Could you please advise which version of the updates (back-copy) deals with the above topic?
Deductibility of Break Costs To Pay A Loan Out Early
If you are breaking the loan to sell the property but it has not been income producing the penalty interest is included in the cost base under the third element but note this element can only reduce a capital gain not increase a capital loss. Reference section 110-25(4) 1997 ITAA which was modified in 2006 so the comments made in TR 93/7 no longer apply.
Breaking the loan to sell a rental property is a different matter. It is a capital cost but section 25-30 of the 1997 ITAA allows mortgage discharge costs such as penalty interest to be claimed as an outright deduction in the year incurred providing the money borrowed has been used to produce income.
If you are simply breaking the loan to refinance a rental property at a lower interest rate or to pay it off the break costs are fully deductible because you will be reducing future interest payments so the penalty interest costs are simply a cost of reducing future interest expenses which means it will be fully deductible in the year incurred.