I sure would like to know the line that ATO draws when it will apply Part IVA to these sorts of things. It seems ridiculous that Part IVA can override a perfectly legal activity (claiming capitalised interest) and make it illegal. Just make sure the term 'tax benefit' never appears anywhere on any literature, act surprised if ATO auditors mention how much you are benefitting from your capitalised interest structure and it seems that you will get away with it.
Compound Interest - New ATO Ruling
- Thread starter DaleGG
- Start date
The line for the ATO is that if you create a structure for the purpose of obtaining a tax benefit, and there is no other reasonable basis for is, that it tax avoidance.
So why do people pay down their non-deductible debt first? For tax reasons mainly. Is there any other reason? Maybe - if the rate on the non-deductible debt is higher, if there is no redraw facility on the deductible debt, etc. But generally, tax is the sole reason.
I think the whole practice of not paying down non-dedectible debt in order to maximise the tax deduction technically falls under Part IVA. But the ATO does not enforce this consistently. So it is difficult to know when it will be selectively enforced, as in Hart.
- Dave99
If so, 90% of people setting up trusts should be penalised under Part IVA. Some people setting up companies should be penalised under Part IVA too. How about the person three years from retirement who sets up an SMSF and pours their money into that? Kerry Packer once famously said "Do I set up my affairs to avoid tax? Of course I set up my affairs to avoid tax any anyone who doesn't has a hole in their head" and the ATO furious at their failed efforts came up with Part IVA because Kerry Packer complied with the law.
And yet this ruling does not come under the auspiciousness of Part IVA because.... we don't know. It isn't an arrangement? Why? Because there is no literature from the bank? There is nothing in the minutes about ripping off the ATO?
And that is my problem - selective enforcement. The ATO can only use Part IVA when it chooses to, and it will use it when the taxpayer complies with the law but the ATO doesn't want to lose. It is an awful piece of legislation. If the ATO doesn't want compounded interest in certain circumstances it should apply to the legislators to create legislation to that effect and not let it at law, but then use Part IVA to pull the rug out from under the taxpayer if they do it to get a 'tax benefit'.
I agree with you Mry, Part IVA is like frightening children by telling them if you get out of bed the big monster lurking under there will attack you.
At the end of the day you have to argue that the "sole or dominant" purpose is not to obtain a tax benefit. What about all these agricultural products on offer in June to enable people to obtain a huge interest deduction and invest in forestry products. I'm sure they have done heaps of analysis and decided that the returns in 11 years time on their product is the real reason for the investment. yeah right.
Every time we close a "loophole" here in Australia business and people just go offshore. Most of friends now work overseas and are all happy to be returning to Australia when they get old and take advantage of all the infrastructure that our taxes have paid for. I think Reagan made the correct statement, lower taxes and allow business a wide range of deductions and watch the economy grow. I always wonder why the government doesn't abolish FBT on business lunches. Imagine the growth to the restaurant industry if FBT was no longer levied on lunches and dinners with clients. It helps grow business, build relationships and help the food industry. Maybe they figured more lunches = more calories = higher rates of obesity = higher health costs. Who knows.
Anyway my gripe for the evening.
At the end of the day you have to argue that the "sole or dominant" purpose is not to obtain a tax benefit. What about all these agricultural products on offer in June to enable people to obtain a huge interest deduction and invest in forestry products. I'm sure they have done heaps of analysis and decided that the returns in 11 years time on their product is the real reason for the investment. yeah right.
Every time we close a "loophole" here in Australia business and people just go offshore. Most of friends now work overseas and are all happy to be returning to Australia when they get old and take advantage of all the infrastructure that our taxes have paid for. I think Reagan made the correct statement, lower taxes and allow business a wide range of deductions and watch the economy grow. I always wonder why the government doesn't abolish FBT on business lunches. Imagine the growth to the restaurant industry if FBT was no longer levied on lunches and dinners with clients. It helps grow business, build relationships and help the food industry. Maybe they figured more lunches = more calories = higher rates of obesity = higher health costs. Who knows.
Anyway my gripe for the evening.
Mry,
I totally agree with you. Part IVA is too broad and not generally enforced.
But using HDT or company structures also have non-tax benefits like flexibility in ownership etc. These are defensible I think. As coastymike said, it is the dominant/sole purpose which they look at.
I guess in Hart, it was all the same debt. The "subaccounts" were an artificial structure designed just to reduce tax, with no financial benefit. The ATO called them on this. It is such a grey area, I will have to talk to some tax lawyer friends for what they think.
- Dave99
I totally agree with you. Part IVA is too broad and not generally enforced.
But using HDT or company structures also have non-tax benefits like flexibility in ownership etc. These are defensible I think. As coastymike said, it is the dominant/sole purpose which they look at.
I guess in Hart, it was all the same debt. The "subaccounts" were an artificial structure designed just to reduce tax, with no financial benefit. The ATO called them on this. It is such a grey area, I will have to talk to some tax lawyer friends for what they think.
- Dave99
I've been thinking about this some more.
In the example I gave before. If I had no undeductible debt, and just allowed my LOC (all deductible) to pay off my Loan repayments without making any repayments to the LOC and allowing the interest to capitalize, I assume that it would still be all deductible.
There could be a number of reasons why this would happen, for example, sudden unemployment, funds urgently required for other uses etc.
Am I wrong in assuming that this would be legitimate, and if it is, why would a seperate loan for non-deductible purposes (however it may be managed) affect the LOC for the deductible items?
The way things are, with this, is that repayment of the non-deductible sub-account of a LOC has the potential to get you into trouble with Part IVA if the deductible sub-account of the LOC is allowed to get any bigger. That just doesn't make sense.
I could understand why part IVA would get you into trouble if the overall debt (deductible + non-deductible) was not reduced and only transferred to the deductible account, but what about the case where the overall debt level is reduced over time? Surely we shouldn't be penalized for trying to arrange our affairs in the most beneficial way available under the law.
I'm struggling to understand why there would be problems with paying down a debt, and if the debt is structured in such a way that the deductible and non-deductible items are clearly differentiated, and the having debt on non-deductible items is more expensive to me than the deductible items (even at the same interest rate), why I wouldn't be allowed to pay down the most expensive debt first?
It's the most sensible way to pay off the debt.
Someone, please enlighten me. I'm really struggling with this.
In the example I gave before. If I had no undeductible debt, and just allowed my LOC (all deductible) to pay off my Loan repayments without making any repayments to the LOC and allowing the interest to capitalize, I assume that it would still be all deductible.
There could be a number of reasons why this would happen, for example, sudden unemployment, funds urgently required for other uses etc.
Am I wrong in assuming that this would be legitimate, and if it is, why would a seperate loan for non-deductible purposes (however it may be managed) affect the LOC for the deductible items?
The way things are, with this, is that repayment of the non-deductible sub-account of a LOC has the potential to get you into trouble with Part IVA if the deductible sub-account of the LOC is allowed to get any bigger. That just doesn't make sense.
I could understand why part IVA would get you into trouble if the overall debt (deductible + non-deductible) was not reduced and only transferred to the deductible account, but what about the case where the overall debt level is reduced over time? Surely we shouldn't be penalized for trying to arrange our affairs in the most beneficial way available under the law.
I'm struggling to understand why there would be problems with paying down a debt, and if the debt is structured in such a way that the deductible and non-deductible items are clearly differentiated, and the having debt on non-deductible items is more expensive to me than the deductible items (even at the same interest rate), why I wouldn't be allowed to pay down the most expensive debt first?
It's the most sensible way to pay off the debt.
Someone, please enlighten me. I'm really struggling with this.
Puppeteer,
I see nothing wrong with it. I'm far from an expert, however if the ATO demanded that you pay the LOC equally with personal debt - such as your personal house, then the ATO is essentially telling you how to spend your income, which itself is already subject to income tax laws. As long as you are using income and not borrowings to pay off personal debt then I think that you should be covered. My business reason is that I wan't my investments to be self sufficient and provided the growth outstrips the interest then they are.
As an aside - The ATO ruling has been law for a number of years (since around 2002) the ATO has finally done their own study and confirmed that they agree that the law applies in this specific instance. i.e. they won't argue with you about it. It doesn't mean that before today this arrangement was illegal.
Having separate loans such as a LOC is completely different from the SCHEME where both Investment & Personal debt were rolled into one loan, but the bank paid off, on your behalf, the personal debt first.
I see nothing wrong with it. I'm far from an expert, however if the ATO demanded that you pay the LOC equally with personal debt - such as your personal house, then the ATO is essentially telling you how to spend your income, which itself is already subject to income tax laws. As long as you are using income and not borrowings to pay off personal debt then I think that you should be covered. My business reason is that I wan't my investments to be self sufficient and provided the growth outstrips the interest then they are.
As an aside - The ATO ruling has been law for a number of years (since around 2002) the ATO has finally done their own study and confirmed that they agree that the law applies in this specific instance. i.e. they won't argue with you about it. It doesn't mean that before today this arrangement was illegal.
Having separate loans such as a LOC is completely different from the SCHEME where both Investment & Personal debt were rolled into one loan, but the bank paid off, on your behalf, the personal debt first.
ID 2006/298 withdrawn today
How dare they use the excuse that it is to prevent uncertainty. How can withdrawing the ruling increase certainty!! The fact is the ruling was right and they now don't know what to do about it so they are just going to hide.
Printable
version
ATO Interpretative Decision
ATO ID 2006/298 (Withdrawn)
Income Tax
Deductibility of compound interest on a line of credit facility
This ATO ID is withdrawn because the facts and reasons for decision are considered to be incomplete and, therefore, potentially misleading. The Tax Office is considering what guidance on the particular issue dealt with in the withdrawn ATO ID is necessary in order to provide certainty for taxpayers.
FOI status: may be released
Status of this decision: Decision Withdrawn 1 December 2006
[email protected]
How dare they use the excuse that it is to prevent uncertainty. How can withdrawing the ruling increase certainty!! The fact is the ruling was right and they now don't know what to do about it so they are just going to hide.
Printable
version
ATO Interpretative Decision
ATO ID 2006/298 (Withdrawn)
Income Tax
Deductibility of compound interest on a line of credit facility
This ATO ID is withdrawn because the facts and reasons for decision are considered to be incomplete and, therefore, potentially misleading. The Tax Office is considering what guidance on the particular issue dealt with in the withdrawn ATO ID is necessary in order to provide certainty for taxpayers.
FOI status: may be released
Status of this decision: Decision Withdrawn 1 December 2006
[email protected]
Oh, now that is disgusting. Perhaps they should do these checks BEFORE posting it online.
By the way, Julia had a great article in the recent API on these compounding interest issues.
Anyway thanks to the ATO for giving us a clear concise decision on when interest can be compounded and how Part IVA interacts......not.
By the way, Julia had a great article in the recent API on these compounding interest issues.
Anyway thanks to the ATO for giving us a clear concise decision on when interest can be compounded and how Part IVA interacts......not.
With me being the synic I can't help but think that they have withdrawn it in the hope to discourage those people that won't act until there is an interprative decision by the ATO. I agree with Julia, the ruling was correct ... The good news is that the Law is still the Law and does not require the ATO to say so for something to be legal.
Hiya
Im not a legal practitioner.
How does this work ???????? Foe example, I have clients that have acted in good faith and in RELIANCE on information sought from and provided by the ATO in this regard.
Many have just put in place a structure that utilise the "legitimate" ATO structure and many have expended a lot of dollars time and sweat.
Soooooooooo, for the legal peoples, whats the go here in terms of financial restitution ??
ta
rolf
Im not a legal practitioner.
How does this work ???????? Foe example, I have clients that have acted in good faith and in RELIANCE on information sought from and provided by the ATO in this regard.
Many have just put in place a structure that utilise the "legitimate" ATO structure and many have expended a lot of dollars time and sweat.
Soooooooooo, for the legal peoples, whats the go here in terms of financial restitution ??
ta
rolf
Hi Rolf
I would think that your clinets should have no great concerns whatsoever.
However, I would suggest that they each print off a copy of the ruling that they considered as part of their due diligence at the time they made decisions and place it in their "just in case" file.
As stated below, the ruling is not the law, it merely attempted to provide some clarification and certainty. The law has not changed at all.
Dale
I would think that your clinets should have no great concerns whatsoever.
However, I would suggest that they each print off a copy of the ruling that they considered as part of their due diligence at the time they made decisions and place it in their "just in case" file.
As stated below, the ruling is not the law, it merely attempted to provide some clarification and certainty. The law has not changed at all.
Dale
DING
Thanks Dale
I keep thinking that the ATO is the Supreme Court and that perhaps the ATO has God's direct number.
Thanks for reminding me they have to abide by the laws of physics too
ta
rolf
Thanks Dale
I keep thinking that the ATO is the Supreme Court and that perhaps the ATO has God's direct number.
Thanks for reminding me they have to abide by the laws of physics too
ta
rolf
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