This Determination, released on Wed 7.3.2012, states that Pt IVA of the ITAA 1936 can apply to deny a deduction for some, or all, of the interest expense incurred in respect of an “investment loan interest payment arrangement” of the type described in the Determination. The Determination was previously released as Draft TD 2011/D8, and is essentially unchanged from the Draft.
The kinds of investment loan interest payment arrangements that the TD is concerned with have features such as:
- The taxpayer owns at least 2 properties: one property is the taxpayer’s residence and the other is used to derive rent.
- The taxpayer has an outstanding loan, which was used to acquire the residence, an outstanding loan which was used to acquire the investment property and a line of credit or similar borrowing facility with an approved limit.
- The respective interest rates on the home loan and investment loan are typically at or about the same rate. The interest rate on the line of credit is typically (but not always) higher by a small margin (eg 0.15%).
- The investment loan is typically an interest-only loan for a specified period with principal and interest repayments required thereafter, or the interest only period may be extendable.
- The line of credit typically has no minimum monthly repayment obligations provided the balance remains below the approved limit.
- The home loan, investment loan and the line of credit are each secured against the taxpayer’s residence and/or investment property.
The ATO says a key feature of the arrangement is the use of the line of credit to pay the interest on the investment loan. The ATO view is that the real effect and substance of the arrangement is to purportedly make the payment of interest on the capital sum paid in reduction of the home loan tax deductible. The ATO considers it is open for a reasonable person to conclude, having regard to the matters in para 177D(b), 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 to obtain a tax benefit in connection with the scheme.
Notified in the Commonwealth Gazette No GN 9, 7 March 2012 [p 608]
[LTN 45, 7/3]