Danny, a self-employed electrician, purchased a house in Melbourne as an investment for $560,000 on 1 October 2020. He rented out the house from that date to the existing tenant for $500 per week. Danny took out a bank loan of $400,000 on 1 October 2020 to purchase the house, and the loan terms was for 25 years and a variable rate of interest. Interest paid on the loan for the tax year ended 30 June 2021 was $35,000. The legal fees, loan charges, and stamp duty paid in relation to the loan were $6,800. Danny has asked for your advice as to whether he can claim a tax deduction for the borrowing costs of $6,800. Which of the following is most correct in respect to Dannys ability to claim a deduction for the borrowing costs? Question 4 options:

1) The borrowing costs are capital, but they are deductible over 5 years.

2) The borrowing costs are capital, but they are deductible over 25 years.

3) Borrowing costs are capital and, therefore, never deductible.

4) The borrowing costs are immediately deductible.