Hi all,
Interesting thread developing here on the topic of split loans... Loved your post Mike. Very logical and when put into perspective it's hard to see why you WOULDN'T adopt this strategy, regardless of the ATO's current appeal to the high court!
The reality is that the benefits and structure of split loans are currently available, and legal, to people who wish to do so and structure their affairs accordingly. ie LOC to fund IP expenses/interest,etc as discussed in previous posts.
Quoting Austral's Managing Director, Vicki Edema the so called pioneer of the split loan facility:
"It seems outrageous to us that a structure can be available to wealthier people who devote more time and money to structuring their affairs, whilst the same advantages are not available to the average person who chooses to go the Wealth Optimiser route. The ATO seeks to deny Wealth Optimiser clients advantages enjoyed by others, apparently because of the sheer simplicity of the structure we have created."
I agree with her in the sense that their "wealth Optimiser home loan" is a very simple yet flexible/fully feautured and competitive product, which allows the average Joe blow investor to adopt this strategy quite easily.... ie more accessible. The wealth Optimiser product is competitive even without the advantages the ATO seeks to deny people.
Split loans were very popular until the ATO became alarmed about the potential blowout in lost revenue due to the tax claims for compound interest, which as we know, accelerate the tax benefits of negative gearing. It issued an adverse public ruling in 1997 and funded a test case which resulted in last month's 3-0 judgement in favour of taxpayers.
As we all know, at the centre of the court action was a Canberra couple, Richard and Trudy Hart, who five years ago refinanced their old house,rented it out, and bought a new house. They borrowed $300,000 via an Austral Mortgage wealth optimiser loan, split into home and investment accounts. They directed all payments to the home loan, making no interest or principal payments on the investment account.
As a result, the mortgage on the new house, with its non-tax-deductible interest, was paid off in six years instead of 25, while tax-deductible interest on the investment loan, relating to the old house, compounded, increasing the tax deduction by $170,000 in the Harts' case.
Justice Graham Hill said the split loan was "certainly explicable only by the taxation consequences" and clearly created greater tax deductions for interest than would otherwise have been available. Nonetheless, he said the Harts' main purpose was to finance the two properties, not to avoid tax. Justices Richard Conti and Peter Hely agreed, citing John Howard, who 19 years ago, when he was federal treasurer, introduced PartIVA of the general tax avoidance section of the Tax Act, and said the provision was confined to "schemes of the blatant or paper variety".
Deloitte tax partner and former ATO deputy chief tax counsel Michael Bersten says the ATO, like anyone else, has about a one in 10 chance of getting the High Court to hear its appeal.
He is also of the view that if the ATO is unsuccessful, Treasury could also seek to have the law changed. But Bersten says that could be "challenging" in an environment where the Federal Government appears "resistant" to introducing more specific tax-avoidance rules.
"The actual arrangement involves a very basic deduction provision, so you'd probably need a specific anti-avoidance provision," Bersten says.
Still, he advises caution: "Investors also still have to pay the interest some day, so you need to be aware of the risks if the tax benefit is denied,"
I think its important for people to remember that this type of loan structure will be more beneficial to some than others, though if your a property investor, or investor in general(some lenders will allow the same structure for share investments,etc)and you have a loan on your PPOR, then overall, as Mike clearly pointed out, the advantages clearly outweigh the disadvantages.
I think THE MOST IMPORTANT THING IS THAT YOU you need to weigh up/determine whether this product is beneficial to you or works for you, WITHOUT THE TAX EFFECTIVENESS!!! If you go into a resonable product without the tax benefit then there is no downside. Also, the High Court application may not be heard for many many months, but in the meantime a borrower that has this structure is in no worse a position. They're setting themselves up in a tax-effective structure and not paying any more for it. The interest rate is exactly the same as any standard lines of credit. And if your already thinking about refinancing, purchasing,etc then there is nothing to lose I reckon ie no break fees,etc
There has been many years of uncertainty brought on by the ATO's position. You would have hoped that a unanimous full bench decision would have put the matter to rest, particularly as the position the ATO seeks to put is not consistent with its attitude and rulings when there are two separate loans from different lenders, heh?!
Anyway, have alot more thoughts about this topic.A friend of mine has a split loan facility with Austral already, and I myself am considering switching to this structure soon. But can't get into any more details right now. (it's late, and my wife is calling me to bed again!
Mike, will find out about your question re whether once PPOR loan paid off if the repayments on the capitalised IP loan being just paid down to original loan amount or whether you can just pay IO on the new amount post capitalisation?? I suspect it depends on whether you go with like an Austral product or just restructure your loans with existing lender,etc for the same effect?
anyway, keep the posts on this topic coming along!!!
regards,
Darren
