Guide to tax treatment of property expenses

Expense

Category

Tax Treatment

Comments

Source

Interest on loan

cost of money

deductible

s8-1 ITAA97

Capitalised interest on investment

cost of money

deductible

Currently subject to appeal before the High Court.

s8-1 ITAA97

Lease document expenses

lease document expenses

deductible

A deduction is allowed for expenditure incurred for the preparation, registration and stamping of a lease.

s25-20 ITAA97

Stamp duty on loan

Mortgage Insurance

Loan application fee

Other borrowing expenses

borrowing expenses

deductible

The deduction is spread equally over the first 5 years of a loan or the period of the loan, whichever is shorter.

A deduction is allowed for expenditure incurred for borrowing money if the money is used for producing assessable income. E.g. stamp duty on loan, mortgage insurance, legal expenses, valuation fees, survey fees. This is not the same as the "cost" of money (interest) which is deductible under another section of the Act.

s25-25 ITAA94

Expenses of discharging a mortgage

expenses of discharging a mortgage

deductible

Expenditure incurred in discharging a mortgage is deductible to the extent that the borrowed money was used for the purpose of producing assessable income.

s25-30 ITAA97

Stamp duty on property

capital expense

not deductible. Increases cost base and so reduces capital gains tax liability.

For capital gains tax purposes the Act allows incidental costs incurred in acquiring an investment property to be included in the property's cost base when it is sold.

s110-25 ITAA97

General repair

non-capital repair

deductible

The courts look for the presence of three characteristics to determine whether a repair has occurred: (i) the essense of the repair is the restoration of an income producing item to its previous condition: (ii) an item must be in need of restoration before it can be "repaired" for taxation purposes; (ii) and a repair involves replacement or renewal of a part of an item, rather than the entire item.

s25-10 ITAA97, W Thomas & Co Pty Ltd v FCT (1965) 115 ClR 58; (1965) 14 ATD 78, Case J47 (1958) 9 TBRD 244, Case G29 75 ATC 167, Lurcott v Wakely and Wheeler [1911] 1 KB 905

Notional repair

capital expenditure repair

not deductible, but can be depreciated

A taxpayer cannot carry out a non-deductible capital improvement to a property and claim the "notional" amount which it would have cost just to repair the item.

s25-10 ITAA97, FC of T v Western Suburbs Cinemas Ltd (1952) 86 CLR 102

Additions

capital expenditure repair

not deductible, but can be depreciated

When an addition is made to a property, this does not constitute a repair - rather capital expansion.

s25-10 ITAA97

Improvements

capital expenditure repair

not deductible, but can be depreciated

An improvement makes an item functionally better than it was previously (eg. use of modern, more efficient materials).

s25-10 ITAA97, BP Oil Refinery (Bulwer Island) Ltd V FC of T (1992) 33 FCR 594; 92 ATC 4031.

Initial repairs

capital expenditure repair

not deductible, but can be depreciated

Initial repairs occur when the taxpayer makes good defects that existed at the time the property was acquired, regardless of whether the taxpayer was aware of the need of the repair at the time the property was purchased.

s25-10 ITAA97, Law Shipping Co Ltd v IR Commrs (1924) 12 TC 621

Depreciation of investment property

capital works

deductible

The decline in value of buildings constructed for producing residential income and structural improvements to such buildings can be deducted. The annual percentage deduction is 2.5% for residential income-producing buildings where construction commenced after 16th September 1987.

ITAA 97 Div 43

Depreciation of plant in investment property

capital allowances

deductible

The decline in value of depreciable assets that are used for producing assessable income is deductible over the effective life of the asset (choice of diminishing value method or prime cost method*). The Act defines a depreciating asset as one "that has a limited effective life and can reasonable be expected to decline in value over the time it is used" (exceptions include land).

s40-25 ITAA97, s40-30 ITAA97, s40-65 ITAA97

Expense

Category

Tax Treatment

Comments

Source

Own property

private or domestic expense

not deductible

Expenses incurred in connection to a taxpayer's main residence tend not to be incurred in producing assessable income, rather they are of a private or domestic nature, hence they are not deductible, nor can assets be depreciated for tax purposes.

s8-1ITAA97

Depreciation of own property

private or domestic expense

not deductible

Expenses incurred in connection to a taxpayer's main residence tend not to be incurred in producing assessable income, rather they are of a private or domestic nature, hence they are not deductible, nor can assets be depreciated for tax purposes.

s8-1ITAA97