Bank fees on investment loans are often overlooked as a potential tax deduction by property investors. Under the Australian Taxation Office (ATO) guidelines, these fees can be claimed as a tax deduction if they are incurred in the process of earning assessable rental income. Specifically, bank fees fall under what the ATO terms 'borrowing expenses', which are costs incurred in taking out a loan for an income-producing property.
Borrowing expenses, which include bank fees, can be deducted over a period of five years or the term of the loan, whichever is shorter, if they exceed $100. If the total borrowing expenses are $100 or less, you can claim the full amount in the year they are incurred. It's important to note that these fees must be directly related to the loan used to purchase or maintain an investment property and not for personal use.
Common misconceptions among investors include believing that all bank fees are immediately deductible or that fees related to personal accounts can be claimed. Only fees that relate directly to the investment loan, such as loan establishment fees, mortgage insurance, and account-keeping fees, are deductible.
Take a practical example of a property investor with a $600,000 loan for a rental property in Melbourne. If the bank charges a $500 establishment fee and $200 in annual account-keeping fees, these can be claimed over the term of the loan. Assuming the loan term is 30 years, the establishment fee can be deducted at $100 per year (since it exceeds $100 and is spread over five years), while the account-keeping fees are deductible at $200 per year.
In our experience reviewing thousands of properties across Australia, many investors miss out on these deductions simply because they don't keep track of their bank fees. It's crucial to maintain detailed records and ensure that you're only claiming fees directly associated with the investment property. Another common mistake is failing to adjust claims if the loan is refinanced or if the property use changes.
The answer can differ depending on your situation. If you acquired the property before the 2017 budget changes, your eligibility to claim certain deductions might differ. Additionally, if you're using an offset account linked to your investment loan, be cautious as this could affect the interest deductibility. For joint ownership, ensure each owner claims their proportionate share of the fees.
Given the complexities surrounding these deductions, consulting both a Chartered Quantity Surveyor and an accountant is advisable. They can provide tailored advice based on your specific circumstances, ensuring you maximise your deductions and comply with ATO regulations.