The Commissioner of Taxation yesterday issued Taxation
Determination TD 2012/1 (Determination) in relation to split loans
structures described as 'investment loan interest payment'
arrangements. The Determination had previously been issued as a
The Determination discusses the ATO's views regarding the
potential application of Part IVA of the Income Tax Assessment
Act 1936 (Cth) to 'investment loan interest payment'
Part IVA contains the general anti-avoidance rules designed to
prevent taxpayers obtaining tax benefits from blatant, artificial
or contrived tax avoidance schemes.
What are the key elements of an 'investment loan interest
The arrangement described in the Determination comprises:
a home loan;
an investment loan; and
a line of credit loan that funds interest on the investment
No cash is required from the borrower to pay interest on the
investment loan because the interest is paid from the line of
credit. The line of credit has no monthly repayment obligation.
The result of the arrangement is that interest is capitalised on
the line of credit and the borrower applies the cash saved to
reduce the home loan faster.
What is the tax benefit?
The ATO rejects claims by borrowers that these arrangements are
entered into for the purpose of paying their home loan of
According to the ATO, borrowers would otherwise pay interest on
the investment loan out of their cash flow rather than using the
line of credit and that means they would have fewer deductions if
it were not for the arrangement.
On that basis the ATO considers that the tax benefit may be
the whole amount of the allowable deduction for interest
incurred on the line of credit; or
the difference between the otherwise allowable deduction for
interest on the line of credit and the amount of interest on the
line of credit that would have been an allowable deduction if the
arrangement had not been carried out.
here to view Taxation Determination TD 2012/1.
Announcements to amend Part IVA
The ATO's Determination coincides with an announcement
last week by the outgoing Assistant Treasurer Mark Arbib. The
Assistant Treasurer announced that the general anti-avoidance rules
in Part IVA will be amended to counter tax avoidance schemes
carried out as part of broader commercial transactions.
Mr Arbib stated that:
"The Government amendments will confirm that Part IVA
always intended to apply to commercial arrangements which have been
implemented in a particular way to avoid tax. This also includes
steps within broader commercial arrangements."
These proposed amendments may strengthen the ATO's power
to block tax benefits arising out of ordinary commercial
transactions and lending arrangements, such as the so-called
'investment loan interest payment'
here to view the Government's announcement on Part
This report does not comprise legal advice and neither
Gadens Lawyers nor the authors accept any responsibility for
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Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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