Split Loan Decision

NEWSFLASH:Taxman wins in split-loan case
The future of tax-effective “split” property loans will remain clouded for at least another six months after the tax office this morning was granted the right to mount a High Court challenge to their generous tax deductibility.
Split or linked loans effectively allow borrowers to make their home loan interest tax deductible if they are financing an investment property at the same time.
Until the outcome of the appeal, the tax office will continue to deny the extra tax deductions these loans generate beyond those that would normally accrue on an investment property loan. The loan providers, however, will continue to offer the loans saying they are still a worthwhile property financing option without the full tax benefits.
The loan products such as Austral’s Wealth Optimiser and New Loan’s Equity Smart see one loan divided into two accounts for two separate properties – the borrower’s own home and an investment property. All repayments are then directed to the home loan account on which interest is not tax deductible while letting interest build up on the investment property account – interest which is tax deductible. This allows borrowers to pay off their own home in a much shorter time, often using both the investment rental income and their own wages.
The validity of this financing strategy has been the subject of a six-year legal battle and industry observers were expecting the ATO’s appeal application to be rejected after the Full Bench of the Federal Court ruled the tax deductions permissible last August. The ATO will continue its challenge on the basis of the Part IV A general anti-avoidance provisions of tax law – that the primary objectiove of these loan structures is to avoid tax.