What Are Borrowing Expenses?
When purchasing a rental property, investors often incur a range of costs associated with taking out a loan. These borrowing expenses are separate from the loan principal and interest payments, and many of them are tax deductible — but the way they are claimed differs from most other rental property deductions. Understanding the rules around borrowing expenses can help property investors legally reduce their taxable income while staying compliant with Australian tax law.
At Trinity Accounting Practice, we help property investors across Sydney and Australia correctly identify, calculate, and claim their borrowing expense deductions.
Borrowing expenses are the costs directly related to taking out a loan for a rental property. They do not include the loan principal repayments or the interest on the loan (interest is claimed separately as a standalone deduction). Common borrowing expenses include loan establishment fees, title search fees charged by the lender, mortgage broker fees, stamp duty on the mortgage (not on the property itself), lender's mortgage insurance (LMI), mortgage registration fees, and costs for preparing and filing loan documents.
How Borrowing Expenses Are Claimed
Borrowing expenses are not claimed in full in the year they are incurred. Instead, the ATO requires them to be deducted over a period of five years or the life of the loan, whichever is shorter, provided the total borrowing expenses exceed $100.
If the total borrowing expenses are $100 or less, they can be claimed in full in the income year they are incurred.
For expenses above $100, the deduction is spread evenly across the five-year (or shorter) period. For example, if you incur borrowing expenses of $3,000 on a 25-year loan, you would claim $600 per year for five years. If the loan term were only four years, you would claim $750 per year over four years instead.
In the first and last years, the deduction is apportioned based on the number of days in that income year for which the loan was in place. For instance, if you took out the loan on 1 March and the financial year ends on 30 June, you would claim only 122 days out of 365 for that first year.
Early Loan Repayment
If you repay the loan in full before the five-year period expires, you can claim the remaining unamortised borrowing expenses in full in the income year the loan is discharged. This often occurs when a property is sold or when the investor refinances with a different lender. If you refinance the loan, the remaining unclaimed expenses from the original loan become immediately deductible, and any borrowing expenses associated with the new loan start a fresh five-year amortisation period.
Our team at Trinity's real estate accounting division regularly assists investors who refinance to ensure both the old and new borrowing expenses are claimed correctly in the year of transition.
What Cannot Be Claimed as a Borrowing Expense
Not all costs associated with purchasing a rental property qualify as borrowing expenses. The following are specifically excluded from a borrowing expense claim:
Loan repayments — both principal and interest components are not borrowing expenses. Interest is claimed separately as a deduction, and principal repayments are never deductible.
Conveyancing and legal fees — solicitor or conveyancer costs for the property purchase are not borrowing expenses. These form part of the cost base of the property for capital gains tax purposes.
Stamp duty on the property purchase — only stamp duty on the mortgage itself is a borrowing expense. Stamp duty on the property transfer is added to the CGT cost base.
Loan redraw fees — fees charged by the lender when you redraw funds from a loan facility are generally not deductible as borrowing expenses.
Break costs on fixed-rate loans — if you break a fixed-rate loan early, the break cost may be deductible, but it is claimed as a separate deduction in the year incurred, not as a borrowing expense amortised over five years. The deductibility depends on whether the funds were used for the rental property.
Borrowing Expenses and Loan Purpose
A critical requirement for claiming borrowing expenses is that the loan must be used to produce assessable rental income. If the loan is used partly for private purposes (such as purchasing a property that is partly your home and partly rented out), the borrowing expenses must be apportioned to reflect only the rental portion.
Similarly, if you redraw funds from your rental property loan for personal use, the interest and borrowing expenses on the redrawn amount are no longer deductible. This is a common trap for investors who use offset accounts or redraw facilities without properly tracking the purpose of each withdrawal.
Maintaining a clear separation between rental and personal borrowings is essential. Our bookkeeping team can help you set up systems to track loan usage and ensure your deductions are correctly apportioned.
Lender's Mortgage Insurance (LMI)
Lender's mortgage insurance is one of the larger borrowing expenses investors encounter. LMI is typically required when the loan-to-value ratio (LVR) exceeds 80%, meaning you are borrowing more than 80% of the property's value. LMI premiums can run into thousands of dollars, and they are fully deductible as a borrowing expense — but they must be amortised over five years like other borrowing expenses above $100.
If you are considering whether to pay LMI or contribute a larger deposit, our business advisory team can model the tax impact of each scenario. Our mortgage brokerage division, Nexus Wealth Partners, can also help you compare loan structures that minimise LMI costs while maintaining tax efficiency.
Record-Keeping Requirements
You must retain records of all borrowing expenses for at least five years after you lodge the tax return that includes the final claim. Given that borrowing expenses are amortised over five years, and CGT records must be kept for the entire period of ownership plus five years after disposal, the practical advice is to keep all borrowing expense documentation for the life of the investment plus five years.
Key documents to retain include the loan contract, settlement statements showing fees and charges, LMI premium notices, mortgage broker invoices, and any correspondence from the lender detailing establishment fees or other charges. Using cloud accounting software such as Xero to store digital copies of these documents ensures they remain accessible over the long term.
Trinity Accounting Practice
Accounting Firm in Beverly Hills, Sydney
Phone: 02 9543 6804
Address: 159 Stoney Creek Road, Beverly Hills NSW 2209
Website: www.trinitygroup.com.au
Weekend and after-hours appointments available
Our Virtual CFO division, VCFO Australia, provides strategic financial management, budgeting, forecasting, and compliance support for growing businesses and not-for-profits.
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Disclaimer: Information provided on this website is intended as a general overview only and does not replace professional advice tailored to your personal circumstances.
