Does anyone really believe that the main reason underpinning a decision to negative gear is something other than tax minimisation? Or to claim a tax deduction for property management expenses? Or to claim a deduction for your contributions to charity?
There's nothing wrong with tax minimisation. Why pay more tax than you are required to?
Tax minimisation is allowed. Tax avoidance is not.
The question here is whether the ATO views the arrangement in question as minimisation or avoidance. At the end of the day, the ATO and government simply make decisions about whether or not they allow certain arrangements. If they say yes, then it's tax minimisation. It they say no, then it's tax avoidance.
While that's a perfectly sound argument, I don't think it gets past TF's question.
If the courts have to decide what is minimisation and what is avoidance, then the courts might well reach the conclusion TF implies.
By my reading (and I could be wrong, I admit), capitalising interest as we are discussing here is entirely contrary to the spirit of the Tax Act.
So, while I well know we all regard tax law as black letter law (i.e. if there be a spirit, it can stuff off and bother someone else), the courts can and do sometimes look to the spirit of the Tax Act, and then can interpret with retrospective intent.
Call me a fool, but this is why I personally stay out of the grey and don't capitalise interest.