Pay off your home loan to 5.2 Years!

[redwing]

Just read this on a Real Wealth link today

How does this strategy work?

The aim of this strategy was to shift your debt so that virtually every interest expense you incur was tax deductible. The result was often years shaved off your owner-occupier mortgage loan term and conversion of all of your interest repayments to become tax deductible, with no increase in payments.

To make this work, you needed:

a home loan;
an investment loan; and
a line of credit loan to fund interest on the investment loan.

No cash was required from the borrower to pay interest on the investment loan, because the interest was paid from the line of credit, which had no monthly repayment obligation.

Therefore, that interest was capitalised on the line of credit and the borrower deposited all rental income received – say, $350 per week, or $18,000 annually – into their own mortgage. These payments were made on top of regular mortgage payments to reduce the outstanding balance of the owner-occupier (non tax-deductible) home loan more quickly.

and

WARNING – The ATO now sees this strategy as tax avoidance.

A recent ruling by the Australian Tax Office (ATO) has changed the rules and put an end to landlords employing this strategy. If you are using the following method to maximise your tax deductions, contact your accountant immediately to find out whether the new Taxation Determination TD 2012/1 (Determination) impacts you.

In March 2012, the Commissioner of Taxation issued Taxation Determination TD 2012/1 (Determination) in relation structures such as these, described as “investment loan interest payment” arrangements.

The tax office rejected claims by borrowers that these arrangements are entered into for the purpose of paying their home loan off sooner and determined that these structures breach anti-tax avoidance rules, “designed to prevent taxpayers [from] obtaining tax benefits from blatant, artificial or contrived tax avoidance schemes”.

They caution taxpayers against using this type of mortgage structure and warn that if they do, many of the interest deductions will be cancelled and financial penalties will apply.

Source

I had thought this was still a viable strategy?

 

[Terry_w]

Just read this on a Real Wealth link today



and



Source

I had thought this was still a viable strategy?

It was really just a scheme to save tax.

However, it may still work in some cases. Depends on your reasoning. If you are doing it to pay off your home loan sooner then the ATO may deny deductibility.

 

[redwing]

It was really just a scheme to save tax.

However, it may still work in some cases. Depends on your reasoning. If you are doing it to pay off your home loan sooner then the ATO may deny deductibility.

Come back to intent then Terry?

 

[Terry_w]

Come back to intent then Terry?

Probably comes down to showing why you were setting the loan up like this. On the face of it the interest would be deductible, but the ATO could apply Part IVA and deny deductibility. I am not sure how this works but the onus of proof would probably be with the tax payer to prove, or convince the ATO initially, that they were not doing it as a scheme with a dominate purpose of tax savings.