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Hi, Don’t normally post here now because of the Green words but battleships contacted me. The following is an article I wrote when Hart’s case was decided. It is a bit wordy but worth the read.
From Booklet: Rental Properties, Claimable Loans, Real Estate Agents
Hart’s Case Decided for the ATO – Linked Split Loans
NewsFlash Issue: 82
By: Julia Hartman B.Bus CPA – Tax Accountant
Last Updated: 2004, June 15thOn Friday 27th May, 2004 the High Court handed down its decision on Linked Split Loans in favour of the ATO.
I do not find it too surprising that they found that these types of loans were a scheme with the dominant purpose of a tax benefit therefore caught by Part IVA. This case was a clay pigeon for the ATO and yet it still needed to go all the way to the High Court. It was a clay pigeon because the banks marketed these arrangements on the basis of the tax savings. Therefore it was difficult for the taxpayer to argue a different motive.
It is important to remember this case does not change the deductible nature of interest or for that matter interest on interest. Gleeson & McHugh specifically stated that the question of the deductibility of interest upon interest does not need to be addressed because the issue was already decided on the basis that there was a scheme to gain a tax benefit.
The moral of the story is not to get involved with mass marketed tax schemes unless they have an ATO ruling. This is because the ATO has no trouble proving your primary motive was a tax benefit as there is always an abundance of marketing propaganda to prove this.
On the other hand don’t lose sight of the fact that you are not obliged to pay more tax than necessary. In IT 2330 the ATO states:
“Notwithstanding that an arrangement may not be capable of explanation by reference to
ordinary business or family dealing and even though it may be entered into to avoid tax, it will
not attract the operation of section 260 (now Part IVA) if its purpose is to take advantage of a
specific or particular provision in the Income Tax Assessment Act and complies in every respect with the requirements of the specific or particular provision, i.e., the choice principle.”
This approach is supported in Harts case where the judges stated;
“If such a taxpayer took out two separate loans, and the terms of the loan for the investment property were different from the terms of the loan for the residential property in that they provided for a higher ratio of debt to equity, and for payments of interest only, rather than interest and principal, during a lengthy term, then ordinarily that would give rise to no adverse conclusion under [Part IVA]. It may mean no more than that, in considering the terms of the borrowing for investment purposes, the taxpayer took into account the deductibility of the interest in negotiating the terms of the loan. How could a borrower, acting rationally, fail to take it into account?â€
Unfortunately the judges concluded that such a loan was not normally available so it was not reasonable to argue it was a normal arrangement apart from the tax benefit. Ultimately it was the linking of the loans that sunk them. This should not discourage investors seeking similar loans that stand on their own merits rather than being linked to a non deductible loan.
Fine tuning this theory in relation Part IVA we need to recognise that this test has two elements. Firstly there has to be a scheme and secondly it needs to have a dominant purpose of a tax benefit. In Hart’s case it was recognised that a scheme as per 177A(1)(b) can basically include any …. course of conduct. So there is no point in poking around here for a gap other than to say the legislators could not have intended this section to be so wide or it would catch everything.
So now let’s look at the dominant purpose of a tax benefit test. Which must also be present for Part IVA to apply. No this does not mean that if you walk into a newsagency to buy an invoice book your dominant purpose was to gain a tax deduction for the book and as it was a “course of conduct’ that is it no tax deduction because this is a tax scheme. We have to be more realistic than that. Nevertheless the High Court found that Hely J was correct in stating:
“A particular course of action may be both tax driven, and bear the character of a rational commercial decision. The presence of the latter characteristic does not determine in favour of the taxpayer whether, within the meaning of Pt IVA, a person entered into or carried out a ‘scheme’ for the dominant purpose of enabling a taxpayer to obtain a tax benefitâ€.
So finding another reason to justify the arrangement is not enough. It is all about the dominant purpose.
The simpler the arrangement the better, the more artificial it becomes the more it meets the definition of a scheme.
The court having disallowed the capitalised interest because it was part of a tax scheme did not have to rule on whether capitalised interest itself was tax deductible. I feel that the capitalised interest would normally be deductible providing it has not been created as part of a scheme with a dominant purpose to save tax.
Say for example you have a line of credit on your rental property and a separate loan on your home. Your tenant may pay you a couple of months rent in advance which you pay off your home loan as everything is up to date and cash flow looks good at the time. Over the next two months you have quiet a few personal expenses that take up all of your wages. Then the rates and some repairs are due on the rental property. You need to draw the funds to cover the rates and repairs from the line of credit on the rental property and due to lack of funds the interest that month has to be capitalised. Luckily you just manage to make the P&I payment required on your home loan. This scenario is not a scheme. Events just happened that way and it is not for the ATO to tell you how to manage your affairs. Linking the two loans or a systematic approach to the increase in the loan on the rental property may point towards a scheme. Just watch out for spare funds to make extra repayments on your home and don’t prop up the rental property with your spare cash if you can use the equity in your rental property instead.
This principle can also work with a business instead of a rental property.Disclaimer: Please note this information is general in nature and constantly changing so please don’t act on it without consulting your Accountant.
Julia Hartman
[email protected]
http://www.bantacs.com.auBetterbiz,
You may have the right idea as I believe it can be a problem when the ATO and practitioners have the same professional body. But then some ATO staff are CAs so the whole thing needs re alining.Bwendan,
Thanks for the information. I have sent it to the CPAs and asked why.Julia Hartman
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http://www.bantacs.com.auWhat a load of crock Yack,
The reason that vote on merging was taken 5 to 10 yeas ago was because for several year before that the CPAs had had just as stringent membership requirements and training. Yet the CAs some how still thought they were better so voted against the merger. That is all history now and the CPAs are still the major professional body as they where when the vote was taken.
I chose to be a CPA despite the fact I had always worked for CAs so quaified to be a CA because the CPAs were, even back then, the largest accounting body so more resources for members.
It was simply a matter for service not egos. I still qualify to be a CA by simply filling out the form an paying my subscription. Why should I?Julia Hartman
Skidaveski,
Have a look at Beachmere, same shire, better beach, closer to Brisbane, School, shops, reastaurants, club, buses. Yet still small commuity 10 minutes from Caboolture. I know of a large block quiet street yet heart of town and accross the road from waterfront properties only $300,000.Julia Hartman
[email protected]
http://www.bantacs.com.auThanks Jo and Oldtimer,
Yes I had a look around Somersoft last night.
Thanks for the encouragement.
Julia Hartman
[email protected]
http://www.bantacs.com.auSteve,
Thanks for your reply but I don’t quiet understand. This template? How do I remove it from my posts? Please keep it simple my mind has nothing left after dealing with tax law. How do I remove the green words from my posts.Julia
Steve,
The first time I read a post with the green words I assumed the person who wrote the post made the links. I do not want people assuming that with my post as it then appears that I endorse your products. Just as I’m sure you don’t want to be liable for anything I write in forum I don’t want to put my name to anything you are trying to sell.
I am currently experimenting with miss spelling words to avoid this but it makes my posts hard to read and hard to write so I am considering nolonger contributing to your forum.
Is there anyway you can remove the green words from all my previous posts or will I have to go back through and delete them?Julia Hartman
[email protected]Clint,
Its revenue, plant and equipment are no longer subject to capital gains tax.Julia Hartman
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http://www.bantacs.com.auIt is the ongoing cost of running a smsf that I am talking about. If you use a public fund you will be charged an annual administration fee of between 1 and 2% of the amount invested. If you have your own fund your fixed costs will be between $1,500 to $2,000 per year.
If you have $150,000 in super you are going to pay between $1,500 and $3,000 to a public fund so it is starting to get worth running your own.
Though if you are just going to use the SMSF to invest in managed funds you are probably not going to save much in fees at all by having your own.Julia Hartman
[email protected]
http://www.bantacs.com.auBig A
Please excuse the strange spelling on some words but I am trying to avoid the green words so any relevant words I will mixed up the last two or three letters. Sorry but I refuse to have my posts look like I am advertising Steevs work.You borrwo againsts the equiyt in your hoem then lend it to your truts
You have to pay GST on any propetyr you buy from someone who is registered for GST. The good thing is if you byu a commercali propetyr and you are registered for GST you get 1/11th back if the seller is registered and didn’t use the margin scheme.
Julia Hartman
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http://www.bantacs.com.auI particularly do not like the green words because it makes it look like I recommend the product. I think it is very unethical of Steve to edit my posts in such a way.
Julia Hartman
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http://www.bantacs.com.auMichael C
This rollover relief only applies in America. Robert Kiysaki talks and writes about it but it does not apply in Australia, he is from the US. In special cases such as compulsory acquisition rollover is allowed otherwise it is only available to active assets of a business and it specifically excludes assets that have been used to produce rental income section 152-40(4)(e).
Julia Hartman
[email protected]
http://www.bantacs.com.auMichael C
You can roll over other super into your own SMSF. From 1st July, 2005 you will be able to specify which super fund your employer pays into. Careful having your own SMSF as the running costs don’t really make it worth it unless you have over $150,000 to invest.Julia Hartman
[email protected]
http://www.bantacs.com.auPS How about reducing the flood control to 30 seconds. The 60 seconds limit must have been put in place by someone who cannot type. Its caught me twice now.
Michael C
You can roll over other super into your own SMSF. From 1st July, 2005 you will be able to specify which super fund your employer pays into. Careful having your own SMSF as the running costs don’t really make it worth it unless you have over $150,000 to invest.Julia Hartman
[email protected]
http://www.bantacs.com.auTo All,
It is not normally a strategy I recommend because it is so costly to set up but a superfund can enter into a joint venture and the other party borrow money. You have to make sure that any property owned directly by the super fund is not used as security but this is possible within a joint venture. Peter Kane at Maroochydore does the legal documents. He is both a solicitor and accountant. He does not see the general public. He will only see clients with their accountant. Last time I spoke to him he was charging $500 per hour. When I go to see him with a client I don’t charge for my time as I consider it a privilege to listen to what he has to say.
Julia Hartman
[email protected]
http://www.bantacs.com.auWayne,
Your cost base is made up of buying costs such as stamp duty and selling costs such as commission plus holding costs such as rates. Travel costs cannot be included in any of these.
The capital gain is the difference between the selling price and the cost base. You can deduct from this any capital losses on other assets then half it for the 50% CGT discount.
Assuming the property is in joint names and the difference between the selling price and the cost base is $90,000 the taxable amount would be $45,000 if you have no other capital losses. That is $22,500 to each of your parents. Your mother would pay 31.5% on this ie $7,087. Your father would pay 18.5% on the first $14,840 and 31.5% on the rest. His total tax would be $5,158. Your parents’ combined total tax would be $12,245.
If you think this is too much your father could consider making a contribution to super and your mother could salary sacrifice her wage into super. The super contributions would be taxed at 15% in the superfund’s hands but this is still better than their marginal tax rates.Julia Hartman
[email protected]
http://www.banacs.com.auMichael,
I have a booklet on buying a business on my web site http://www.bantacs.com.au under free publications.Julia Hartman
[email protected]
http://www.bantacs.com.auPlease remove the green words from my post as I do not want it to look like I recommend the product it links to.
What is going on with these green words linking to other pages. I object to my posts being altered in this way as it appears I recommend the link! Please remove the links or remove my post.
Julia
