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Forward Thinking Magazine : April 2011
23 Figure 1. Wealth Optimiser Structure Facility features ■ Total loan amount – $298,000 (approx.), secured over both properties ■ Interest calculated daily on unpaid total loan balance ■ Borrowers can nominate to split loan amount into two accounts and the account which repayments are credited to ■ P&I repayments calculated on total loan amount over 25 year repayment term ■ Variable rate 9.15% pa (previous loan variable rate was 8.69% pa) ■ P&I repayments $2,533 per month, based on $298,000 capital Account 1: New residential property ■ New loan $203,000 (approx.) ■ Non-income producing asset, non-deductible interest Account 2: Rental property ■ Asset originally the Hart’s principal residence ■ Now an income producing asset ■ Outstanding loan $95,000 (approx.) ■ Interest incurred otherwise deductible ■ Interest compounded on this account, increasing level of interest charged each period, and the level of deduction ■ Outstanding amount projected to almost double over 8 years, possibly exceeding property value case, one relating to the new main residence (i.e. Account 1), interest upon which was non- deductible, and another relating to the rental property (i.e. Account 2), interest upon which was deductible. In addition, as long as the minimum P&I repayments (based on the total outstanding debt) were made, the Harts could request the repayments be credited to either of the two accounts. The Harts elected that the all repayments should be applied to Account 1. Figure 1 below summarises the Wealth Optimiser structure. The implications The election made by the Harts to credit all repayments to Account 1 resulted in interest accruing on Account 2 compounding on that account, increasing the level of deductible debt, the periodic interest charges relating to the account and hence the level of tax deductions. The Court found that, but for entering into the Wealth Optimiser arrangement, the Harts would have entered into an arrangement based on either two separate loans, or one combined loan for both properties, with P&I repayments and interest being charged on a prorated basis to both loans (or accounts). Therefore the tax benefit of the Wealth Optimiser structure was the additional deduction relating to the extra interest incurred on Account 2 in excess of the interest that would have been incurred on that account if a P&I repayment basis had been applied. The Court found that Part IVA should be applied to deny this additional interest expense deduction. Harts nominated all repayments to non-deductible debt MAStech