Loan repayments are not an interest schedule

The client's spreadsheet has a tab called "Loan". Twelve rows, one per month, each the same figure, and a total at the bottom in bold. Beside it, in a cell the client has coloured yellow, the word interest.

You already know it isn't. It is the direct debit. The same amount leaves the account on the same day every month whether the rate moved or not, which is the whole point of a repayment schedule and the exact reason it tells you nothing about how much of each payment was interest.

That yellow cell is a very common way for a rental schedule to be wrong while looking finished. The figure comes from a real document, it adds up, and it is the wrong number.

Repayments are a mix, and only one part is the claim

The ATO's page on rental interest expenses draws the line plainly: the deduction is for the interest charged on the loan, and additional payments made to reduce the principal are not deductible. Fees are a separate question again. The ATO lists loan establishment fees, lender's mortgage insurance and similar costs as borrowing expenses, claimed under their own rules and not as interest.

So a repayment total is three different things added together, and each one is treated differently. Summing the debits and calling the result interest is not a simplification. It is a different number.

Start from the lender, not the bank account

Most lenders show interest as its own line on the loan account: a monthly debit to the loan labelled interest charged, separate from the repayment credited against it. Add those lines for the year and you have the figure. If the lender issues a year-end summary, it should agree to that total, and when it does, that agreement is your reconciliation: two records produced independently arriving at the same place.

Two things to check before trusting either:

The period. A summary that runs on a calendar year, or to the anniversary of the loan, is not a financial-year figure. You need the statements that cover the months either side, and the interest lines inside the year only.

The account. Clients with two properties often have three or four loan accounts, plus an offset and a redraw. The summary for the home loan arrives first, because it is the one they open. Match each loan account number to the property it funds before any figure goes on the schedule.

When the client cannot get the loan statements, say so on the schedule. Ask for them by name, which is the argument of why chasing documents is the bottleneck: "the loan account statements for the Westpac investment loan ending 4471, July to June" gets answered; "your loan details" does not.

The loan that also bought the car

A redraw that paid for a holiday. A top-up when the loan was refinanced, spent partly on the property and partly on a car. A line of credit secured against the rental that has been the household's overdraft for six years.

The ATO page is explicit that interest on the portion of a loan used for private purposes is not deductible, and that a loan account used for both needs records accurate enough to separate the two. It also says that repayments must be apportioned across the rental and private portions for the life of the loan. A client cannot nominate that every repayment went to the private part first. The page points to TR 2000/2 for how that apportionment is worked on a line of credit or redraw.

What that means for the file is that a mixed-purpose loan needs a history, not a statement. When was each draw made, what was it spent on, and what has the balance done since. Without that, the interest figure on the schedule is a guess at a ratio, and the paper should say so.

This is the point to stop and ask rather than decide. If the client cannot say what a redraw paid for, that is a review point, written down, not a judgement made quietly by whoever happened to be preparing the file. The reviewer may know the history from previous years, or may decide it needs a conversation with the client before anything is lodged.

What the schedule should show

Per loan account:

1. The account and the property it funds. Lender, the last four digits, the property address the client uses.
2. Interest charged for the year, from the loan statements, with the statement period and pages referenced.
3. The lender's annual summary figure, if there is one, beside it, and the difference between the two if they disagree.
4. The deductible proportion, and where it came from. One hundred per cent, because the whole loan bought the property, is a claim like any other and should be stated, not implied.
5. Fees, kept apart. Anything on the loan account that is not interest, listed separately so it can be considered on its own.

Then one more line underneath, deliberately: total repayments from the transaction account, not used in the calculation, shown so the difference between "what left the account" and "what was interest" is visible to anyone who wonders why the client's yellow cell does not match.

The variance is the useful line

Do not resolve that by picking the larger number, or the one that came from the more official looking PDF. Put both on the schedule, write down the difference, and say what you think explains it. A variance that is explained on the face of the paper takes a reviewer seconds. One hidden inside a total is found much later, by someone with less time and less patience.

Where BeforeMay fits

None of that replaces the habit that matters: take interest from the lender, not from the repayments, and show the working.