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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, 09:20 AM (13,596 Views)
Shadow
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zaph
27 Apr 2012, 12:36 PM
yes, it might be easier to say sorry than ask permission
Yes, that's what I reckon. I've never been audited, but if I am, then they're just going to ask for the back tax to be repaid, probably with interest. But even then, I'm not really any worse off than someone who never claimed it in the first place. So there is little downside risk, and considerable upside potential, given that the most likely outcome is I get to keep the deductions.

A fine is a possibility if you're caught doing something seriously dodgy, for which there is no legitimate precedent, but that's unlikely to apply in this case.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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slabberdegullion
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Shadow
27 Apr 2012, 12:37 PM
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.
Dunno. It would seem fairly arduous to have to renew the PBR each year. The ATO can make determinations over multiple years. Only the person who had applied for the PBR would know.

I agree they won't get such a ruling from now on.
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zaph
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Shadow
27 Apr 2012, 12:42 PM
Yes, that's what I reckon. I've never been audited, but if I am, then they're just going to ask for the back tax to be repaid, probably with interest. But even then, I'm not really any worse off than someone who never claimed it in the first place. So there is little downside risk, and considerable upside potential, given that the most likely outcome is I get to keep the deductions.

A fine is a possibility if you're caught doing something seriously dodgy, for which there is no legitimate precedent, but that's unlikely to apply in this case.
in those circumstances i doubt you will have to pay interest or a fine.
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peter fraser
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Shadow
27 Apr 2012, 11:35 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.
To set that up correctly you need what is known as a "global lending facility" where the lender may want reductions on the overall facility, but they don't care if one loan or split is increasing, as long as the total debt is performing as per the loan contract.

Those facilities are quite rare.

Lenders are quite aware of the tax risks, and most don't want to be dragged through a court case, so most lenders avoid these loans, and usually only provide them where tax avoidance isn't the reason behind the facility.

If borrowers have plenty of security, they can do it themselves using lines of credit, but they would be taking a risk. It's been a touchy issue with the ATO for a long time.

Any expressed market opinion is my own and is not to be taken as financial advice
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kennyjaiz
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Nothing more to add. Capitalising interest / investment loan interest payment arrangement has been debated for as long as I know, that's why Julia H. had to apply for a Private Ruling to confirm with ATO that Part IVA would not be invoked.

Private Rulings are legally binding for the ATO (but not for the taxpayer), even if new Tax Determination contradicts with the ruling. They are provided for a specific tax-payer, for a specific income year. You cannot rely on other's PBR for your own circumstance.

Personally, I haven't heard that filing for a Private Ruling would increase the probability of being audited. I can't confirm or deny this. While it is a logical assumption, but that's possibly an overestimation of the communication between the ATO departments. Having said that, if in your ruling application made salient of something untoward, they may follow it up with further investigation.

So, it may be a case of claiming it first and ask for forgiveness later. If found to be genuine mistake, no penalty will apply.
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TED BULLPIT
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There are many who use this to their advantage.
It shows how desperate the government is becoming and shows we can look forward to a less than desirable outcome for the budget next month. :?:
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Admin
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Quote:
 
ATO slams 'most common' investment strategy as illegal

By BN | December 06, 2013

The ‘most common’ investment strategy recommended by brokers and advisers has been slammed by the ATO as bad practice and a potential breach of tax law.

Following Australian Broker’s revelations that many brokers are unaware they may be prosecuted as ‘scheme promoters’ for suggesting certain investment strategies, a number of readers came forward with their understanding of the legislation.

The article related to arrangements such as those described in Tax Determination 2012/1 – a determination based on the Hart case.

The arrangement involves a borrower using a line of credit to pay interest on an investment loan, then, as the line of credit can be claimed as a tax deduction, allowing the debt to capitalise and compound while all of the client’s available cash is used to pay the debt on their home of primary residence.

A number of readers responded that there are some notable exceptions to this rule. A Victoria-based broker, speaking with Australian Broker claimed the practice of ‘snowballing’ is one of these.

“Snowballing is the most common strategy being used in the industry at the moment. You don’t have to trust me on that; you can ring the tax department. Snowballing is something they don’t even have to worry about.

“We have the rent going into the line of credit, so the line of credit is compounding but it’s only going up by the loss on property. So in other words they’re not putting after tax income or wages towards the shortfall - and the tax department are quite happy with that.”

But Australian Broker did contact the ATO, and assistant commissioner Wayne Barford says the tax department is in fact very worried about these types of arrangements.

“Such arrangements capitalise the investment loan interest whilst freeing up funds for use elsewhere, often in order to meet private expenses. This increases the overall level of tax deductions."

Any borrower capitalising on interest and claiming extra tax benefits leaves themselves exposed to consideration as participating in a tax avoidance scheme, says Barford.

Whether or not this is a breach of tax law is then determined by other factors, such as the dominant purpose for entering the arrangement.

Barford refutes claims that borrowers can use the extra funds to meet other expenses, and that these other expenses would then constitute the borrower's dominant purpose.

“These arrangements may be subject to the general anti-avoidance provisions (Part IVA) of the Tax Act (see Taxation Determination 2012/1), even where an arrangement advances a wider objective.

“It’s a two-step process. You can say you did the arrangement to help you afford private school expenses for your kids, but your primary purpose is to get a tax benefit and you’re using that benefit to meet extra expenses. This is simply not allowable."

Arguments from readers that banks, accountants or advisers are the ones who should be responsible for such arrangements were also clarified by Barford.

“Banks provide products but it is how the products are used by the clients that is important. There’s nothing wrong with line of credits and accounts being provided by those banks, it would only be an issue if the banks were the ones providing the advice and we have no evidence that this is the case.

“If brokers give such advice they are responsible. If brokers give tax advice they’re exposed and may be subject to civil penalties under the Promoter Penalty Laws.

“We encourage taxpayers and advisors who may be concerned that they have entered into arrangements of this type to lodge a ruling request with the ATO.”

Read more: http://www.yourinvestmentpropertymag.com.au/news/ato-slams-most-common-investment-strategy-as-illegal-182216.aspx
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