ATO sounds warning on split loan schemes

The Australian Tax Office has warned against schemes that seek to make interest payments on home loans tax deductable.

The draft determination relates to a taxpayer with separate loans for at least two properties – residential and investment – with a line of credit.

The line of credit is then drawn down to pay the interest on the investment loan as it falls due, and where no repayments are required the taxpayer does not make any repayment, which results in the interest on the line of credit being capitalised and compounded.

The ATO says without the line of credit, the taxpayer would have made interest payments with cash.

“A key feature of the investment loan interest payment arrangement is the use of the line of credit to pay the interest on the investment loan. This results in interest on the investment loan, in effect, being capitalised and thus its payment deferred in order to enable the taxpayer(s) to repay an equivalent amount on the home loan.

“Therefore, the real effect and substance of the investment loan interest payment arrangement is to purportedly make the payment of interest on the capital sum paid in reduction of the home loan tax deductible.

The draft determination says it is “open for a reasonable person to conclude … that one or more of the parties that entered into or carried out the scheme did so for the dominant purpose of enabling the taxpayer(s) to obtain a tax benefit in connection with the scheme.”

“If such a conclusion is reached, Part IVA applies to the scheme and the Commissioner would be entitled to determine … that any deduction for the relevant interest incurred on the line of credit shall not be allowable to the taxpayer(s).”

Gavan Ord, business policy adviser CPA Australia, says the intent of the scheme is to get a tax deduction on your home loan – and that’s precisely what the ATO doesn’t want.

While expressing surprise that the issue has reared its head again, Ord says the ATO has “obviously seen something, and it’s quite clear it’s something they don’t accept.” 

“Somehow the issue’s come back up, and people seem to be offering the product and probably making a risk-assessment to put it out there to see whether the ATO will act.

“And they’re finding the ATO is now acting.

“For those that are doing it, and those that are offering, they need to clarify the tax benefits.”

Ord urges individuals to speak to their accountant first before entering into a similar scheme, adding a lot of them come up at the end of the financial year.

Those that sign up for the scheme are expected to have their deduction claim rejected, and be subject to penalties if they are found to have paid insufficient tax.

Likewise, businesses promoting this scheme could be subject to ATO’s promoter penalty regime, which contains very large fines for the company and its directors, Ord says.

Gerald Foley, managing director of National Mortgage Brokers, was also surprised.

“I haven’t heard of anyone writing these loans for years,” Foley says.

“It seemed as though a small number jumped on the structure and fought a good fight to get it ticked off by the tax office.

“As I recall, it wasn’t a success.”