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Forward Thinking Magazine : April 2011
Interest deductibility: Intention and Hart are just the start... Many financial advisers are turning their focus to mortgage lending advice and services as an additional value-add service for their clients. As 30 June looms, issues of interest deductibility come into sharper focus for financial advisers as they consider the debt-related strategies their clients might adopt for the new income year, including: ■ fixing interest rates ■ prepaying interest ■ using annual bonuses or other capital inflows to reduce debt, and ■ restructuring existing debt arrangements. The issue of interest deductibility is not always straight-forward. The basic principle is a simple one - in general, interest expenses incurred in producing assessable income are an allowable deduction. There are, however, quite a number of issues which can cause concern for advisers including, for example, the timing of interest expenses incurred, the intention of the borrower regarding the income producing activities of the underlying asset and the intended holding period of the asset. Additionally it is now almost seven years since the High Court of Australia handed down its landmark decision in the Hart case. 1 This decision has resulted in a lasting legacy of wariness for the mortgage industry, especially for mortgage product providers and financial advisers in the area of split loans and restructuring deductible and non-deductible debt. In this article we look at a number of interest deductibility issues, including those mentioned above, and identify some of the discernible messages that arose from the Hart decision. Written by David Barrett, Head of MAStech 1 Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 19 MAStech