Penalty Interest

[Roberto]

Just wondering about the tax treatment for penalty interest. In this case, the property is being sold and the lender will charge penalty interest for breaking the mortgage.

Is the penalty interest tax deductible just like the normal mortgage interest payments? Or does it simply reduce the net sale price.

Any actual cases or expert views appreciated.

[masteraccountants]

Hi Roberto,

New Zealand is not like Australia where it took (if I remember correctly) fifteen years or more for the Steele Case to decide that interest is on revenue account. It does take Aussies longer to figure out what the rest of us already know (hee hee).

In New Zealand, interest has always been on revenue account. This means it is not capital expenditure and can be claimed against income.

If the property to which you refer is a rental property, the penalty interest is claimable. The use of the word penalty in front of the word interest may be confusing you, as penalties are not claimable. IRD says that they will not allow a taxpayer to claim for breaking the law. I can see their point. Otherwise, where would it stop? Claiming for bribes?

However, you are being charged penalty INTEREST, not a penalty a such. So the penalty interest is deductible. Treat it like your normal mortgage interest in your rental property tax return.