The High Court has ruled that split-purpose property loans or “linked” loans, which effectively enabled borrowers to make financing their own home tax deductible, amount to tax avoidance schemes. The result means lucrative tax deductions claimed on such loan arrnagements will not be permitted. Split loans have been under a cloud in a long-running legal case between the Australian Taxation Office and a Canberra couple, The Harts. In the Hart case, the High Court has agreed with the ATO that the “wealth optimiser” loan provided to the couple by Austral Mortgage was a tax-avoidance scheme. The strategy saw one loan divided into two accounts for two separate properties – the borrower’s own home and an investment property. The idea was to direct all repayments 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. Although the outstanding loan amount increased for the investment property as interest gets capitalised on top of the original amount borrowed, this was to be offset by higher tax deductions. The Harts increased tax deductions by $170,000 using the wealth optimiser loan structure. Austral wrote more than $100 million of the loans before the ATO stepped in and rejected them in 1997. Many lenders were waiting for the outcome and were planning to launch similar products. (from Infochoice)
Cheers
Stu
Herd it today on ABC radio, but in the end I didn’t get to hear (as it went on and on with something to do with water conservation… Grrrr…).
O’h well, hopefully we will find a way so that doing a certain way does not amount to a tax avoidencen scheme… We can only hope though….
Wonder what is going to happen to all these people who have done it!!
Rgds.
Lucifer_auThis I assume also spells the death of optimised loans where you pay reduced interest on your non deductable line of credit vs a higher interest on your deductable.
(see the thread “4.49% line of credit”) from a couple weeks ago..
EZ-Rent. The free tax and cashflow simulator for Australian property investors. Version 2 out now!
http://www.ez-rent.comIt always sounded doubtful to me at the time.
Thanks Stuart, My wife and I have been following that case for a while now as we saw that as an option if it was cleared.
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Bundy made me do it…..
What would the situation be if one only owns an investment property and one elects to let the interest accrue and be added to the loan ?
One collects rent from the investment property which is of course txable income.
The interest on the original loan amount is of course tax deductable and can be offset against one’s income.
The interest incurred on the unpaid monthly interest itself wouldn’t be a tax deduction because it isn’t used to generate income.
Do I at least understand that aspect correctly ?
If that is correct then, bringing one’s owner occupied home into the equation, wouldn’t the same rules apply there i.e. the interest on the original investment loan is tax deductable to interest incurred on the unpaid monthly interest would not be ?
There appear to be two issues in the court case i.e. firstly, interest on the unpaid monthly interest payment isn’t acceptable (which I concede) and, secondly, whether directing one’s money (derived from one’s after tax income) towards one’s home loan rather than towards one’s investment loan.
Is my understanding there correct ?
Peter
Yes, you are correct. However, the second point is moot. You can direct you income wherever you like. However, if you choose not to make repayments on your tax deductible interest then you can’t keep on claiming interest on interest.
Cheers
Stu
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