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TD 2012/1 ATO Taxation Determination: Deductibility of Investment Property Interest; Alarm as taxman takes interest
Topic Started: 25 Apr 2012, 08:20 AM (8,179 Views)
CapedCrusader
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Alarm as taxman takes interest

A NEW tax ruling sounds a warning to some of Australia's 1.5 million property investors and may cost them thousands of dollars in tax breaks, experts say.

The Australian Taxation Office has flagged it will crack down on property investors claiming deductions for interest expenses on certain types of loan arrangements.

Property owners using some or all of the rental income from an investment property to pay off their own home loan while adding the interest from the investment loan to the principal and claiming it as a deduction would come under scrutiny, accountants BDO said.

In a determination last month, the ATO said it would reject such arrangements.
''People are trying to divert all the rental income off into their home loan. That's pushing it too far and that's what the Tax Office is getting at,'' said Age columnist and tax expert Max Newnham.

The change would affect one of the ''big ticket'' items, claiming interest paid, which landlords rely on when lodging their tax return, said BDO property tax specialist Eddie Chung. ''Any loan arrangement that incorporates features that would effectively give rise to the capitalisation of interest on an investment loan while the loan repayments are used to pay down the principal of a private loan is now under the spotlight,'' he said.

Read more: http://www.theage.com.au/business/property/alarm-as-taxman-takes-interest-20120424-1xjbv.html#ixzz1szzbp8iK
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stinkbug
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My understanding is that this was tested some years ago, and that it was clearly ruled that interest payments on investment properties couldn't be capitalised for tax purposes. What was interesting is that you can do this with other asset types (e.g. shares) but not property.
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I'm a successful property investor, but what worked for me may not work for you, so do your own thinking and manage your own risks.
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Sydneyite
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It was difficult to quantify how many investors would be affected, Mr Newnham said. ''Of our clients, I'd be surprised if 10 per cent were doing it,'' he said.

Sounds like only a minority of PIs would be pulling this trick?

Regardless, I guess all they are saying is that if you earn income from your investment, and you have borrowings used to acquire said investment, you have to use the investment income to cover the loan interest before you can use it to cover personal expenses. Doesn't sound unreasonable? I think with loans for shares most interest capitilisation approaches involve re-investing the income (dividends) back into the portfolio, hence you can capitalise the interest, as you are effectively buying more shares with the capitalised interest amount - Ie it is new borrowing for investment purposes.
Edited by Sydneyite, 25 Apr 2012, 09:43 AM.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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Alex Barton
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This is the ATO ruling:

Quote:
 
Taxation Determination TD 2012/1

Income tax: can Part IVA of the Income Tax Assessment Act 1936 apply to deny a deduction for some, or all, of the interest expense incurred in respect of an 'investment loan interest payment arrangement' of the type described in this Determination?

Ruling

1. Yes, provided that the interest is otherwise an allowable deduction. In the context of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936)1 a taxpayer's purpose of 'paying their home loan off sooner' or 'owning their own home sooner' does not prevent the application of section 177F to an 'investment loan interest payment arrangement' of the type described in paragraph 3 of this Determination.

Date of effect

2. This Determination applies to years of income commencing both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 to 76 of Taxation Ruling TR 2006/10).
Commissioner of Taxation

7 March 2012

Appendix 1 - Explanation

This Appendix is provided as information to help you understand how the Commissioner's preliminary view has been reached. It does not form part of the proposed binding public ruling.

Explanation

Investment loan interest payment arrangements

3. While investment loan interest payment arrangements may vary in the precise loan and security details, they all have similar financial and purported tax effects. An investment loan interest payment arrangement will exhibit all or a significant number of the features set out as follows:

(a)
The taxpayer(s) own at least two properties: one property is the taxpayer(s)' residence and the other is used to derive rent ('investment property').

(b)
The taxpayer(s) have an outstanding loan which was used to acquire the residence (or refinance an earlier loan used to acquire the residence) ('home loan'), an outstanding loan which was used to acquire the investment property (or refinance an earlier loan used to acquire the investment property) ('investment loan') and a line of credit or similar borrowing facility with an approved limit ('line of credit'). All three loan products are typically (but not always) provided by a single financial institution.

(c)
The respective interest rates on the home loan and investment loan are typically at or about the same rate. The interest rate on the line of credit is typically (but not always) higher by a small margin (for example, 0.15%).

(d)
The investment loan is typically an interest-only loan for a specified period with principal and interest repayments required thereafter, or the interest-only period may be extendable.

(e)
The line of credit typically has no minimum monthly repayment obligations provided the balance remains below the approved limit. Alternatively, it may require minimum monthly repayments equal to the accrued interest.

(f)
The home loan, investment loan and the line of credit are each secured against the taxpayer(s)' residence and/or investment property.

(g)
The line of credit is drawn down to pay the interest on the investment loan as it falls due. Where no repayments are required on the line of credit, the taxpayer(s) will generally not make any repayments, which results in interest on the line of credit being capitalised and compounded. Where monthly interest repayments are required on the line of credit, the taxpayer(s) meet such repayments from their cash flows.

(h)
Typically all or a significant proportion of the taxpayer(s)' available cash inflows (including that which the taxpayer(s) otherwise might reasonably be expected to use to pay the interest on the investment loan) are deposited into their home loan or an 'acceptable loan account offset account',2 which has the effect of reducing the interest otherwise payable on the home loan.

(i)
If the line of credit reaches its approved limit before the home loan has been repaid, the taxpayer(s) may apply to increase the limit on the line of credit in conjunction with a corresponding decrease in the available 'redraw' amount in the home loan.

4. It is often said that taxpayers who enter into an investment loan interest payment arrangement do so for the purpose of 'paying their home loan off sooner' or 'owning their own home sooner'.

5. Taxpayers who have entered into an investment loan interest payment arrangement may be entitled to deductions for the interest incurred on the line of credit under section 8-1 of the Income Tax Assessment Act 1997 .

Can Part IVA apply?

6. Part IVA is a general anti-avoidance rule. Part IVA gives the Commissioner the power to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

7. In broad terms, Part IVA will apply where the following requirements are satisfied:

·
there is a scheme3 (see section 177A);

·
a taxpayer has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme (see section 177C); and

·
the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (paragraph 177D(b)).

8. The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case. Therefore, in the absence of all relevant information it is not possible to state definitively whether a particular arrangement or transaction will attract Part IVA. However, an investment loan interest payment arrangement of the type described in paragraph 3 is capable of attracting the operation of Part IVA.

9. The precise description of the scheme for the purposes of Part IVA will depend on the facts of the particular case. However, in the context of considering whether Part IVA applies to an investment loan interest payment arrangement the scheme would normally include some or all of the elements described in paragraph 3 of this Determination.

10. In relation to this type of scheme it might reasonably be expected that if the scheme had not been entered into or carried out, the taxpayer(s) would have met the interest payments on the investment loan out of their own cash flow rather than use the line of credit. Thus, the taxpayer(s) would not have incurred any interest, or would have incurred less interest, on the line of credit. Consequently, the taxpayer(s) would not have been entitled to any deductions in respect of any such interest or would have been entitled to a smaller deduction. Accordingly, the relevant tax benefit obtained by the taxpayer(s) in connection with the scheme under paragraph 177C(1)(b) is (or includes) either:

·
the whole amount of the allowable deduction for interest incurred on the line of credit; or

·
the difference between the otherwise allowable deduction for interest incurred on the line of credit and the amount of interest incurred on the line of credit that would have been an allowable deduction if the scheme had not been entered into or carried out.

11. A key question, for Part IVA purposes, is whether the identified scheme was entered into or carried out by a person for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme.

12. Paragraph 177D(b) requires the drawing of a conclusion about purpose from the eight objective matters identified in that provision. The conclusion to be reached is the conclusion of a reasonable person.4 The provision does not require, or even permit, any inquiry into the subjective purpose or motive of the relevant taxpayers or others who entered into or carried out the scheme.5

13. Further, an objective purpose of the taxpayer(s) of 'paying their home loan off sooner' does not prevent Part IVA from applying to an investment loan interest payment arrangement. As was noted in the joint judgment of the High Court in Spotless :6

A particular course of action may be...both 'tax driven' and bear the character of a rational commercial decision. The presence of the latter characteristic does not determine the answer to the question whether, within the meaning of Part IVA, a person entered into or carried out a 'scheme' for the 'dominant purpose' of enabling the taxpayer to obtain a 'tax benefit.

14. Further, Gleeson CJ and McHugh J of the High Court noted in Hart 7 that:

...a transaction may take such a form that there is a particular scheme in respect of which a conclusion of the kind described in s 177D is required, even though the particular scheme also advances a wider commercial objective.

15. Callinan J in Hart 8 similarly distinguished between objectives that are 'entirely irreproachable and proper' and the 'means adopted to achieve these results'.

16. Therefore, the means by which the taxpayer(s) achieve their objective of 'paying their home loan off sooner' may result in the requirements of Part IVA being satisfied.

17. In the context of applying paragraph 177D(b) to an investment loan interest payment arrangement the following general observations can be made:

(a)
In respect of arrangements that include all, or a significant number, of the elements set out in paragraph 3 of this Determination the manner in which the scheme is entered into or carried out is generally explicable only by the taxation consequences. For instance, apart from the purported availability of additional tax deductions, it appears to make little (if any) financial sense for the taxpayer(s) to, in effect, fund repayments on a home loan using a line of credit that has the same or a slightly higher interest rate than the home loan.

(b)
In many of these arrangements a careful analysis of the terms and conditions indicates that the interest rate on the line of credit is both notionally and in substance higher than the interest rate payable on the home loan.

(c)
Apart from the purported availability of additional tax deductions, the taxpayer(s)' financial position under the scheme is generally no better (and possibly worse) than it would have been if the arrangement had not been entered into. The increase in the line of credit balance is matched by an equal reduction in the balance (or effective balance) of the taxpayer(s)' home loan.

(d)
A key feature of the investment loan interest payment arrangement is the use of the line of credit to pay the interest on the investment loan. This results in all or most of the interest on the investment loan, in effect, being capitalised. That is, the payment of the investment loan interest is deferred. This deferral has the economic effect of allowing the taxpayer(s) to repay the home loan at a faster rate than would otherwise be possible: the taxpayer(s) are able to pay an amount equivalent to the deferred investment loan interest on the home loan.

(e)
In many of these arrangements a careful analysis of the all the facts (including the taxpayer(s)' financial circumstances and the relevant terms and conditions of the relevant agreements) indicates that the investment loan interest payment arrangement will have only a limited lifespan. The circumstances often demonstrate that the arrangement will only last for the period during which the taxpayer(s) have non-deductible interest expenses (for example home loan interest), and that once the debt that gave rise to the non-deductible interest expense is repaid the taxpayer(s) are likely to revert to making the payments on their investment loan out of their cash flow rather than using the line of credit. In many cases the taxpayer(s) are simply reverting to what they were doing prior to entering the arrangement.

(f)
If the taxpayer(s)' residence is used as security for either the investment loan or the line of credit, the taxpayer(s) will not actually own an unencumbered home any faster under the scheme than would have been the case if they had not entered into the arrangement.

18. Accordingly, it would be open for a reasonable person to conclude, having regard to the matters in paragraph 177D(b), that one or more of the parties that entered into or carried out the scheme did so for the dominant purpose of enabling the taxpayer(s) to obtain a tax benefit in connection with the scheme. If a reasonable person would reach such a conclusion then Part IVA applies to the scheme and the Commissioner would be entitled to cancel under paragraph 177F(1)(b) the tax benefit. That is, the relevant interest incurred on the line of credit would not be deductible to the taxpayer(s).
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Shadow
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Back in 2009, the ATO issued a PBR (Private Binding Ruling) allowing interest to be capitalised on a rental property loan while using the rent to pay off the borrowers own home. The ATO at that time determined that this arrangement was not caught by Part IVA (general tax avoidance guidelines).

The idea was that if you have multiple loans, some deductible and some non-deductible, then it makes financial sense to allow the deductible loans to capitalise, if doing so enables you to pay down the non-deductible debt more quickly.

I know people who have been doing this for a long time, but I was always reluctant to do it until the 2009 PBR gave the green light.

However, this latest ruling (TD 2012/1) completely reverses the precedent set in 2009, by saying that 'paying off your own home sooner' is no longer considered to be a valid reason for allowing interest to capitalise on deductible debt.

Here is some further reading (from Somersoft) for anyone interested...

Capitalise Interest and Paying Rent off your own home

Interest on Interest and Capitalising Interest

Debt Recycling

Quote:
 
Capitalised Interest Ruling Finalised

Yep, this is the article you have been waiting for. TD 2011/D8 has been finalised as TD 2012/1 in much
the same form. Many of the points raised against the draft were just brushed over and while it deserves to
be challenged in the courts it is important to remember that the ruling is only on the question of whether
paying off your home loan sooner can be a more dominant purpose for a loan arrangement than the tax
benefit. Accordingly it is time to move onto other possible dominant purposes which will be covered later
in this article.

Firstly, for readers that have not been following this saga, it is about loan arrangements where a LOC is
used to cover the rental property expenses including the interest payment on the rental property loan while
all available funds are directed towards the home loan which is non deductible debt. This will result in
interest capitalising, namely interest being charged on the money borrowed in the LOC to pay the interest on
the rental property loan.

The issue is not really what is the appropriate loan structure, that is just a side line to try and align
arrangements to Harts case. Ultimately Hart’s case was decided in favour of the ATO because there was
bank advertising material advising of the tax benefit. Accordingly, the court found that the dominant
purpose for the taxpayer entering into the arrangement was the tax benefit. It is important that the loans you
use are simply accounts used by people that would not necessarily be looking for a tax benefit.

Two important absences from the ruling are:

1) There is no instruction regarding where the rent should be deposited which seems to show that the
ATO know they will be overstepping the mark if they specify that the rent should be used to pay off
the rental property loan.
2) While there is a requirement that an amount “might reasonably be expected to pay the interest on the
investment loan”, there is no definition of what a reasonable amount is. This should alarm investors
with a negative cash flow property who are borrowing the difference between the rental expenses
and the rent received, they would also be caught if it is seen that their dominant purpose is to benefit
from the deduction for capitalised interest.

It is all about your reason for not making the interest payment on the rental property and whether that is
considered by the ATO to be more dominant than the tax benefit. Some examples worthy of consideration:

1) Wanting to save for a holiday or safety net for unforeseen circumstances. Choosing to do this
through the offset account attached to your home loan is practical as your only other source of funds
in an emergency is the LOC used to pay rental property expenses. If this was accessed for private
purposes it would create the record keeping nightmare of interest apportionment on a mixed purpose
loan.
2) Your home loan is over 10 years so the repayments are high, add to this a detailed budget of your
living expenses and you just can’t afford the interest repayments on the rental property but
fortunately, you have enough equity to secure a LOC for these borrowings.
3) You have organised the LOC so that you have all the rental property expenses recorded separately
and on one statement and so that you can be sure that payments are met when due because you have
so much available credit. All your income is directed to the offset account for you home loan. The
question you have for the ATO is what happens when due to the order that expenses are drawn from
the LOC or because the property is negative cash flow or because you are not that organised and
irregularly transfer money into the LOC and then only what you feel you can afford considering
possible private expenses. As a result of any of these interest will capitalise on the LOC is this also
caught by Part IVA. Is the dominant purpose of your lack of attention to your accounts on a daily
basis, to obtain a tax benefit?
4) It is your intention to start a family as soon as it is financially viable but it is a personal choice that
during the first few years of your children’s life that you will live off one wage. To be able to
manage on such a reduced income you will need to be far enough ahead on you home loan to not be
required to make repayments during that period. The question for the ATO is whether letting
interest capitalise on you rental property while saving to have a family is a scheme with the
dominant purpose of a tax benefit.
5) You had thought you could meet your financial commitments but due to a change or circumstances
such as pregnancy, demotion, unemployment, sickness etc you are finding it difficult to pay your
bills and are anxious about future doctor’s bills unemployment etc. You wish to concentrate all your
income towards you offset account to ensure you can meet your home loan repayments and
emergencies. Fortunately, you have plenty of equity so can use a LOC to support the rental
property. Is the ATO going to use Part IVA to force you to borrow for personal expenses rather than
rental property expenses?
6) The interest rate on your private debt is higher than that on the LOC. This maybe because your
private debt is a credit card or car loan. It may even be the case with your home loan. This scenario
may even be the one opportunity where the way the loans are organised can affect the success of
your arrangement. In this case you argue that your dominant purpose is simply to reduce your
interest expense by paying the highest interest rate loan off as soon as possible.
7) If you have sufficient equity in assets other than your home to finance the growing LOC debt then
the concept of paying off your home sooner has much more punch. You dominant purpose could be
to make sure that only your rental properties are exposed to risk of mortgage repossession.


Quote:
 
Expanding Part IVA Anti Tax Avoidance Provisions

The ATO are pushing to further increase their powers under Part IVA which is the anti tax avoidance provision of the Income Tax Assessment Act. Basically Part IVA examines a transaction and can disallow it if the dominant purpose of the transaction was a tax benefit.

Currently the ATO has to produce a counter argument that if it was not for the scheme the taxpayer would have had done something different which would have resulted in more tax being paid, note this has to be a plausible argument. The ATO cannot just say you should have made a choice that resulted in the highest tax payable, they can only argue that a reasonable person would have expected the taxpayer to have acted differently, if not for the tax benefit. This is a bit of a safety net to stop the ATO applying Part IVA to every deduction, there is a need to examine what a reasonable person would have done in those circumstances, and question if there is something artificial about the arrangement. As the law currently stands, Taxpayers can argue back that there is no way they would have handled their affairs in the way the ATO is suggesting they should have, because the tax consequences are too high so they would simply have done nothing.

Treasury has announced that the law will be changed to restrict the taxpayer’s right to argue against what the ATO has decided they should have done. There is a real risk that the reasonable/plausible test will be removed.

The taxpayer’s defence is already difficult because the law requires the taxpayer to argue that what a reasonable person would have done rather than why they made the choice they made. Further restrictions here could lead to the taxpayer having to accept whatever alternative action the ATO can dream up and this is on any arrangement not just marketed tax schemes. To quote the press release “this also includes steps within broader commercial arrangements”.

It is time that everyday taxpayers brought this issue up with their local MP for the following reasons:

1) The new laws are intended to apply retrospectively from 1st March 2012 yet they have not even been written yet and are unlikely to pass through Parliament until the end of the year.
2) It is an abuse of power to create uncertainty for such a long period of time especially to such an already widely worded provision.
3) To allow the ATO to decide how a taxpayer should arrange their financial affairs will lead to further uncertainty even once the law is written and an unworkable taxation system as the ATO is not in a position to advise all taxpayers what it’s opinion is of each transaction.
4) When evaluating the fairness of the law, parliament should consider that very few taxpayers can afford to fight the ATO in court as the ATO simply continues to appeal until the taxpayer runs out of money. Further the ATO has a history of using Part IVA on simple everyday mum and dad arrangements without sufficient testing in the court. If the ATO does not like something they simply say there is a tax benefit and they will apply Part IVA. The average taxpayer just has to accept this whereas more wealthy taxpayers can fight it. Any discretion given to the ATO is a strike to tax more heavily those that can least afford it.
5) It is extremely difficult to get a private ruling from the ATO on how Part IVA will be interpreted by them and certainly not possible within sufficient time to make a timely decision on “steps within broader commercial arrangements”.
6) Part IVA is already confusing and being abused as a scare tactic by the ATO, they do not need any more powers. Taxpayers must have some rights to certainty.

If you think I am exaggerating, consider that the ATO has already used Part IVA to prevent taxpayers offsetting a capital gain they have made during the year by, before 30th June, selling off shares that have a capital loss and later buying those shares back. This simple choice is now already considered a tax scheme, what next? The first thought that comes to mind is choosing an interest only loan rather than principle and interest on your rental property.
If we allow the ATO to decide what your action should be without at least requiring them to consider what a reasonable person would do, we may as well throw out the rest of the tax law and just let them decide each year just how much they would like of your hard earned dollars.

The bottom line is that if the ATO cannot meet the requirement that a reasonable person would not consider the transaction to have been entered into for the dominant purpose of a tax benefit, then that should be the end of the matter and the ATO should not be given any powers to go beyond that to choose what other course of action the taxpayer should have taken so that they would have paid more tax. Considering the harsh penalties the ATO has in its arsenal, taxpayers should not be forced to examine everyday transactions (or “steps within broader commercial arrangements”) for the possibility of a more tax expensive way of doing business. After all it would still be better to pay the extra tax then suffer an ATO audit and penalties. This is what will happen when clear guidelines at law are replaced by ATO discretion.
Edited by Shadow, 27 Apr 2012, 10:44 AM.
1 - Debunking Demographia. Demographia Survey Debunked. Australian housing is not particularly unaffordable by global standards.
2 - USA, Ireland, UK, Spain and Japan Property Bubbles versus Australia. All property bubbles had one thing in common...
3 - Banks can't margin call on residential property unless borrower defaults, because residential property loans regulated by NCCP Act 2009.
4 - Housing is second highest taxed sector of Australian Economy. Renters subsidised by high taxes incurred by homeowners.
5 - Epic Fail! Steve Keen's Bad Calls and Predictions.
6 - Australian household formation rate faster than population growth rate since 1960s = ongoing improvement in housing affordability.
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zaph
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Shadow
27 Apr 2012, 10:35 AM
Back in 2009, the ATO issued a PBR (Private Binding Ruling) allowing interest to be capitalised on a rental property loan while using the rent to pay off the borrowers own home. The ATO at that time determined that this arrangement was not caught by Part IVA (general tax avoidance guidelines).

The idea was that if you have multiple loans, some deductible and some non-deductible, then it makes financial sense to allow the deductible loans to capitalise, if doing so enables you to pay down the non-deductible debt more quickly.

I know people who have been doing this for a long time, but I was always reluctant to do it until the 2009 PBR gave the green light.

However, this latest ruling (TD 2012/1) completely reverses the precedent set in 2009, by saying that 'paying off your own home sooner' is no longer considered to be a valid reason for allowing interest to capitalise on deductible debt.

Here is some further reading (from Somersoft) for anyone interested...

Capitalise Interest and Paying Rent off your own home

Interest on Interest and Capitalising Interest

Debt Recycling



Also... Expanding Part IVA Anti Tax Avoidance Provisions
i guess that's a lesson not to rely on someone else's PBR and always get your own PBR in future.
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Shadow
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zaph
27 Apr 2012, 10:39 AM
i guess that's a lesson not to rely on someone else's PBR and always get your own PBR in future.
Applying for a PBR just draws attention to yourself. I reckon people who apply for PBRs are more likely to get audited. There's also a good chance the ATO will say no (despite earlier precedents), and thereby prevent you from doing something that lots of other people are doing under the radar (but legitimised, at least in their mind, by prior PBRs).

I might decide to concentrate all my income towards my home loan, in order to leave a personal buffer for emergencies and to ensure that only my IPs and not my home are at risk of repossession. Does the ATO have the right to claim this is a 'tax avoidance scheme' under part IVA?

The probability of an ATO audit for an individual person is pretty slim. Worst case scenario, in a situation like this, if they decide to apply the new rule retrospectively, and if I get audited, and if they didn't accept one of my valid reasons for entering into such an arrangement (especially given the 2009 precedent), then they ask me to repay the back tax (in my case that would be about $5K, no big deal).

Also, I wonder if the person who did get the 2009 PBR, now finds it nullified by the latest ruling, meaning they're no better off for having the PBR?
Edited by Shadow, 27 Apr 2012, 11:05 AM.
1 - Debunking Demographia. Demographia Survey Debunked. Australian housing is not particularly unaffordable by global standards.
2 - USA, Ireland, UK, Spain and Japan Property Bubbles versus Australia. All property bubbles had one thing in common...
3 - Banks can't margin call on residential property unless borrower defaults, because residential property loans regulated by NCCP Act 2009.
4 - Housing is second highest taxed sector of Australian Economy. Renters subsidised by high taxes incurred by homeowners.
5 - Epic Fail! Steve Keen's Bad Calls and Predictions.
6 - Australian household formation rate faster than population growth rate since 1960s = ongoing improvement in housing affordability.
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slabberdegullion
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Shadow
27 Apr 2012, 10:51 AM
Also, I wonder if the person who did get the 2009 PBR, now finds it nullified by the latest ruling, meaning they're no better off for having the PBR?
Treasury report

Quote:
 
2.1.2 Types of Tax Office advice
The Tax Office provides taxpayers and practitioners with a range of advice on applying the income tax law, through formal rulings and other products.

There are currently three main types of formal income tax ruling: public rulings, private binding rulings (PBRs), and oral rulings. The advice in formal rulings is binding by law on the Tax Office and a taxpayer covered by a formal ruling is therefore protected from retrospective amendment, even if the Tax Office subsequently changes its interpretation of the law.

Public rulings provide written guidance to taxpayers generally. They state the Tax Office’s view on how the income tax law applies to a type or class of arrangements. They are provided at the discretion of the Tax Office and are prepared in conjunction with panels containing representatives from the accounting and legal professions.

PBRs provide written advice to a given taxpayer on how the Tax Office considers the law applies to a specified arrangement for particular income years.

Oral binding rulings provide specific advice on a limited range of income tax matters to taxpayers with simple tax affairs.

The Tax Office also provides a wide range of other written advice in the form of manuals, booklets, schedules, fact sheets, press releases, Interpretative Decisions, taxpayer alerts and TaxPack. A considerable amount of this advice is available on the Tax Office website. In addition, the Tax Office provides advice in person and by telephone. Advice provided through these mechanisms is not legally binding, however some advice is treated as administratively binding, meaning the Tax Office will not apply penalties or interest if the advice is wrong, while other advice will only provide protection from penalties.


I read from this that the PBR is binding for the income years the individual obtained them and cannot be collected retrospectively for these years.

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zaph
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Shadow
27 Apr 2012, 10:51 AM





Quote:
 
Applying for a PBR just draws attention to yourself. I reckon people who apply for PBRs are more likely to get audited. There's also a good chance the ATO will say no (despite earlier precedents), and thereby prevent you from doing something that lots of other people are doing under the radar (but legitimised, at least in their mind, by prior PBRs).


that's an interesting theory. perhaps Kenny has mates at the ATO that he could ask if it is true. or you could post the question on somersoft (sorry, don't have account there, or i would) where there are accountants who might also have mates at the ATO.

the opposite argument might also be true. ie the ato views those who seek PBRs as ultra compliant and don't want to do anything wrong, therefore the ATO views those with PBRs as more compliant. i have no insight into which view is correct.

yes, it might be easier to say sorry than ask permission.

Quote:
 
I might decide to concentrate all my income towards my home loan, in order to leave a personal buffer for emergencies and to ensure that only my IPs and not my home are at risk of repossession. Does the ATO have the right to claim this is a 'tax avoidance scheme' under part IVA?


they can claim almost anything is a tax avoidance scheme under IVA and then the onus is on you to disprove it. small fry property investors aren't going to go through the courts. the problem with the ATO is that they are turning up to fight with a nuclear weapon and the taxpayer is trying to defend themselves with a butter knife.

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The probability of an ATO audit for an individual person is pretty slim. Worst case scenario, in a situation like this, if they decide to apply the new rule retrospectively, and if I get audited, and if they didn't accept one of my valid reasons for entering into such an arrangement (especially given the 2009 precedent), then they ask me to repay the back tax (in my case that would be about $5K, no big deal).


yes, very very slim as long as you don't do anything to set off a trigger for an audit. if you had 25k of rental income and claimed 50k of deductions you would be guaranteed an audit. if you were a plumber earning 50k with 40k deductions, same. etc.

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Also, I wonder if the person who did get the 2009 PBR, now finds it nullified by the latest ruling, meaning they're no better off for having the PBR?


i'm not sure if the PBR is nullified by the latest ruling. Kenny?
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slabberdegullion
27 Apr 2012, 11:33 AM
Treasury report

I read from this that the PBR is binding for the income years the individual obtained them and cannot be collected retrospectively for these years.
Thanks, I guess that means you have to renew a PBR each tax year? Agree that the new rule couldn't be applied retrospectively to the person with the PBR, and I suppose the ATO will just refuse to renew it again now, the next time that person applies.
1 - Debunking Demographia. Demographia Survey Debunked. Australian housing is not particularly unaffordable by global standards.
2 - USA, Ireland, UK, Spain and Japan Property Bubbles versus Australia. All property bubbles had one thing in common...
3 - Banks can't margin call on residential property unless borrower defaults, because residential property loans regulated by NCCP Act 2009.
4 - Housing is second highest taxed sector of Australian Economy. Renters subsidised by high taxes incurred by homeowners.
5 - Epic Fail! Steve Keen's Bad Calls and Predictions.
6 - Australian household formation rate faster than population growth rate since 1960s = ongoing improvement in housing affordability.
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