Yes, you can claim borrowing costs over five years for investment properties in Australia, provided they exceed $100. The Australian Taxation Office (ATO) allows these costs to be deducted over the lesser of five years or the loan term. Borrowing costs include loan establishment fees, title search fees, mortgage broker fees, and stamp duty on the mortgage. However, interest on the loan and ongoing loan maintenance fees are not considered borrowing costs and are separately deductible under different provisions.
The most common misconception is that all costs associated with obtaining a loan can be claimed immediately. In reality, only specific upfront costs are deductible over this period. The ATO requires these costs to be apportioned if the loan is for both investment and private purposes. This means you must calculate the percentage of the loan used for investment to determine the deductible portion of the borrowing costs.
Take a practical example: Consider a $700,000 investment property in Melbourne with borrowing costs totaling $3,500. These could include a loan establishment fee of $1,000, mortgage broker fees of $1,500, and title search fees of $1,000. Since the total exceeds $100, you can claim $700 per year over five years as a tax deduction. At a 37% marginal tax rate, this deduction reduces your tax bill by $259 each year.
In our experience reviewing thousands of properties across Australia, many investors overlook borrowing costs entirely, either because they are unaware these costs are deductible or they misunderstand the timing of deductions. Another frequent issue is failing to apportion costs correctly when loans serve mixed purposes. Investors also often forget to adjust their claims if they refinance within the five-year period, which can alter the remaining deductible amount.
The answer can differ depending on your situation. For loans under $100 in borrowing costs, you can claim the whole amount in the first year. If you refinance, the remaining unclaimed borrowing costs from the original loan become immediately deductible. For properties held within a self-managed super fund (SMSF), different rules may apply, and these should be discussed with a specialist. Moreover, if the property is sold before the loan term ends, the remaining unclaimed borrowing costs can be claimed in the year of sale.
Given the complexity of borrowing cost deductions, engaging a Chartered QS and an accountant ensures you maximise your tax benefits while adhering to ATO guidelines. Your accountant can provide tailored advice based on your financial situation, and a QS can accurately assess and document all relevant costs.