Income tax: property development: if a property developer borrows money to purchase trading stock, under what section of the Income Tax Assessment Act 1936 is the cost of borrowing that money an allowable deduction?

If a property developer incurs borrowing costs on money borrowed to purchase trading stock (e.g. stamp duty, legal expenses, but not interest) those costs are deductible under section 67 as an expenditure incurred in borrowing money used to produce assessable income.

Costs of borrowing money are of a capital nature. Such costs relate to the loan and, 0 loans are generally on capital account, borrowing costs are also generally on capital account. Such costs remain a capital expense even if the money borrowed is used to purchase trading stock.

The costs of borrowing money to purchase trading stock are separate and distinct from the use to which the money borrowed may be put, i.e. to purchase trading stock. Such costs are not expenditure incurred in the purchase of trading stock and are not deductible under subsection 51(1) by virtue of subsection 51(2). Even if there is inconsistency between subsection 51(1) by virtue of subsection 51(2) and section 67, subsection 51(1), being a provision of general application must give way to section 67, it being a specific provision.

Because borrowing costs are a capital expense, they are not deductible under subsection 51(1).