Ruling against split home loans
May 27, 2004
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SPLITTING home loans to claim big tax deductions on investment properties was an illegal tax dodge, the High Court found today.
In a unanimous decision, the High Court upheld an appeal by the Australian Taxation Office against a Canberra couple, Richard and Trudy Hart, who used a split loan to finance an investment property in 1996.
Under the split-loan arrangement, the investor splits a loan into a home loan account and an investment property account.
All available money – including rent from the investment property – is then used to pay off the home loan, where interest is non-deductible, while interest accrues on the investment property account.
Unpaid interest on the investment property is then claimed against tax, allowing investors to claim tens of thousands of dollars in extra tax deductions while paying off their home loan in six or seven years.
The High Court ruling overturned a decision by the Full Court of the Federal Court that the split loan was simply designed to allow the Harts to buy a new home and refinance their old home and rent it out.
"We are unable to share that opinion," Chief Justice Murray Gleeson and Justice Michael McHugh said.
"The 'wealth optimiser structure' depended entirely for its efficacy upon tax benefits generated by arrangements between the respondents and the lender that had no explanation other than their fiscal consequences.
"What 'optimised' the respondents' 'wealth' was the tax benefit earlier described: not the deductibility of interest as such; but the deductibility of additional interest on loan account 2 contrived by the particular form of the borrowing transaction."
The court heard Austral Mortgage advised the Harts using the so-called wealth-optimiser loan would allow them to claim an extra $170,000 in tax deductions over 25 years compared to a conventional loan.
Its brochure claimed the benefits of the split loan included paying off the home loan faster, receiving bigger tax breaks on the investment loan, and making the same monthly repayments as a normal loan.
AAP
May 27, 2004
link
SPLITTING home loans to claim big tax deductions on investment properties was an illegal tax dodge, the High Court found today.
In a unanimous decision, the High Court upheld an appeal by the Australian Taxation Office against a Canberra couple, Richard and Trudy Hart, who used a split loan to finance an investment property in 1996.
Under the split-loan arrangement, the investor splits a loan into a home loan account and an investment property account.
All available money – including rent from the investment property – is then used to pay off the home loan, where interest is non-deductible, while interest accrues on the investment property account.
Unpaid interest on the investment property is then claimed against tax, allowing investors to claim tens of thousands of dollars in extra tax deductions while paying off their home loan in six or seven years.
The High Court ruling overturned a decision by the Full Court of the Federal Court that the split loan was simply designed to allow the Harts to buy a new home and refinance their old home and rent it out.
"We are unable to share that opinion," Chief Justice Murray Gleeson and Justice Michael McHugh said.
"The 'wealth optimiser structure' depended entirely for its efficacy upon tax benefits generated by arrangements between the respondents and the lender that had no explanation other than their fiscal consequences.
"What 'optimised' the respondents' 'wealth' was the tax benefit earlier described: not the deductibility of interest as such; but the deductibility of additional interest on loan account 2 contrived by the particular form of the borrowing transaction."
The court heard Austral Mortgage advised the Harts using the so-called wealth-optimiser loan would allow them to claim an extra $170,000 in tax deductions over 25 years compared to a conventional loan.
Its brochure claimed the benefits of the split loan included paying off the home loan faster, receiving bigger tax breaks on the investment loan, and making the same monthly repayments as a normal loan.
AAP
