Hart lost his case because the court found that the arrangement was a scheme to reduce tax. Most of this argument centered around the fact the banks had marketed the arrangement that way.
This case did not change the deductible nature of interest or interest on interest. Both Gleeson & McHugh stated that the question of the deductiblity of interest upon interest does not need to be addressed becasue the issue was already decided on the basis that there was a scheme to gain a tax benefit.
THe judges also said; "If such a taxpayer took out two separate loans, and the terms of the loan for the investment property were different from the terms of the loan for the residental property in that they provided a higher ratio of debt to equity, and for payments of interst only, rather than interst and principal, during a lengthy term, then ordinarily that would give rise to no adverse conclusion under Part IVA. It may mean no more than that, in considering the terms of the borrowing for investment purposes, the taxpayer took into account the deductibility of interest in negoitating the terms of the loan. How could a borrower, acting rationally, fail to take it into account?"
In other words the judges are saying there is nothing wrong in chosing the best tax outcome it is only logical that you should. The ATO can't make you arrange your affairs for the best outcome for them.
The ATO in IT2330 even states they will not attack your right to simply choose a more tax effective option. Don't let them bluff you. Harts was the ATO's clay pigeon. You do not have to change the way you do things just so you will pay more tax. If there is a need to borrow money and the nexus to the income producing purpose exists go for it. It was the linking of the loans and the advertising material, not paying interest on interest that sunk Hart.
To be caught under Part IVA there must be a scheme that has a dominant purpose of a tax benefit. You are not talking about a scheme simply a choice.
Julia Hartman
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