When refinancing, break fees can be tax deductible

OPINION: Over the holiday break you may have considered refinancing existing business loans to lock in current rates, especially with the prospect of interest rates increases in the near future, writes Murray McClennan in this week's Taxing Times.

One cost of refinancing is a mortgage break fee.

Of course, the usual question we are asked is whether any mortgage break fee incurred is deductible. Please note this discussion is limited to business taxpayers for whom interest on the borrowings in question is fully deductible.

Generally, taxpayers who are cash basis persons are entitled to a current-year deduction for the break fee, regardless of whether the loan is terminated or refinanced. (Cash basis persons are those who meet prescribed thresholds. Before April 1, 2009, only individuals could be cash basis persons).

Taxpayers who are not cash basis persons may be required to spread the break fee over the remaining loan term if the interest rate reduction is merely a variation of their existing loan.

However, if those taxpayers replace their loan with a new financial arrangement, they may well be eligible for a current year deduction for the break fee. Whether the existing loan is modified or repaid can completely alter whether the fee is deductible.

This is one example where discussions with your banker and proper structuring upfront can result in a tax deduction for the break fee.

In the case of a non-cash basis person, the taxpayer should work with their bank to put a suitable arrangement in place to ensure that they do more than just vary an existing loan. For example, making changes to the fundamental terms of the borrowing to ensure the old loan terminates and a new one starts may well ensure deductibility of the break fee in the income year that the cost is incurred.

Please note, the above comments are of a general nature only and are not a substitute for tailored professional advice.

» Queenstown-based Murray McClennan is a tax director at WHK Cook Adam Ward Wilson.

- © Fairfax NZ News

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