tax bonanza on home loans

From: See Change


This is the headline from a story in todays AFR. I couldn't post link to the AFR story but the following link covers the same Story.

http://www.lexisnexis.com.au/aus/products/samples/ITB.pdf

The ATO made a decision to disallow a scheme where people paid of their PPOR using the income from an IP , while allowing their IP debt to build up. They were then claiming all of the debt on the IP as a tax deduction.

The Federal court has overturned the ATO's decision to disallow this. The ATO has indicated it may appeal , but if this decision stands it may have a significant impact on the property market.

I wasn't involved in IP's at the time the scheme was in use, but remember hearing about it and feeling it sounded "dodgy". If however it becomes an accepted part of the investment landscape it can only add further fuel to the market, in particular to that segment ( the majority ) who only see IP's in terms of negative gearing.

Not only should it boost the straight IP market, but many will see it a reason to spend ( ie borrow ) more for their PPOR's as they will then be able to get a "bigger tax deduction ".

It may also end up setting the market up for a bigger fall further down the line as people will tend to borrow more.

I would be interested in knowing how widespread these schemes were at the time from those who were active investors at the time.

see change


it's better to be guided by your dreams than your fears
 
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Sim

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Reply: 1
From: Sim' Hampel


On 8/3/02 11:42:00 AM, See Change wrote:
>
>Not only should it boost the
>straight IP market, but many
>will see it a reason to spend
>( ie borrow ) more for their
>PPOR's as they will then be
>able to get a "bigger tax
>deduction ".

I'm not sure how you figure this logic SC. A change in conditions in this matter does not change the tax status of a PPOR.

I can accept the argument "because they get a bigger tax deduction, they will then be able to spend more on their PPORs", not the other way around.

Doesn't the ruling specifically relate to the deductibility of capitalised interest ? So the benefits are directly related to IPs, with PPOR benefits incidental only.

 
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Reply: 1.1
From: Waverly Bay


Hi SC

the link u attached seems to refer to the federal court decision last year to strike down the split loan arrangements.. (on the basis of the anti avoidance provisions). It is therefore appropriately titled . . "Split loan arrangement investment structures struck down by the Federal Court"

Was there another link/article that was meant to be attached?

cheers

Waverly
 
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Reply: 1.1.1
From: See Change


I might be going crazy sim and if I am please point this out to me.

My under standing of negative gearing is that you have to spend 100 % in order to get 50 ( 48.5 ) % back. Sure you pay less tax, but the end result is that you have less money in you pocket. To me this is not a logical state. The only reason it can make sense is if the value of the asset you hold by negative gearing increases significantly in value. Personally I think if you can get positively geared property that also increases in value , you get the best of both worlds.

But regardless of the pro's and cons of negative gearing , for the majority of investors in Australia , negative gearing is seen as some sort of religious icon...

What this decision means ( if it is upheld on appeal ) is that people will be able to shift non tax deductible debt on their PPOR into tax deductable debt on their IP. The article states

" The great challange for the average mum and dad investors is to pay off the non-deductable home mortgage. This changes the strategy. If you've paid off part of a home loan , you don't have to pay it all off before you can buy an investment property"

Obviously many people on this forum disagree with this idea anyway , but it is a widespread " belief"

The tax deductable debt is obviously more affordable. Also capital growth on you PPOR is not subject to CGT so for many people it is more attractive to have more money in their PPOR ( you also have a nicer place to live in ...) . To my sense of logic this will make it easier for people to afford larger debts on their PPOR. If only a few people use this facility it won't have much affect on the market , if however it becomes intrenched in the thinking of financial advisors and becomes used in a widespread fashion it may cause a fundamental shift in the values of property (IMHO).

WB , I wanted to post a link to the article in todays AFR but I couldn't , and I also couldn't cut and paste it. The article didn't state when the court decision was made, but if it did occur last year it's interesting that they chose to use it as a prominent article now ( was actually on the billboard for the AFR today . My reading of the article and the link I posted was that they referred to the same decision, but I didn't check when the decision was made.

I used the topic , because that was the headline used in the AFR.

see change

it's better to be guided by your dreams than your fears
 
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Reply: 1.1.1.1
From: Dale Gatherum-Goss


Hi

I saw this article as well. It talks abt the Harts case which was decided a little while ago now and which has been discussed on this forum before.

The case opens the door for split loans to be used with the blessing of the court system, but, the possible ATO appeal should temper any excitement just yet . . .

My advice is to wait and see what falls out of this in the next few months.

Have fun

Dale
 
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Reply: 2
From: Duncan M


SC,

Thanks for the info..

Whilst the decision MIGHT change I've decided to start capitalising interest and reducing our PPOR debt using our rental income. At least in 11 months time if Harts has once for all been settled by the courts in our favour I'll have 11 months of interest capitalised and a substantially lower non-deductible debt.


Regards,

Duncan

 
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Reply: 2.1
From: Rolf Latham


Hi Dunc

With the only problem being that if there is a change in the wind you may one day be asked for a little bit of interest on disallowed claims.

The way I understand it is that the court decision is about the interpretation of existing legislation, therefore any action you take under the current legislation wont provide any protection in terms of retrospectivity. The best example of that is "Budplan".

But then what do I know about this sort of stuff, Im neither a tax person nor a legal person.

Ta

Rolf
 
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Reply: 2.1.1
From: Peter Henery


Anyone who still has a mortgage on their PPOR may like to follow this one closely. It's pleasing to see some common sense being applied to the use of "part IVA".
 
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W

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Reply: 3
From: H T


Rolf
I believe that even in the unlikely case that the decision was reversed, you would not have to pay back the deduction you received on the other interest...

sp
 
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W

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From: H T


Rolf
I believe that even in the unlikely case that the decision was reversed, you would not have to pay back the deduction you recieved on the other interest...

HT
 
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Reply: 4.1
From: Waverly Bay


SC - the link u provided above was in relation to the federal court decision late last year to strike down the split loan structure on the basis of the anti avoidance provisions.

The taxpayer appealed that decision to the full federal court.... and recently the decision was handed down in favour of the taxpayer. The AFR article from last saturday was in relation to this decision.

Another article dealing with this full federal court decision is as follows:

http://finance.news.com.au/common/story_page/0,4057,4835831%255E462,00.html

The next port of call is likely to be an appeal by the Commissioner of Taxation to the High Court.

Cheers
Waverly
 
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Reply: 4.1.1
From: Dale Gatherum-Goss


Hi

For what it is worth . . . the whispers from inside the tax office is that they will definitely appeal this decision.

We'll know soon enough.

Dale
 
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Reply: 4.1.1.1
From: See Change


wb

oops

seems brain wasn't engaged fully

see change

it's better to be guided by your dreams than your fears
 
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