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Treatment of borrowing costs for incomplete IP purchase

Discussion in 'Accounting, Tax & Legal' started by DexterJambles, 3rd Apr, 2008.

  1. DexterJambles

    DexterJambles Member

    Joined:
    30th Mar, 2008
    Posts:
    19
    Location:
    Melbourne, VIC
    Hi,

    Just wondering how you would treat costs incurred with buying an investment property (e.g. building/pest inspections, bank fees, etc.) where you do not end up going through with the contract of sale.

    So despite not making the investment it has still cost you. I'm assuming it's not tax deductable?

    Can you add these costs to the cost base of a future IP or is it simply lost money?

    DJ
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
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    Location:
    Sydney, Australia
    Only if you were running a business of buying and selling IPs (in a business-like manner) would these costs be deductible I think.

    Happy to be told otherwise from our resident tax experts, but I fear they may well be sunk costs.
     
  3. DaveA

    DaveA Well-Known Member

    Joined:
    19th Feb, 2007
    Posts:
    617
    Location:
    Sydney, NSW
    bank fees are deductible over the life of the loan or 5 years (which ever is less)...

    stamp duty, pest and building (i think) and transport costs for visiting the property for a pre settlement inspection (ie when your contracted to buy) all add to the cost base of the property when calculating cgt...

    as always please check with your accountant...
     
  4. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
    717
    Location:
    Melbourne, VIC
    Sounds mostly like "Black Hole Expenditure" based on your brief facts.

    Where capital costs of borrowing (loan establishment costs) do not result in the borrowed money being used for an assessable income producing source you cannot deduct (over time) under s.25-25 ITAA97.

    Non-capital costs of borrowing (e.g. interest) you might have a case for deduction if you were committed at the time incurred (e.g. Steele's case).

    Likewise, if capital borrowing and incidental costs do not result in an acquisition of a CGT asset, they most likely cannot form part of a cost base.

    Are you by any chance suing the other party to the failed venture ? You might have acquired a legal right upon which you can add these to the cost base if you get awarded damages (CGT event C2).

    I presume you are not carrying on a business.

    Cheers,

    Rob
     
  5. DexterJambles

    DexterJambles Member

    Joined:
    30th Mar, 2008
    Posts:
    19
    Location:
    Melbourne, VIC
    Thanks guys.

    Sounds like "black hole expenditure" sums it up nicely.

    I was buying a property as an individual but after a building inspection & other checks decided not to go through so have been left with the cost of arranging these checks and the preliminary finance costs such as application fee, bank chargesm etc.

    I guess that's the price of experience!

    Thanks for your replies. :)