Borrowing expenses - costs of maintaining non-income producing property used as collateral for a loan

Is the taxpayer entitled to a deduction for borrowing expenses under section 25-25 of the Income Tax Assessment Act 1997 (ITAA 1997) for the costs of maintaining a non-income producing property used as collateral for a loan?

No. The taxpayer is not entitled to a deduction for borrowing expenses under section 25-25 of the ITAA 1997 for the costs of maintaining a non-income producing property used a collateral for a loan as they are not borrowing costs.

The taxpayer purchased a vacant block of land. This vacant block of land was not used for income producing purposes.

The taxpayer subsequently purchased an income producing asset. The vacant block of land was used as collateral to finance the purchase of the income producing asset.

The taxpayer incurred maintenance costs in respect of the vacant land.

Section 25-25 of the ITAA 1997 allows a deduction for expenditure incurred for borrowing money to the extent that the money is used for the purpose of producing assessable income.

'Borrowing' is defined in section 995-1 of the ITAA 1997 as meaning any form of borrowing, whether secured or unsecured, and includes the raising of funds by the issue of a bond, debenture, discounted security or other document evidencing indebtedness.

Borrowing expenses are those which relate to the actual borrowing of monies, eg the costs incurred in taking out a loan for the purchase of a rental property. Typically these would include costs such as application and other fees charged by the lender (e.g., valuation fees, procuration fees, legal expenses, stamp duty and survey fees).

The costs of maintaining a property that is used as collateral for a loan are not expenses relating to the actual borrowing of monies. These costs are too remote and are not part of the cost of borrowing.

The expenses incurred by the taxpayer relate solely to the vacant land and not to the income producing asset. Even though the vacant land is used as collateral for the loan used by the taxpayer to purchase the income producing property, the character of the expense does not change. The costs of maintaining the vacant land are not borrowing costs and therefore are not deductible under section 25-25 of the ITAA 1997.