Capitalisation of Interest

I was looking at the ATO web-site the other day for the Baby Bonus and noticed that the ATO are "looking" (I can't remember their term) at the issue of "Interest Capitalisation" provided by some banking products.

The idea is that someone with a PPOR buys an IP and presumably puts all the rental income against their own PPOR and lets the interest on the IP capitalise.

The idea that since the interest on the IP is tax deductible and the interest on the PPOR is not, it's best to clear the PPOR as quickly as possible.

Anyone care to comment on this scheme and its legalities?
I thought that there was a case on this just recently- and the ATO lost.

However, I'm sure they will appeal.

I've been very badly bitten by the ATO. In my situation, capitalisation is not a situation I'm comfortable with.

But it may be worthwhile.