Split Loans - Not deductible according to the High Court
In recent times, some financing companies were endorsing split loans as a means for reducing income tax. A split loan facility lets people combine a home loan and an investment loan under one umbrella facility. These arrangements allow people to direct loan repayments to their home loan while allowing interest to capitalise on their investment loan.
This increases the interest on the investment loan, while allowing the interest payable on the home loan to be reduced.
The intended effect of these arrangements is that a borrower could claim a greater tax deduction for interest on the investment component of the loan than would be the case with the conventional loans where two separate loans, one for private purposes and the other for income producing purposes, had been taken out.
In 1998, the Tax Office issued Taxation Ruling TR 98/22: Income tax: the taxation consequences for taxpayers entering into certain linked or split loan facilities.
This ruling states that the extra interest is not deductible under section 8-1 of the Income Tax Assessment Act 1997 and that Part IVA of the Income Tax Assessment Act 1936 (the anti-avoidance provisions) applies to split loan arrangements.
In Hart’s case in May 2004, the High Court held that the extra interest on the investment loan was not deductible because the general anti-avoidance provisions of Part IVA apply to split loan arrangements.
Please note that this decision does not affect all investment loans … it only applies to interest deductions under a split or linked loan facility.
Under the general anti-avoidance provisions the Commissioner may amend income tax returns for up to six years. The Australian Taxation Office have advised that if taxpayers voluntary disclosure their interest in such schemes that penalties will be remitted to 5% of the tax shortfall. If voluntary disclosure is not made and the ATO detects the over claiming of interest a significantly higher penalty may be imposed.
If you have any loans that are similar to a split loan arrangement you should contact your ARW Advisor as soon as possible to discuss what options you may have.
