Julia mentioned this in her recent newsletter and I have some clients interested in the matter as well.
The short of it is
1 - Interest on interest is deductible under section 8-1, except
2 - The tax office thinks that all interest on interest claims IS tax avoidance using Part IVA to override section 8-1 unless you can prove otherwise.
Directing rent into the home loan or the home loan offset while meeting the IP repayments from a line of credit was a great result for the person who got the original PBR and the reason "that they wanted to pay their house off sooner" is one that could work for anyone that had a house and an IP.
This ruling, instead of drawing a line in the sand on what is and isn't sanctioned behavior doesn't make things any clearer. It tries to outline a position without being very specific. At the end of the day, you still need to prove that you have a very good reason for capitalizing interest that doesn't involve you getting a tax benefit, even though you might be, and you need a PBR to defend your position. We don't know what reasons they might accept as suitable for capitalizing interest and we don't know if putting rent towards our home loan is ok or not. Julia references some interesting examples in her newsletter.
They do mention in para 3 part (h) that there is an expectation that some of the cash inflows received are expected to be paid towards the loan, which seems to be inferring that paying rent towards your private house loan instead of towards the IP loan repayments is not commercial behavior from their perspective but they aren't saying it outright because that would be rather dangerous for those who negatively gear.
In my opinion, "paying off your house sooner" does not mean you are looking to avoid tax, it actually means you want to "pay off your house sooner" by directing all your cashflow towards your private debt. I think this determination could be successfully challenged in court but unless you want to pay for the challenge, we have to accept that this is how the ATO will act when they see interest on interest claims and rent being paid to private loans.
I'm sure that if someone lodged a PBR saying that they are trying to pay for their kids private school fees so they need to direct rent to their home and capitalise their IP expenses, and that PBR passed and the ATO received 100+ PBR applications on the same basis, another similar TD would be released.