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 draft determination.

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' arrangements.

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 payment' arrangement?

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 loan.

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 sooner.

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 either:

  • 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.

Click 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'

Click here to view the Government's announcement on Part IVA.

This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.