Are Refinance Fees Tax Deductible in Australia? A Guide for Property Investors

Some refinance costs are tax deductible when the borrowing is used to produce assessable income. Others must be spread over time or may form part of a property's cost base. Private borrowing costs cannot be claimed.

Start with what the borrowed money was used for, then identify each fee. This guide explains the distinctions and a mixed-purpose example; ask your accountant to confirm your own claim.

Tax treatment follows the use of the borrowed funds, not simply which property secures the loan. Keep evidence showing where the money went.

If you've taken out a loan to purchase, renovate, or maintain an investment property that generates rental income, then the associated interest and borrowing costs, including many refinancing expenses, are typically tax deductible.

For example, let's say you refinance your investment loan to secure a better interest rate or to access equity for a rental property renovation. In this case, not only is the interest tax-deductible, but so are many of the associated fees, like:

So, are refinance fees tax deductible for investment properties? Generally yes, if the borrowed money is used to produce rental income. Borrowing expenses on the new loan, such as application fees, title searches and LMI, are claimed over five years or the loan term if that is shorter. Discharge fees and break costs on the old loan are generally claimed in the year you pay them.

However, it's essential that the funds remain strictly used for income-generating purposes. If any of the money is used for something private, such as a holiday or a personal car, interest on that part of the borrowing is not deductible.

Interest and fees relating to money used to buy or improve your own home are generally private and not deductible.

However, using your home as security does not make every part of a loan private. Money borrowed against it for an income-producing investment can have different tax treatment.

If a refinance includes private and investment purposes, separate and document them. Ask your accountant how to apportion eligible costs.

Now, what if you refinance a loan and the new funds are split between investment and personal use?

For example, imagine you refinance your mortgage, and part of the new loan is used to pay for upgrades to your rental property, while another part is used for a kitchen reno in your family home. In this scenario, you'll need to apportion the loan and related fees accordingly.

Only the interest and eligible refinancing fees relating to the investment portion may be deductible. The private portion of those costs remains non-deductible.

Accurate record-keeping is critical here. Keep clear documentation of how the borrowed funds were used, as the ATO requires evidence to support any deduction claims.

The security property and the use of the money are different. A loan secured against your home can fund an investment; a loan secured against a rental property can fund private spending.

The "nexus" or link for a deduction is the purpose of the funds. According to ATO Tax Ruling TR 95/25, interest is deductible if the borrowed money produces income.

Keep a clear record of each use of released equity, including transfers, invoices and contracts.

If some funds pay for a private holiday, interest on that portion is not deductible. Apportion a mixed-purpose loan rather than treating all the interest as investment-related.

Here's a hypothetical example. John and Mary own a family home and an investment property. They currently have a $500,000 investment loan that was originally used entirely to purchase their rental property, meaning the interest may be deductible, subject to the usual rules.

They decide to refinance and borrow an additional $100,000. They plan to use the extra funds in two ways:

• $50,000 for upgrades to their investment property (new roofing and landscaping).
• $50,000 for a kitchen renovation in their family home.

They refinance their loan to a new total of $600,000.

John and Mary refinance their existing $500,000 investment loan and borrow an additional $100,000.

The new $600,000 loan consists of:

To determine how much of the interest and refinancing fees are deductible, the entire refinanced loan must be classified according to the purpose of each portion.

Investment Portion

This represents:

Because these funds are used to produce rental income, this portion of the interest and eligible refinancing costs is tax-deductible.

Private Portion

This represents:

$50,000 ÷ $600,000 = 8.33% of the total loan.

Because these funds are used for private purposes, this portion is not tax-deductible.

Now, let's assume the following:

Annual Interest on the Total Loan

$600,000 × 5% = $30,000

Apportioning the Interest

Since 91.67% of the loan relates to income-producing purposes:

Investment Interest (Deductible)

Private Interest (Non-Deductible)

$30,000 × ($50,000 ÷ $600,000) = $2,500

Assume they also pay $2,000 of eligible borrowing expenses to establish the refinance. This excludes property purchase costs and any fees with a different tax treatment.

Using the same apportionment:

Investment Portion (91.67%)

$2,000 × ($550,000 ÷ $600,000) = $1,833.33

Private Portion (8.33%)

$2,000 × ($50,000 ÷ $600,000) = $166.67

This portion relates to private borrowing and is not deductible.

It is essential that John and Mary maintain accurate records to support the deductions they claim. This includes keeping:

In this illustration, $27,500 of annual interest relates to investment use and $2,500 to private use. Of the $2,000 eligible borrowing expenses, $1,833.33 relates to investment use and is generally spread over 5 years or the loan term if shorter; it is not all claimed immediately. The $166.67 private portion cannot be claimed. Keep records of the use of each portion.

When you refinance, you'll encounter various fees. For tax purposes, they generally fall into three categories:

Eligible costs of setting up an income-producing loan may be borrowing expenses. Apportion mixed-purpose costs and check each fee's treatment rather than claiming the full refinance bill. Examples include:

Although these costs are deductible, borrowing expenses aren't claimed in full straight away. Instead, the ATO requires that these costs be apportioned over time, based on the following rules:

You must spread the deduction over five years, or over the term of the loan if that is shorter.

Let's say you refinance your investment property, and the associated borrowing expenses total $2,000.

Your new loan has a term of 20 years.

Since 5 years is shorter than the loan term (20 years), the $2,000 must be spread across 5 years.

Annual deduction: $2,000 ÷ 5 = $400 per year

Your first-year deduction must be prorated based on how many days you held the loan during the financial year.

If your loan commenced on 1 January, meaning you held it for 181 days in the financial year (assuming a non-leap year), you'll need to prorate the first year's deduction:

You then claim about $400 in each of the next four financial years and the small remaining balance in the sixth year, unless the loan is repaid early. The ATO counts the five-year period in days, so your accountant's figures may differ by a few dollars.

You can claim the remaining balance of borrowing expenses in the year the loan is paid off.

Let's say you pay off or refinance this loan during the third financial year. In that year you claim everything not yet deducted, rather than the usual $400.

You claim this $1,401.64 in the year the loan is discharged.

You can claim the full amount in the year you incur the costs.

To simplify things, the ATO provides a borrowing expenses calculator to help determine your eligible deductions.

When an income-producing loan is repaid early, eligible borrowing expenses not yet deducted can generally be claimed in the repayment year. A refinance that pays out the old loan may trigger this treatment.

For a mixed-purpose loan, only the eligible income-producing portion can be claimed. Keep this separate from the borrowing expenses of the new loan.

Imagine you spent $2,000 on borrowing costs two years ago. You have been claiming $400 each year. You still have $1,200 left in unclaimed deductions.

If that qualifying loan is repaid through a refinance, the remaining $1,200 can generally be claimed in the repayment year. Your accountant should check the dates and amount already deducted.

Give your accountant the original loan costs, past deductions and payout statement so they can calculate the remaining eligible balance.

Mortgage discharge expenses are the fees charged by your outgoing lender to officially close and release the mortgage tied to your investment property. These are generally one-time costs paid at settlement when you refinance or sell the property.

If the loan being discharged was entirely used for an investment purpose, then these refinance fees are typically tax-deductible in the financial year you incur them.

Here are the most common mortgage discharge expenses you may be able to claim:

This is a standard administrative fee your old lender charges to remove the mortgage from your property's title. It's a necessary step in the refinancing process and, when tied to an investment loan, it's tax-deductible.

If your old loan had a fixed interest rate, there might be a break cost or early exit fee for repaying the loan before the fixed term ends. These fees are often higher with fixed-rate loans, but are also claimable if the discharged loan was for an income-producing purpose.

Discharge expenses are generally claimed as a one-off deduction in the same financial year you pay them.

There's no need to spread these deductions over several years like with other borrowing costs. That said, there are a couple of important rules to be aware of:

Some refinancing or property-related costs can't be claimed as a yearly tax deduction, but that doesn't mean they're financially useless. Instead, they increase your property's cost base, which is important when you eventually sell the property and calculate Capital Gains Tax (CGT).

Simply put, your cost base is what you've spent to acquire and hold the property. A higher cost base means a smaller capital gain, which could reduce the amount of tax you owe when you sell.

Here are common costs that are added to your cost base:

While stamp duty is a significant upfront cost, especially in cities like Sydney and Melbourne, it's not an immediate tax deduction. Instead, it becomes part of the cost base when calculating CGT later on.

Any fees paid to solicitors or conveyancers to assist with the original purchase of the property are not deductible but are added to the cost base.

If you obtain a property valuation for your own reference (not one required by your lender), that cost cannot be claimed as a borrowing expense. However, it may be included in the cost base for CGT purposes.

These are typically ordered before settlement and used as part of your due diligence. They aren't immediately deductible, but like other acquisition costs, they form part of your property's cost base.

Private-use costs cannot be deducted. The following distinctions also matter when a loan has both investment and private purposes.

This is a common misconception. While interest on an investment loan is typically deductible, the principal portion, the amount you borrowed, is not. You're simply repaying what you originally received, which is not considered a tax-deductible expense.

If your loan is used for both investment and personal reasons (a mixed-purpose loan), only the interest associated with the investment portion is deductible. Interest on money used for private purposes, such as buying a car, paying off credit cards or renovating your own home, is not deductible.

Just like interest, fees incurred when taking out or discharging a loan must be apportioned if the loan is not 100% investment-related. The private portion of these fees cannot be claimed.

If the funds were used for your own home or other private spending, the related application fees, discharge costs and LMI are generally private. If your home secures funds used for an investment, assess that portion separately.

Use of the money determines the treatment. Identify the eligible investment portion, the type of expense and when it can be claimed; do not rely on an owner-occupied or investment product label alone.

Keep loan statements, invoices and transfer records showing what each portion funded. Your accountant needs the evidence as well as the lender's loan description.

A common mistake is "double-dipping" on expenses. This often happens with property manager reports.

If your property manager pays an eligible expense from rent, check that it appears only once in your claim. Reconcile the manager's statement with invoices and your own records.

Calculate and document the private and income-producing portions. A refinance does not turn private debt into deductible investment debt.

TR 2000/2 explains the treatment of redraws and mixed-purpose accounts. Repayments to a mixed account generally reduce both portions proportionately; separate splits and their actual uses require their own records.

Private stays and periods when a property is not genuinely available for rent can affect deductions. Check the applicable rules with your accountant.

Keep rental advertisements, booking records and a diary of private use. Apportion expenses where required; do not assume an online listing alone establishes genuine rental availability.

We can compare loan structures and refinance costs. Your accountant should confirm deductibility, apportionment and the timing of claims.

Before claiming, check these distinctions:

Loan purpose: follow the use of the funds, not the property used as security.

Mixed use: apportion eligible interest and fees between income-producing and private borrowing.

Borrowing expenses over or under $100: If your new investment loan incurs borrowing expenses over $100, you must claim them over 5 years or the loan term (whichever is shorter). These include application fees, LMI, lender-required valuations and broker fees. If the total is $100 or less, you can claim it all in the financial year you incur the cost.

Discharge expenses: eligible income-producing costs may be claimed in the year incurred; apportion any private portion.

Capital costs: Certain purchase-related costs (e.g. stamp duty, legal fees) aren't deductible now but can be added to your property's cost base to reduce Capital Gains Tax (CGT) when you sell.

Records: keep evidence of loan use, fees and prior deductions.

Compare the rate, fees, remaining term and features before refinancing. We can help with the loan comparison; your accountant should assess the tax consequences.

Our team at Hunter Galloway is here to help you. We have a full team of brokers and support staff to help with your refinance. If you want to get started, please give us a call on 1300 088 065 or book a free assessment online to see how we can help.

This is general information, not personal tax advice. Ask a qualified tax adviser or accountant to assess your circumstances and check the current ATO rules.