over 5 years and multiplying the result by the number of days in the loan period that are in the income year.