Property investors and share investors will be used to borrowing to invest and know that it’s always good to maximise those deductions. But a ruling has been released recently by the ATO which could burst their bubble regarding an old favourite – mortgage reduction and minimisation “strategies”. Or what the ATO would prefer to call a “scheme” for tax avoidance.
It involves a newer type of split-loan mortgage which includes a:
- Home loan (non-deductible, personal loan);
- Investment loan (for investment property); and
- Line of credit (from which repayments are made from).
You then pay the actual repayments for your home loan from your bank account, or your savings; but the repayments for the investment loan are added to the balance of the line of credit. The ATO says that the capitalisation of interest on the investment loan amounts to tax avoidance, just like the old split-loan schemes of the late 90′s and Hart’s case. In effect – the interest is not “paid” at that time and the home loan for your house is paid off and reduced sooner.
They warn taxpayers not to fall into this type of mortgage structure and that, if they do, many of the interest deductions will be cancelled and penalties will apply. Please contact us to discuss how this affects you.