Just wondering what the thoughts are out there in the financial planning/ Accounting/ tax planning community are about Hart’s case, the ATO appeal and surrounding issues for tax deductability?
thanks in advance for any responses,
Nathan[
].Hi Nathan,
Could you enlighten us about this case, as I feel there would be some of us at this site (myself included) who have no idea about Hart’s case. It would be much appreciated.
Cheers
Sooshie [
]<font color=purple><i>There are no problems, only solutions!</i></font id=purple>
I have read about this case in API Mag this month. Interesting situation from a newbie point of view.
Roughly the Harts had $X of deductions for compound interest, rejected by the ATO and now there is an appeal with final ruling due in June as to whether “people” with “split loans” will have to pay back the claimed deductions received to date as well as fines etc.
It is all centred around loan packages aimed at minimising tax, I beleive the ATO claim it is tax evasion.
I guess that is why so many people are asking questions hear about structuring and line of credit loans etc. We all want to make the right choices and stay under the tax mans radar.
I hope I wasnt too vague there, I have a horrible lurgy[xx(]
Cheers
Leigh K“If you will take on your self-doubt and laziness, you will find the door to your freedom.”
-Robert KiyosakiHi Leigh,
You did a good job of the explaination. The Hart’s were using a type of loan that was marketed heavily in the mid to late 90s due to the perceived tax benefits. That was until the ATO disallowed interest deductions as you mentioned Leigh.
I believe the Harts had a principal place of residence and an investment property. The type of loan they sourced was a split loan (ie an account for each property). Under the loan setup they were able to direct all payments to their PPOR (the non-tax deductable part of the loan) and let interest capitalise on the investment property portion of the loan giving good tax benefits.
It is the deductability of the capitalised interest that the ATO disallowed. In the most recent installment of this case Hart has won the right to appeal by the Full Federal Court 3 Judges to 0 (thereby allowing the deductability of the interest also). Since this time these types of loans have come back into circulation.
The case has gone to the high court (yet to be heard). I have talked to a financial adviser who is recomending these loans to his clients.
Has anyone had experience with these loans or been recommended them?
Here is the full information from the source. It is a bit dry, but definitely has all the details
http://law.ato.gov.au/atolaw/view.htm?basic=+harts%20v%20+compound&&docid=JUD/50ATR369/00001ATO presently still officially disallows the practice. As Nathan mentioned, the ATO appeal is still to be heard. So really, the battle has been won but not the war. I am waiting for the hearing outcomes.
Nathan, you find latest API article interesting as it debates pluses and minuses of the deal.
I think that the most frustrating thing about this whole situation is that the High court can rule in agreement with the lower court and the ATO can then go back to parliament and have the law changed anyway. So after all the trouble and money if the ATO really wants this one stopped they can just legislate and change the way it works. I realise that we need government and a judicial system to be separate but doesn’t it just make you a little mad that things like this could happen.
The reaon the ATO does not like this scheme. They would potentially lose millions (I mean lots of millions) and no government wants to lose its cahflow. Never underestimate a persons (or people) desire to maintain their cashflow.
Just my thoughts..Enjoy
AD [:0)]“Carpe diem, quam minimum credula postero.”
Lat., “Seize the day, put no trust in tomorrow.”
-Horace, OdesThanks you all for your posts.
It will be interesting to see what eventuates. Will the High Court victory (that is being tipped) give birth to new legislation?
What will happen to those investors who are using the capitalising split loan currently.
We live in interesting times!
Happy investing to one and all! May it be tax effective but not evasive![
]Cheers,
Nathan.
Please, somebody correct me if I am wrong.
I believe in Harts case what occured is that the whole of their interest, from both their PPOR and their investment property, was claimed as tax deductable interest whilst all incoming funds were directed at the mortgage on the PPOR. Therefore, the interest which was claimable grew and grew.
I believe (but very well maybe wrong) that you can still legally (in the eyes of the ATO) split your loan as long as you are only claiming the interest applicable to your investment property.
That’s my understanding anyway. Please correct me if I am wrong.
I believe in Harts case what occured is that the whole of their interest, from both their PPOR and their investment property, was claimed as tax deductable interest whilst all incoming funds were directed at the mortgage on the PPOR. Therefore, the interest which was claimable grew and grew.Hi Kirby,
My understanding of the case is that the interest on the investment portion was claimed as a tax deduction. It differed from normal split loans because interest was alowed to build up or capitalise on the second account (investment) of the loan.
The ATO objected to the capitised interest being claimed as a tax deduction.
The loan setup was effective because it allowed all repayments to be directed into account 1 (PPOR) hence paying it off quickly, while debt increased in account 2 as no repayments were directed to that side of the loan and interest could build upon itself. This, it is claimed, also increased the tax benefits.
Cheers,
Nathan.
You are absolutely right! [
]I got it a bit mixed up yesterday.[xx(]
Hi,
This case was actually the one featured in my second (Feb 02) newsletter! To quote from myself:
Ordinarily there is no problem having a split loan, but the facts in this case are slightly different to the normal in that the investment loan was not repaid in order to claim a higher tax deduction for compounding interest.
Furthermore, pamphlets produced by Austral outlined various tax advantages of their ‘Wealth Optimiser Loan’, including the following references: “a tax efficient loan”, “a tax reduction system which should prove popular in the 1997 financial year”, “gives dramatic tax savings as it often enables you to pay off your home loan within five years”, “increase your negative gearing benefits”, “you obtain increased deductible interest on your investment loan portion” plus specific references made to the capitalisation of interest during the period that all repayments are appropriated to the residential loan.
And I believe probably fair enough too. It is a delicate line between taking advantage of a commercial situation and seeking to avoid paying tax.
There was no issue with the deductibility of the interest on the investment loan (since it was in essence an interest only loan) – just the compounding of the interest since there was no intention to pay it, just let it roll on until the home loan was paid off.
Indeed, there is probably no problem with a compounding I/O loan either, except where a scheme that is advertised as, well, tax effective is involved as well as a private home.
Irrespective of what happens next, the lesson is to be very careful when it comes to entering into a scheme where the dominant purpose seems to be a tax benefit.
Regards,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
This case was actually the one featured in my second (Feb 02) newsletter!
Hi Steve, Is there an archive of these older newsleters anywhere?
Thanks,
Nathan.[
][
]Just a rumour, but I have been told that the unless the ATO lodge another appeal by March 31 you will be able to claim the deduction on this type of split loan. I have already been approached to do the finance. I have also been told it will take the ATO 3 years to change the laws to make it unallowable. Can anyone confirm this rumour?***************
Tracey Imbuldeniya
Authorised Finance Consultant- Mortgage Masters Pty Ltd
Ph: 0401 674464 Email:[email protected]
****************June 20 is D-Day for anyone contemplating investing in a split loan.The ATO will again attempt to outlaw this type of practice on split loans.–Latest API mag explains it all.
Keep looking in newspapers around that time
and go to ATO website.
].
]Just a rumour, but I have been told that the unless the ATO lodge another appeal by March 31 you will be able to claim the deduction on this type of split loan. I have already been approached to do the finance. I have also been told it will take the ATO 3 years to change the laws to make it unallowable. Can anyone confirm this rumour?
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