Interest Deductions and Part IVA

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Dan42
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July 20, 2011 - 4:21 am
The ATO has released this interesting draft Taxation Determination, relating to what it calls 'interest payment arrangements'.
TD2011/D8

It looks at an arrangement where their is a Line of Credit available, and all interest repayments on the investment property loans are paid from the line of credit. Meanwhile, all rental income is being paid into the PPOR (non-deductible) loan, or an offset account linked to the PPOR loan.
Part IVA applies where the dominant purpose is to obtain a tax benefit. While the taxpayer in this case may cl;aim that their dominant purpose was to pay off their loan sooner, this will not exclude it from possible sanction under the Part IVA anti-avoidance provisions.
Terryw
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July 20, 2011 - 7:40 am
hi Dan
Thanks for that.
There are a few groups out there promoting such a 'scheme' and I guess it is getting too popular now.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Dan42
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July 21, 2011 - 2:06 am
Terryw wrote:
hi Dan
Thanks for that.
There are a few groups out there promoting such a 'scheme' and I guess it is getting too popular now.
I think you're right, once the promoters get either too brazen or too large in number, then the ATO looks to put a halt to the schemes.
Ashley C
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July 26, 2011 - 4:00 am
This style of arrangement seems to be modeled on the split loan facilities that were the subject of Hart's case back in 2004. In this context, it's not surprising that the ATO have taken this view.
The focus of the draft ruling is really the use of a line of credit to effectively capitalise interest. It seems that if you take this out of the equation then the ATO may not have an issue with an interest only investment loan along side a P&I home loan where the investment loan is secured by the principal residence. However, would like to have this explicitly in writing.

DAMProperty
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July 30, 2011 - 12:59 am
Thanks for sharing the information Dan. Very interesting.
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Derek
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August 1, 2011 - 10:02 am
Seems too many people were onto this and the ATO has reacted to a growing trend. In some ways it is a bit like drug testing athletes – the drug testers are always playing catch up.
Ashley – I read this ruling slightly differently to you and that is the issue being the parking of rental income in an offset account rather than in an 'operational' line of credit. Be interesting to see how things evolve from here on end.