With a limited recourse borrowing arrangement (LRBA), the trustee of an SMSF may incur expenses associated with borrowing to invest in a real estate property. This article will demonstrate how to process borrowing costs using Simple Fund 360.
If total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less.
If the total deductible borrowing expenses are $100 or less, they are fully deductible in the income year they are incurred.
Please note: BGL does not provide tax advice. This article only acts as a guide for Simple Fund 360 users. For compliance purpose, refer to: ATO - Borrowing Expense List
Two Control accounts first need to be created: namely Property Borrowing Expense account (Expense type) and Property Borrowing Cost account (Asset type). In this case, it will be created as below.
Expense account: 42200 > Property Borrowing Expense
Asset account: 65550 > Property Borrowing Cost (to be amortised)
Note: It is advised to search under Global View if the same Control accounts have been already created for a different fund to avoid duplication. If a control account has been created and attached to another fund, then users can select Attach to all entities. Refer to Global Chart of Accounts for more details.
1. To create new accounts, navigate to from the Main toolbar and select Chart of Accounts. Select Other from the drop-down list under Add Account.
2. Input Code and Name for two accounts respectively. Users can choose to attach the accounts to all entities or select particular funds from the drop-down list to attach to. Select Save once completed.
3. Under Chart of Accounts, search for the relevant property account (e.g. 77250) using the filter on the top right of the page. Select the arrow to reveal sub accounts and click into the relevant sub account.
4. Select More Details to reveal Linked accounts
5. Select Expense & Asset type respectively from the drop-down list under Add Link Account and the accounts would display at the bottom correspondingly for users to select.
6. Select the two accounts from the drop-down list and click on from the bottom left of the page to complete.
7. To process the transaction, follow the steps below.
|Navigate to Accounting from the Main toolbar|
|Select Transaction List|
Select Bank Statement/Journal under Transaction List according to the transaction type
Depending on the scenario, the treatment differs and this would be further demonstrated in the following examples.
SMSF A incurred a total borrowing expense of $80, preparing and filing mortgage documents to obtain a loan for a rental property investment within the SMSF.
Transaction to be entered:
Dr. Borrowing Expense $80 Cr. Bank $80
SMSF B paid for a loan establishment fee of $180 for a rental property investment within the SMSF on 01 July 2018 and the loan term was 10 years.
Then the cost would be amortised over 5 years, provided the SMSF were not to repay early, with $36 ($180/5) to claim each year over the next 5 years.
Transaction to be entered:
When the fee was paid: Dr. Borrowing Cost (Asset Account) $180 Cr. Bank $180
Amortisation at year end: Dr. Borrowing Expense $36 Cr. Borrowing Cost (Asset Account) $36
Note: the Property Borrowing Cost account would be presented in the financial reports as assets.
SMSF C incurred a legal fee of $880 in acquiring a property within the SMSF. This was not deductible as borrowing expenses, but would form part of the cost base of the asset acquired.
For more details, please check article how to record a property cost base adjustment
For compliance purpose, please also check ATO website https://www.ato.gov.au/General/Property/Residential-rental-properties/Rental-expenses-you-can-t-claim/