Tax Implications of Refinancing an Investment Property in Australia

Refinancing an investment property in Australia can offer numerous benefits, such as reducing mortgage interest payments, accessing additional equity, or securing more favourable loan terms.

However, it is crucial to comprehend the tax ramifications associated with this financial decision. By understanding the tax implications, property owners can make informed choices and potentially optimise their financial outcomes.

In this article, we will delve into the tax considerations that arise when refinancing an investment property in Australia, providing valuable insights for investors looking to navigate this complex terrain.

Which Borrowing Costs are Tax Deductible?

When refinancing an investment property in Australia, several borrowing costs are generally tax deductible. These deductible expenses may include:

Loan application fees: The fees charged by the lender for processing your loan application can be claimed as a tax deduction.
Legal fees: Expenses incurred for legal advice or services related to the refinancing process are typically tax deductible.
Lenders mortgage insurance (LMI): If you are required to obtain LMI (lenders mortgage insurance) when refinancing, the premium paid for this insurance can be claimed as a tax deduction.
Valuation fees: The fees paid for property valuations conducted as part of the refinancing process may be tax deductible.
Stamp duty: When refinancing an investment property, stamp duty paid on mortgage documents or loan agreements can usually be claimed as a tax deduction.
Early repayment fees: If you incur any fees for repaying your existing loan early as part of the refinancing process, these fees are generally tax deductible.
Mortgage broker fees: Fees paid to mortgage brokers for their services in arranging the refinancing can be claimed as a tax deduction.

When Can You Claim Tax Deductions for Refinancing Costs?

To clarify, tax deductions for refinancing costs in Australia can be claimed in the financial year in which they are incurred. This means that if you pay any eligible refinancing costs during a specific financial year, you can include them in your tax return for that year.

However, there is an exception when the total amount of your refinancing costs is less than $100. In such cases, you have the flexibility to choose whether to claim the entire amount in the year it was incurred or spread it out over the life of your loan. This option allows you to decide the most advantageous approach based on your financial circumstances.

It’s important to note that the specific rules and regulations surrounding tax deductions for refinancing costs may vary, and it’s recommended to seek advice from a tax professional or accountant who can provide personalised guidance based on your situation and the current tax laws.

How to Claim Tax Deductions for Refinancing Costs

To claim tax deductions for refinancing costs in Australia, follow these steps:

Keep all receipts and documentation: Make sure to keep records of all relevant documents, including loan application fees, legal fees, valuation fees, stamp duty, LMI, early repayment fees, and mortgage broker fees. These documents serve as evidence for your claim.
Prepare your annual tax return: When it’s time to file your annual tax return, ensure that you have the necessary information and forms to accurately report your refinancing costs.
Complete the relevant sections: Within your tax return, there will be specific sections or schedules where you can report your refinancing expenses. These sections may vary depending on the tax return form you are using.
Provide accurate information: Enter the details of each refinancing cost item, such as the amount paid and the purpose of the expense. Be sure to double-check the accuracy of the information to avoid errors.
Submit your tax return: Once you have completed the relevant sections and verified all the details, submit your tax return as per the guidelines provided by the Australian Taxation Office (ATO).

The Impact of Refinancing on Your Capital Gains Tax Liability

When refinancing an investment property in Australia, it’s important to consider the potential impact on your capital gains tax (CGT) liability. Refinancing can trigger a CGT event because you essentially sell your old loan and replace it with a new loan, resulting in a potential capital gain or loss.

The calculation of your CGT liability is based on the difference between the sale price of your old loan (the amount you paid off) and the purchase price of your new loan (the amount you borrowed). The following scenarios may arise:

Capital Gain: If the sale price of your old loan is higher than the purchase price of your new loan, you will have a capital gain. This means that you may be liable to pay capital gains tax on the difference between these two amounts. The capital gain is included in your assessable income for the relevant financial year.
Capital Loss: Conversely, if the sale price of your old loan is lower than the purchase price of your new loan, you will have a capital loss. Capital losses can be used to offset capital gains from other investments or carried forward to offset future capital gains.

Tips for Australian Expats Living Overseas and Foreign Buyers

If you are an Australian expat living overseas or a foreign buyer, there are a few things you need to keep in mind when it comes to the tax implications of refinancing an investment property in Australia.

Understand the tax laws in both Australia and your home country: The tax implications of refinancing an investment property can vary depending on the country where you are living. It is important to make sure you understand the tax laws in both Australia and your home country so that you can make an informed decision about whether or not to refinance.
Keep all of your documentation and receipts: As mentioned earlier, you will need to keep all of your documentation and receipts to support your claim for tax deductions on refinancing costs. This includes things like loan application fees, legal fees, stamp duty, and mortgage broker fees.
Consider using a tax accountant: If you are not sure how to claim tax deductions for refinancing costs, or if you are concerned about the tax implications of refinancing an investment property, you may want to consider using a tax accountant. A tax accountant can help you understand the tax laws and ensure that you are claiming all of the deductions that you are entitled to.

Consult a Professional Tax Advisor

Being aware of the tax implications of refinancing an investment property in Australia is essential to make informed financial decisions and maximise your benefits. If you have specific circumstances such as being an Australian expat or a foreign investor, additional considerations may apply.

It is crucial to familiarise yourself with the tax laws of both Australia and your home country and ensure compliance. Seeking guidance from a tax accountant or expert can provide you with personalised advice tailored to your situation and help navigate the complexities of tax regulations.

To gain a deeper understanding of the tax implications of refinancing an investment property and receive personalised advice, we recommend speaking with our expert tax advisors. They can provide valuable insights and assist you in making informed decisions regarding your investment property refinancing.

Contact our team today to discuss your specific needs and gain clarity on your tax situation.

Frequently Asked Questions

What if I refinance my investment property and then sell it within a short period of time?

If you sell your investment property within a short period of time after refinancing, you may be subject to capital gains tax on the profits from the sale. The amount of capital gains tax you will owe will depend on the difference between the sale price of the property and the purchase price of the property, as well as the amount of time you owned the property.

What if I refinance my investment property and then make improvements to the property?

If you make improvements to your investment property after refinancing, you may be able to claim tax deductions for the cost of the improvements. The amount of tax deductions you can claim will depend on the type of improvements you make and the cost of the improvements.

I am an Australian expat living overseas. Can I still claim tax deductions for refinancing costs on my investment property in Australia?

Yes, you can still claim tax deductions for refinancing costs on your investment property in Australia, even if you are an Australian expat living overseas. However, you will need to keep all of your documentation and receipts to support your claim.

I am a foreign buyer. Can I still claim tax deductions for refinancing costs on my investment property in Australia?

Yes, you can still claim tax deductions for refinancing costs on your investment property in Australia, even if you are a foreign buyer. However, you will need to meet certain eligibility requirements, such as having a visa that allows you to live and work in Australia.